Medicare drug benefit poses some opportunities, and maybe a few threats

Drug Cost Management Report,  July 11, 2003  

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The Medicare reform bills that passed the Senate and House late last month would create new opportunities for PBMs, health plans and specialty pharmacies, but they also pose a few risks and uncertainties. Many details of the new prescription drug benefit for Medicare beneficiaries must still be ironed out in conference committee. But in many regards the two bills are similar, and the likely impact on payers and PBMs is becoming clearer.

Certainly PBMs have been waiting a long time for this legislation, and the ones DCMR has talked to remain hopeful that it will be beneficial to them.

According to spokesman Phil Blando of the Pharmaceutical Care Management Assn., "PCMA believes both the Senate and House bills will ultimately be good because they will provide seniors with more choices and benefits, but that doesn't necessarily mean they'll be good for PBMs. But as far as the bills' effect on PBMs, we're cautiously optimistic, and this could provide some new business opportunities. PBMs need to have the tools and mechanisms available to them to control costs." Blando cites those as the abilities to:

* Create/maintain pharmacy networks;

* Aggressively negotiate rebates with drug manufacturers to drive down costs; and

* Establish formularies to help create competition.

New Benefit Structure

Starting in 2006, a new voluntary Medicare Part D prescription drug benefit would be created, and all beneficiaries would be eligible regardless of whether they are in fee-for-service or Medicare HMOs (to be renamed Medicare Advantage) or regional Medicare PPO plans.

The two versions differ on exact cost-sharing and benefit amounts, but their basic structure is similar and incorporates some modern concepts borrowed from the way consumer-directed health plans are typically structured:

* A monthly premium (estimated by both versions at $35);

* A percentage-based coinsurance paid by the beneficiary up to a certain cap;

* Beyond that cap, the beneficiary pays a 100% coinsurance up to the next cap;

* The House version would pay for 100% of drug costs beyond the $3,500 threshold, while the Senate version would pay 90% beyond a $3,700 threshold.

This type of multi-level benefit is relatively new for prescription drugs, and not all PBMs have experience with it yet. Under a traditional tiered benefit, the member's cost share changes based on which product is being purchased; in the new Medicare benefit, the cost share changes based on the amount of benefit the member has used. The strategy maintains the member's awareness of how the benefit dollars are being spent, and provides incentives to spend wisely.

Specialty Pharmacy Provision

One provision in particular may pose significant opportunities for PBMs and specialty pharmacies. The House bill calls for the Medicare program to establish a competitive acquisition process for the purchase of certain covered outpatient drugs and biologicals. This means that specialty pharmacy providers would be able to bid for contracts to provide products such as chemotherapy drugs, insulin, blood products and other injectable drugs to Medicare patients.

That provision is not popular with physicians, because many of them have relied on the margin opportunities inherent in purchasing these drugs directly and getting reimbursed by Medicare. For many physicians, such as oncologists, the implementation of specialty pharmacy on a widespread basis could pose a severe threat to their revenues.

According to David Willcutts, CEO of Los Angeles-based Ancillary Care Management (ACM), "If all of a sudden 60% to 70% of these [oncology] physicians' revenues are gone, yes you'll save costs, but you've destroyed a business model. The question is how will Medicare respond to physicians who refuse to participate in the program?"

Well, both bills provide for adjustments to the physician fee schedule for oncologists--presumably to provide additional reimbursement for their services regarding administration of chemotherapy drugs. But there is no indication as to the level of "adjustment" that would be forthcoming, and no guarantee that it will be satisfactory to physicians.

Commercial payers are just beginning to experiment with this strategy. Willcutts points out, "There are health plans that have tried this, some with great success and others that have been wounded and bled for trying. In very competitive markets these techniques have worked well, but they haven't worked in areas with little competition" such as rural areas with small oncology provider networks. The House bill includes subsidies to offset costs of providing care in rural areas.

Because Medicare is such a large payer, implementation of a specialty pharmacy program is likely to impact a number of health care sectors. For payers, the program could provide a boost to similar efforts being explored in the commercial sector. Most Medicare providers also have commercial plans, so if they are able to successfully develop specialty pharmacy relationships, they will leverage those deals for their commercial business.