Medicare s Part D Drug Benefit At 10 Years: Firmly Established But Still Evolving

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1 Medicare By John F. Hoadley, Juliette Cubanski, and Patricia Neuman doi: /hlthaff HEALTH AFFAIRS 34, NO. 10 (2015): Project HOPE The People-to-People Health Foundation, Inc. DATAWATCH Medicare s Part D Drug Benefit At 10 Years: Firmly Established But Still Evolving Despite initial controversy and uncertainties, Medicare Part D now provides drug coverage to thirty-nine million beneficiaries through dozens of private plans in each region. Although firmly established, the program faces challenges, including projected spending growth. Enrollees also face challenges as plans adopt new strategies to control John F. Hoadley (jfh7@ georgetown.edu) is a research professor in the Health Policy Institute at Georgetown University, in Washington, D.C. Juliette Cubanski is associate director of the Program on Medicare Policy at the Henry J. Kaiser Family Foundation in Menlo Park, California. Patricia Neuman is senior vice president and director of the ProgramonMedicarePolicy at the Henry J. Kaiser Family Foundation in Washington, D.C. costs.medicare s fiftieth anniversary in 2015 coincides with the tenth year of the Medicare Part D prescription drug benefit, created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and implemented in Initially several features of Part D were highly controversial: provision of drug coverage exclusively through private plans, prohibition on government price negotiations, the coverage gap (or doughnut hole ), and the program s overall cost and financing. 1 Some controversies remain, while others (such as that over the coverage gap) have been resolved. Today Part D is firmly established as the primary source of drug coverage for thirty-nine million Medicare beneficiaries (Exhibit 1). This article reviews trends from the first ten years of Part D, focusing mainly on beneficiary-related issues and drawing primarily on an analysis of data from the Centers for Medicare and Medicaid Services (CMS). 2 Enrollment Trends Part D made quick progress toward the goal of expanding access to outpatient prescription drug coverage, increasing in its first year the share of Medicare beneficiaries with any drug coverage from 75 percent 3 to 90 percent 2 and reaching a total of 22.5 million beneficiaries in Part D stand-alone drug plans (supplementing Exhibit 1 Trends In Medicare Part D Enrollment, By Type Of Plan, SOURCE Authors analysis of Medicare Part D plan and enrollment data files from the Centers for Medicare and Medicaid Services. NOTES Between 2006 and 2010, Medicare enrollment increased from forty-three million to fifty-five million, and Part D enrollment as a percentage of Medicare enrollment increased from 53 percent to 72 percent. Low-income subsidy enrollment decreased from 41 percent of Medicare Part D enrollment in 2006 to 30 percent in MA is Medicare Advantage Health Affairs October :10

2 traditional Medicare) or Medicare Advantage drug plans (private health plans that provide all Medicare-covered benefits). New Part D enrollees included some who had lacked drug coverage and others whose previous coverage had been limited. Some key program features included federal subsidies that helped keep premiums affordable, a premium penalty that discouraged late enrollment, and automatic transfer of benefits from Medicaid to Part D for the many lowincome Medicare beneficiaries who also received Medicaid coverage (known as dual eligibles). Since 2006 the majority of enrollees have chosen stand-alone drug plans (Exhibit 1). However, the share of enrollees in Medicare Advantage drug plans has increased from 28 percent in 2006 to 39 percent in 2015, reflecting broader growth in Medicare Advantage enrollment. 2 In 2006, 53 percent of all Medicare beneficiaries were in a Part D plan, including some who had switched from another source of drug coverage, such as an employer plan or Medicaid. By 2015 Part D enrollment had risen to 72 percent, as more people aged into Medicare and as some employers shifted retirees drug coverage to employer-only Part D plans due to a change in law that reduced the value of the federal subsidy for employer-based drug coverage. Despite the broad reach of Part D, 12 percent of Medicare beneficiaries lacked drug coverage in 2012 (the most recent year for which data are available). 4 Less-than-universal coverage may be because Part D is voluntary, with no default enrollment. Some people with low drug costs may choose to self-insure instead of purchasing coverage, while others may consider Part D unaffordable or have difficulty understanding their options. Low-Income Subsidy A noteworthy feature of Part D is its low-income subsidy, which is the only Medicare benefit with direct premium and cost-sharing subsidies for low-income beneficiaries. In 2015 Medicare provided this subsidy to nearly twelve million beneficiaries (Exhibit 1), or 30 percent of Part D enrollees down from 41 percent in To qualify for the subsidy, individuals must have incomes below 150 percent of the federal poverty level and modest assets or must qualify for Medicaid, Supplemental Security Income, or one of the Medicare Savings Programs (whereby states help pay Medicare premiums and cost sharing). Nearly 90 percent of those who receive the lowincome subsidy were automatically deemed eligible for it because of their participation in these programs; only about 10 percent applied for the subsidy. 