California Insurers Expect Widespread Participation in Medicare Drug Benefit

For California health plans, providing prescription drug benefits to an aging and sick population might not seem, at first glance, like a savvy business venture. But the state’s health insurers appear to be eager to participate in the new Medicare drug benefit slated to begin in January 2006.

Next year, Medicare beneficiaries can choose to receive coverage for their medications through new prescription drug plans. Beneficiaries who wish to continue to receive coverage through traditional fee-for-service Medicare can enroll in a stand-alone drug plan. Beneficiaries also will have the option of enrolling in Medicare Advantage plans, HMOS and regional PPOs that will provide all Medicare benefits including prescription drug coverage.

California’s health plans have expressed enthusiasm for the new PDP program, and enrollment is expected to be high this summer. “We’re anticipating strong participation from our members,” Bobby Pena, spokesperson for the California Association of Health Plans, said.

Health plans offering a Medicare drug benefit must cover at least two drugs in each of 41 classes of drugs, 32 of which are broken down into subclasses, as recommended by the United States Pharmacopeial Convention. USP also suggested that PDPs cover at least one product from each subclass within a category and said that Medicare officials should require insurers to justify the exclusions of drug subclasses. The formulary approach of the PDPs is intended to reduce costs for consumers by encouraging health plans to negotiate discounts and rebates with drug companies, something Medicare is prohibited from doing under the new Medicare law.

“Your strongest ally in negotiation is volume,” Pena said. “Because of our existing networks and our relationships with bigger chains, we’re not foreseeing any problems with drug price negotiations or access to pharmacy networks.”

The Rural vs. Urban Divide

Because providing drug coverage costs more in rural areas, some analysts predict that health plans might shy away from entering these less-profitable markets.

“In a rural setting, you only have one to two hospitals competing for our business, so rates are higher, but the reimbursement from the feds has traditionally been lower than in urban areas,” Pena explained. “We just can’t retain viability in those counties.”

To coax plans into these less-appealing markets, CMS has aggregated states into regions that include both urban and rural areas. CMS has established 26 separate regions of the nation in which Medicare Advantage PPOs will be offered and 34 separate regions in which PDPs will be offered. Each PPO and PDP will offer uniform benefits and premiums within a region, although benefits and premiums likely will vary from region to region. Recognizing the insurance industry’s concerns about reimbursement, CMS also has pledged to offer higher payments for plans offering drug coverage in higher cost regions.

Under the proposed rules, Medicare beneficiaries must have a choice of at least two choices for prescription drug coverage, one of which must be a freestanding PDP. If two plans aren’t available — a potential scenario in some rural areas — a fallback plan must be made available.

Fallback plans will be required to offer only standard prescription drug benefits required in the law, rather than expanded coverage offered by other drug plans.

If fallback plans become the norm in rural areas, Medicare might be faced with a two-tiered coverage system: Beneficiaries who live in urban centers will have access to additional drug benefits while those who live outside of cities will have to rely on less-comprehensive plans.

It’s still unclear how the fallback plans will be designated and what incentives will be used to promote cost savings by these plans, Janet Sutton, PhD, senior research scientist with the Walsh Center for Rural Health Analysis at the University of Chicago, said.

“We just don’t know yet if the benefits would be comparable” between fallback and regular drug plans, Sutton said.

However, CMS spokesperson Peter Ashkenaz said it might not be necessary to work out the details of fallback coverage. “It appears there won’t be any need for any fallbacks,” he said. “There’s been enough interest from plans so that we don’t have to worry about it.”

Although data on plan enrollment hasn’t been released, Ashkenaz says the number of applications has been very encouraging. Both Aetna and Cigna, for example, have pledged to offer national PDP coverage.

“I think we’re pleased by the interest that the companies have shown in helping to provide nationwide coverage to beneficiaries,” he said.

Medicare Advantage Example

If health plans’ interest in the Medicare Advantage program is any indication of how health plans will respond to the PDP opportunity, CMS can, indeed, expect a robust enrollment this summer.

Over the past three years, availability of Medicare HMO plans in California has steadily increased, resulting in expanded availability across the state, with plans now operating in 34 counties. In total, California has 129 health plan options available through the Medicare Advantage program, and 31% of eligible Medicare beneficiaries in California are enrolled in a Medicare Advantage plan, according to the Kaiser Family Foundation. Nationwide, about 12% of Medicare beneficiaries are enrolled in Medicare Advantage plans.

Higher Medicare reimbursement rates might have successfully attracted more HMOs to the market and motivated them to expand the scope of their benefits to Medicare beneficiaries. If CMS follows suit with similar reimbursement increases for health plans offering PDP coverage, California’s health plans could be more likely to embrace the program.

At least one analyst is voicing a note of caution to PDP optimists. Keith Mueller, PhD, director of the Center for Rural Health Policy Analysis at the University of Nebraska, said the program might not be as easy to implement as some health plans are anticipating.

“I don’t think we should expect a lot, at least not in the first year,” he said. “A lot of these plans don’t have a history of operating in rural communities, and we don’t know how well they will be able to extend into these service areas and market to these rural beneficiaries.”

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