Efforts by Health Insurers To Prepare for Medicare Prescription Drug Benefit Examined
Dow Jones/Wall Street Journal on Wednesday examined insurance companies' efforts to prepare for the launch of the new Medicare prescription drug benefit, which begins Jan. 1, 2006. According to Dow Jones/Journal, companies such as UnitedHealth Group and Humana are spending "tens of millions of dollars on marketing, expanding call centers and installing new technology" for their Medicare prescription drug plans.
Humana plans to spend about $80 million this year to prepare for and promote its new Medicare prescription drug plan. Humana's efforts include a marketing and educational partnership with Wal-Mart. Cigna is expected to spend an estimated $40 million this year on preparations for its Medicare prescription drug plan and has partnered with NationsHealth, a provider of prescription discount services, to promote its plan.
According to Aetna CEO Jack Rowe, the company has doubled its projected spending on the Medicare drug benefit to $50 million in 2005. Humana also is spending more than originally projected, Scott Latimer, the company's Medicare director, said.
The increased spending, combined with lower-than-expected premium rates because of competition, could mean 2005 earnings for several insurers will be lower than anticipated, according to Dow Jones/Journal. For instance, Sierra Health Services announced earlier this summer that it expects 2005 earnings to be at the lower end of its previously estimated range of $3.50 to $3.60 per share.
However, some analysts predict that government subsidies and insurers' cost-saving efforts ultimately will boost revenue, Dow Jones/Journal reports.
Sierra predicted a profit margin of 5% to 6% on $100 million to $200 million in revenue in 2006. Aetna, PacifiCare Health Systems -- which was acquired this year by UnitedHealth -- and WellCare Health Plans also could have an increase in revenue in 2006 because of the drug benefit, according to CIBC World Markets analyst Carl McDonald.
Seven of the largest health insurers are expected to experience a $4.45 billion increase in revenue in 2006 and a 2% to 4% increase in earnings as a result of the Medicare drug benefit, McDonald said.
However, Alex Vallecillo, a portfolio manager with Cleveland-based Allegiant Funds, said, "There could be some timing disappointments that I'm worried about. Some people diving into the stocks think, come first quarter of next year, these companies are going to be blowing away the numbers. The profit may not come 'til later" (Loftus, Dow Jones/Wall Street Journal, 9/7).
In related news, a Health Affairs Web exclusive estimates that Medicare will spend up to $60 billion over the next 10 years to attract PPOs to serve beneficiaries in areas not currently served by managed care plans, CQ HealthBeat reports. The study was conducted by Steve Pizer, a health economist at the Department of Veterans Affairs Boston Health Care System and an assistant professor of health services at the Boston University School of Public Health, and colleagues.
According to Pizer, Medicare PPOs, created under the 2003 Medicare law, likely will bid competitively to serve beneficiaries on a regional basis and avoid competing with existing Medicare HMOs. As a result, PPOs will be able to attract more Medicare beneficiaries by offering a less generous and less costly plan.
In a news release, Pizer said that regional PPOs likely will focus "on traditionally underserved areas that will be profitable only because of overpayments."
Critics of the study said it is based on "flawed assumptions," CQ HealthBeat reports. Mohit Ghose, vice president of public affairs at America's Health Insurance Plans, said, "It is premature to attempt to evaluate the impact of payment methodology until some actual experience is available to do so."
An unnamed CMS spokesperson added that PPOs will be "competitive" and subject to the same requirements as other health plans offered to beneficiaries. The spokesperson added that the study "was too speculative and based on the wrong assumptions," including that PPOs will be available in only 11 regions, instead of the actual 21 regions (CQ HealthBeat, 9/6).
The study is available online.
Additional information on the Medicare drug benefit is available online.