5 Low-income beneficiaries might not receive the subsidy because their assets exceed the limit ($13,640 for a single person in 2015) or because they are unaware of the benefit. 6 This extra help for low-income beneficiaries reduces their financial burdens from premiums and cost sharing. 6 However, some low-income beneficiaries do not receive the full financial assistance available to them. Each year, as a result of changes in which plans qualify as premiumfree, CMS reassigns some beneficiaries to plans with no premium, but only those originally assigned to their plan by CMS are reassigned. As a result, one in seven subsidized beneficiaries pay Part D premiums when they could have selected premium-free plans, although some may do so intentionally to get better coverage. 2 Plan Availability And Consumer Choice Part D was designed to be delivered exclusively by private plans. Before 2006 it was uncertain whether firms would sponsor stand-alone drug plans. In fact, Part D has attracted many plans, and the average beneficiary has had a choice of at least thirty stand-alone plans and fourteen Medicare Advantage drug plans each year since 2009 (Exhibit 2).While the number of plans offered to enrollees has fallen because of market consolidation and both statutory and regulatory changes, the average beneficiary continues to have many options. The architects of Part D envisioned that beneficiaries would choose among competing plans each year, switching plans as needed for better coverage or lower costs. Yet few enrollees voluntarily switch plans during open enrollment. 7 This low switching rate means that beneficiaries are not necessarily getting the best value for their Exhibit 2 Average Number Of Medicare Part D Plans Offered To Enrollees, By Type Of Plan, SOURCE Authors analysis of Medicare Part D plan and enrollment data files from the Centers for Medicare and Medicaid Services. NOTES Estimates are beneficiary weighted. The numbers of standalone drug plans are reported at the region level; the numbers of Medicare Advantage (MA) drug plans are reported at the county level. Data for MA drug plans for are not available. October :10 Health Affairs 1683

3 Medicare Exhibit 3 Distribution Of Medicare Part D Enrollment By Plan Type And Health Insurance Firm, 2006 And 2015 SOURCE Authors analysis of Medicare Part D plan and enrollment data files from the Centers for Medicare and Medicaid Services. NOTES The exhibit includes plans in the US territories and employer group plans. MA is Medicare Advantage. UnitedHealth is UnitedHealthcare. WellPoint is now known as Anthem. Member Health has been acquired by CVS Health. Exhibit 4 dollars and that plan sponsors have little incentive to reduce premiums to retain or attract enrollees. Market Concentration From the start, Part D enrollment has been fairly concentrated among a small number of firms, Medicare Part D Weighted Average Monthly Premiums, Overall And By Plan Type, and the market is somewhat more concentrated today than it was in 2006 (Exhibit 3). In 2015, as in 2006, UnitedHealthcare and Humana have the largest numbers of Part D enrollees. CVS Health has increased its market position over time by acquiring other firms. These three firms account for nearly 60 percent of stand-alone drug plan enrollment in Among Medicare Advantage drug plans, UnitedHealthcare and Humana each have 20 percent of the market in 2015, and Kaiser Permanente has 9 percent. Proposed acquisitions of Humana by Aetna and Cigna by Anthem, if approved, will increase market concentration and make the consolidated Aetna-Humana firm the largest sponsor of both types of plans. While consolidation could simplify the market by streamlining choices, it could also weaken competition and increase costs. Part D Premiums The average monthly premium charged by standalone drug plans has increased more than 40 percent since the start of the program, from $26 to $37, but it has been flat since 2009 (Exhibit 4). Average Medicare Advantage drug plan premiums have been lower than stand-alone plan premiums, primarily because Medicare Advantage drug plans lower their Part D premiums by using rebates from Medicare payments to plans for services covered by Parts A and B. These averages, however, mask sizable increases among some plans with high enrollment. The monthly premium for UnitedHealthcare s AARP MedicareRx Preferred plan has nearly doubled since 2006, and the premium for the Humana Enhanced prescription drug plan has more than tripled. Both plans now charge over $50 per month. By contrast, SilverScript Choice (from CVS Health) has lowered its premium by one-fifth since 2006 and now charges less than $25. 