Mending Medicare Part D

1
Mending Medicare Part D

• Richard G. Frank
• Harvard University
• Support From Hamilton Project and NIMH

2
Introduction

• Talk presents elements of three papers
• Mending Medicare Part D (with Joe Newhouse)
• Government negotiation for drug prices what
  might that mean? (with Joe Newhouse)
• Drug price indexes and health policy change (with
  Ernie Berndt)
• Focus today
• Part D PDP choice environment
• Drug prices under Part D
• Donut hole

3
Background Drug Coverage For The Elderly In 2000

• 25 of Medicare beneficiaries had no drug
  coverage all year
• 40 had no coverage for at least part of year
• Average drug spending in 1999 gt 1250
• 17 of beneficiaries spent 5000 or more
• 48 of beneficiaries had incomes lt 300 of poverty

4
Policy Problem Set by Congress/Administration 2003

• Offer insurance coverage against cost of
  prescription drugs
• Use markets to provide coverage and distribute
  drugs
• Provide beneficiaries choice of drug coverage
• Keep government out of price determination
• Live within a 400 billion 10-year budget

5
Some Initial Successes of Part D

• About 2.7 million low income Medicare
  beneficiaries obtained coverage when previously
  they had none (Cubanski and Neuman, 2006)
• Public opinion is generally positive
• Premiums and spending levels have been lower than
  predicted (partly due to lower than expected
  take-up)

6
Policy Set Up Created Unfortunate Design Choices

• The number and complexity of choices facing
  consumers
• Confusion and errors in decisions
• Selection incentives
• Prices for drugs that stress federal budget and
  likely produce rents for industry
• Purchases on behalf of dual eligibles
• Unique drugs
• Inefficient risk bearing donut hole

7
Complexity of Choice Facts

• 1875 plans operate in 34 markets across the
  nation (16 carriers dominate)

8
Dimensions of Choice Facts

• Number of choices per market 45-66
• Formulary Design
• Considerable leeway in how many and which drugs
  can be included
• Protected classes
• Prior Authorization/Fail First/Stepped Care
• Benefit Design copays/coinsurance tiering
  deductibles mail order
• High dimension choice problem

9
Evidence on Decision Making

• McFadden et al fall 2005 survey offering
  hypothetical choices of 4 plans
• 36 chose best protection against expected
  spending
• 26 chose catastrophic plan that was cost
  minimizing for 51 of respondents
• MedPac survey
• High percentages report difficulty in making
  choices
• Appears to have discouraged some from joining

10
Evidence on Decision Making

• Simon-Lucarelli
• Find low correlation between expected OOPS and
  premiums
• Public opinion (KFF)
• 75 of seniors polled reported choices were too
  complicated
• 60 favored reducing the number of plans offered
• 25 of those qualifying for subsidy did not join

11
Selection

• Drug spending is among most predictable elements
  of health care spending
• Risk adjusters used in Part D account for about
  23 of the variance in drug spending where 55
  is explainable (Wrobel et al 2003-04)
• Generous enhanced plans have raised premiums
  and reduced coverage in year 2 (e.g. Humana
  enhanced)
• Irony more confusion less selection

12
Towards a Fix

• Reduce dimensionality of choice
• Attenuate selection incentives
• Preserve variety and choice

13
Proposed Steps I

• Standardize Benefits
• Use process for Medicare supplements as model
  (NAIC)
• Standardize within standard, actuarial
  equivalent and enhanced strata
• Reduce the number of plans per region to between
  6 and 10
• Evidence from 401K experience

14
Proposed Steps II

• Competition-Selection
• Competition for Contracts
• Bids for 6-10 standardized plans in each region
• Weighted average bids (initial weight could be
  set based on year 2 enrollment patterns or
  possible overweighing of high option)
• Constrain national market shares of bidding firms
  (e.g. 30)
• Administrative burden increased

15
Proposed Step III

• Assign each new beneficiary to a default plan
  based on least expected OOP costwith immediate
  switching permitted
• Offer beneficiaries easier information regarding
  impacts of choices for them

16
Part D and the Federal Budget

• In 2007 Medicare is projected (by CBO) to be
  15.7 of the federal budget or 3.1 of GDP
• By 2017 Medicare is projected to account for 21
  of the federal budget or 4 of GDP
• Part D is projected to account for over 700
  billion in cumulative spending for the 2006-2015
  period (CBO, 2007) ltNote Congressional
  gamesmanship re 400 billiongt

17
Medicare Outlays Part A, B and D
Billions of
18
Price Policy Three Segments

• Dually Eligible People
• Drugs purchased by non-dually eligible people
  where there are multiple close competitors
• Unique drugsespecially those heavily used by the
  elderly
• Plavix
• Forteo

19
What Is Known About Prices?

• Dually Eligible People
• Prior to 2006 drugs purchased under best price
  provisions for Medicaid
• Anti-psychotic drugs single most purchased drugs
  for dual eligibles (70 of anti-psychotics
  purchased by Medicaid prior to 2006)
• Manufacturers report important revenue gains from
  shift to Medicare (evidence in 10Qs)
• Pfizer adds 325 million to bottom line in first
  6 months of 2006 or 8 of net revenues
• Astra, Bristol Myers and Lilly make similar
  reports
• RD robust for these drug prior to 2006

20
What Do We Know About Prices?

• Unique Drugs
• Competition requires competitors
• For high cost unique drugs consumers will face 5
  cost sharing PDP face 80 subsidy
• Impact of insurance coverage and unique status is
  a patent system on steroids
• Distortions 4 to 20 fold
• Estimate 3-4 unique drug per years for past 30
  years fewer in most recent years (since 2000)

21
Patent Monopoly With Insurance
P
PI PM )Co-insurance
22
Analysis of Brand Name Drug Prices

• Construct Prices Indexes (Laspeyres and Fisher)
• Focus on Top Selling Branded products w/no
  generic competitors
• Stratify by elderly share of sales (gt55 and
  lt35)
• Case Study of one unique drug --Forteo

23
Price Indexes for Drugs by Age of Users
24
Steps Towards Better Prices

• For drugs with multiple competitors not used by
  dual eligibles
• Maintain status quo
• For drugs used by dually eligible people
• Return prices to an approximation of Medicaid
  prices but do not apply best price method

25
Steps Towards Better Prices II

• Unique Drugs
• Eliminate non-interference clause
• Monitor transaction prices systematically and
  report to Congress
• Develop a negotiation process for government
  and industry
• Allow for possible temporary administered prices
  based on negotiation process

26
Negotiation via Binding Arbitration

• Define the negotiation period
• Choice of arbitrator (administrative law judge or
  GAO)
• Vetoes for parties
• Make fact finders (experts) available to
  arbitrator
• Parties submit price proposals as final offers
• Arbitrator chooses one of the two price proposals
• Variation on theme fact finder also offers a
  price proposal and arbitrator has three choices

27
Donut Hole

• Standard benefit design promotes inefficient risk
  bearing
• Regulations do not permit actuarially equivalent
  plans to offer higher deductibles and coverage in
  donut hole
• We propose to require generic drug coverage in
  the donut hole and a relaxation of the rules on
  actuarial equivalence

28
What have we proposed?

• Our suggestions aim to rely on market forces when
  they are likely to advance the aims of coverage,
  meaningful consumer choice, efficiency and a
  concern for the federal budget
• This means standardization of benefits and more
  focus on competition for contracts on the PDP
  side
• This means reliance on administered prices for
  dual eligible drug purchases and binding
  arbitration for unique drugs
• We also propose amending the statute in a way
  that improves the efficiency of risk bearing