2 Because few enrollees switch plans, plans face limited risk of losing enrollees when raising premiums. However, some sponsors have introduced low-premium plans to attract new beneficiaries who have low drug costs. SOURCE Authors analysis of Medicare Part D plan and enrollment data files from the Centers for Medicare and Medicaid Services. NOTES Average premiums are weighted by enrollment in each year (as of April for 2015). The exhibit does not include plans in the US territories. MA is Medicare Advantage. Benefit Design And Cost Sharing The Part D statute defines a standard benefit design but gives plans flexibility to deviate from it within limits. The standard benefit includes a deductible, uniform coinsurance, a coverage gap, and catastrophic coverage with 5 percent coinsurance above a threshold for out-of-pocket spending. The Affordable Care Act included a provision phasing out the coverage gap by 2020, eliminating significant out-of-pocket costs Health Affairs October :10

4 From the start, nearly all Part D enrollees have been in plans offering alternative designs. Today the typical enrollee s plan has five cost-sharing tiers, with tiers for preferred and nonpreferred brand-name and generic drugs and for high-cost specialty drugs (Exhibit 5). About half of Part D enrollees are in plans with deductibles. Since 2006, cost sharing the amount an enrollee pays per prescription has increased substantially for brand-name drugs but has decreased for generics (Exhibit 5). Cost sharing in the median stand-alone drug plan rose from $28 to $38 for preferred brand-name drugs and from $55 to $80 for nonpreferred brand-name drugs. Also, more enrollees are in plans with coinsurance, not flat copayments, for brandname drugs. The share of stand-alone drug plan enrollees in plans that charge the maximum coinsurance for specialty drugs (33 percent) has jumped from 13 percent to 48 percent. By contrast, cost sharing for preferred generic drugs has fallen from $5 to $1, which strengthens enrollees incentive to select generics. For the average Part D enrollee without a lowincome subsidy, monthly out-of-pocket spending declined from $59 in 2007 to $47 in 2012, reflecting the impact of partially closing the coverage gap and increased use of generic drugs. 8 These averages, however, do not convey the extent of out-of-pocket spending among enrollees with extraordinarily high drug costs. For example, in 2012 a small share of nonsubsidized beneficiaries had out-of-pocket spending above the catastrophic coverage threshold ($4,700 in that year), which was substantially above the $564 average. 4 Low-income subsidy beneficiaries are not subject to tiered cost sharing; instead, their copayments are set by statute. Consequently, these enrollees spend, on average, $7 out of pocket per month on their prescriptions, or about one-seventh the average monthly cost of medications for nonsubsidized enrollees. 8 Other Cost And Utilization Management Strategies Part D places the responsibility for managing utilization and costs on private plans. In addition to cost sharing, plans have increasingly used other management tools. For example, the average stand-alone plan enrollee in 2015 is in a plan Exhibit 5 Changes In Medicare Part D Stand-Alone Drug Plan Characteristics From 2006 To 2015 Characteristic Benefit design Enrollees with tiered cost sharing instead 78% 100% of the standard benefit Design of tiered cost sharing (median plan) 1 tier for generic drugs, 2 tiers for brandname drugs (preferred and nonpreferred), and 1 tier for specialty drugs 2 tiers for generic drugs (preferred and nonpreferred), 2 tiers for brand-name drugs (preferred and nonpreferred), and 1 tier for specialty drugs Enrollees in plans with tiers who have coinsurance instead of flat copayments for tiers for brand-name drugs Enrollees in plans with tiers that have a tier for specialty drugs Enrollees in plans with a tier for specialty drugs that have cost sharing of 33% Enrollees with deductibles Preferred drugs: 12%; nonpreferred drugs: 14% 82% 100% 13% 48% 44% with deductible up to $250 maximum Cost-sharing amounts (median plan) For preferred generic drugs $5 $1 For nonpreferred generic drugs No separate tier $4 For preferred brand-name drugs $28 $38 For nonpreferred brand-name drugs $55 $80 Formularies (mean plan) Drugs on formulary 87% a 83% Covered drugs subject to prior authorization 8% a 23% Pharmacy networks Enrollees with tiered pharmacy networks 0% 81% Preferred drugs: 28%; nonpreferred drugs: 63% 52% with deductible up to $320 maximum SOURCE Authors analysis of Medicare Part D plan and enrollment data files from the Centers for Medicare and Medicaid Services. NOTE All calculations are based on stand-alone drug plans only and are weighted by enrollment. a Estimate is for October :10 Health Affairs 1685

5 Medicare that requires prior authorization for 23 percent of formulary drugs, up from 8 percent in 2007 (Exhibit 5). Prior authorization requirements make it more difficult for beneficiaries to get needed medications, but they help plans ensure appropriate drug use and manage costs. A rapidly growing trend has been the use of tiered pharmacy networks, in which enrollees pay less at pharmacies where plans have negotiated lower prices. These arrangements emerged in 2011, and in 2015, 81 percent of stand-alone drug plan enrollees are in plans that have them (Exhibit 5). CMS has noted that these networks may raise cost and access issues for consumers. 9 After ten years, Part Disafirmly established source of Medicare drug coverage, with a steady rise in enrollment. Program Cost Trends Total Part D benefit spending grew from $44.3 billion in 2006 to an estimated $88.6 billion in 2015 (from 10.8 percent to 13.6 percent of total Medicare spending). 10 Spending per enrollee increased on average by 3.2 percent annually between 2006 and Growing reliance on generic drugs and the introduction of few new costly drugs kept spending growth lower than expected. 11 Part D spending per enrollee rose by 10.8 percent in 2014 (driven especially by hepatitis C drugs), and more rapid growth is likely to continue. The average annual growth in per person Part D spending between 2014 and 2024 is projected to be 5.8 percent, almost double the average growth rate from 2006 to Actual spending has fallen short of projections to date, so future spending may be lower than current projections. 11 In the next decade, however, generic substitution will offer fewer opportunities to slow growth, and approvals of expensive new drugs will increase cost pressures. Accelerated spending growth is stirring interest in proposals to reduce drug costs for beneficiaries and the Medicare program and increasing pressure on plans to implement additional costsaving measures. Conclusion After ten years, Part D is a firmly established source of Medicare drug coverage, with a steady rise in enrollment. Since 2006, plans have increased cost sharing for brand-name drugs, imposed prior authorization requirements on more drugs, and adopted tiered pharmacy networks. In the future, plans and policy makers face the challenge of slowing spending growth while protecting beneficiaries gains in access and affordability for prescription drugs. Jack Hoadley s work on this research was conducted under a contract between the Henry J. Kaiser Family Foundation and Georgetown University. The authors thank Anthony Damico for assistance with data analysis, Elizabeth Hargrave and Laura Summer for their contributions to this research, and two external reviewers for valuable feedback on an earlier draft of this article Health Affairs October :10

6 NOTES 1 Oliver TR, Lee PR, Lipton HL. A political history of Medicare and prescription drug coverage. Milbank Q. 2004;82(2): Hoadley J, Cubanski J, Neuman T. Medicare Part D at ten years: the 2015 marketplace and key trends, [Internet]. Menlo Park (CA): Henry J. Kaiser Family Foundation; 2015 Oct 6 [cited 2015 Oct 6]. Available from: kff.org/other/report/medicare-partd-at-ten-years-the-2015-marketplaceand-key-trends / 3 Stuart B, Briesacher BA, Shea DG, Cooper B, Baysac FS, Limcangco MR. Riding the rollercoaster: the ups and downs in out-of-pocket spending under the standard Medicare drug benefit. Health Aff (Millwood). 2005;24(4): Medicare Payment Advisory Commission. Report to the Congress: Medicare payment policy [Internet]. Washington (DC): MedPAC; 2015 Mar [cited 2015 Aug 27]. Chapter 14. Available from: documents/reports/chapter-14- status-report-on-part-d-(march report).pdf?sfvrsn=0 5 Based on the authors analysis of a 5 percent sample of Medicare claims for from CMS s Chronic Conditions Data Warehouse. 6 Summer L, Hoadley J, Hargrave E. The Medicare Part D low-income subsidy program: experience to date and policy issues for consideration [Internet]. Menlo Park (CA): Henry J. Kaiser Family Foundation; 2010 Sep [cited 2015 Sep 14]. Available from: 7 Hoadley J, Hargrave E, Summer L, Cubanski J, Neuman T. To switch or not to switch: are Medicare beneficiaries switching drug plans to save money? [Internet]. Menlo Park (CA): Henry J. Kaiser Family Foundation; 2013 Oct 10 [cited 2015 Aug 27]. (Issue Brief). Available from: to-switch-or-not-to-switch-issuebrief/ 8 Medicare Payment Advisory Commission. A data book: health care spending and the Medicare program [Internet]. Washington (DC): Med- PAC; 2015 Jun [cited 2015 Aug 12]. Available from: 9 Centers for Medicare and Medicaid Services. Announcement of calendar year (CY) 2016 Medicare Advantage capitation rates and Medicare Advantage and Part D payment policies and final call letter [Internet]. Baltimore (MD): CMS; 2015 Apr 6 [cited 2015 Aug 27]. Available from: Health-Plans/MedicareAdvtgSpec RateStats/Downloads/ Announcement2016.pdf 10 Boards of Trustees annual report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds [Internet]. Baltimore (MD): Centers for Medicare and Medicaid Services; 2015 Jul 22 [cited 2015 Jul 23]. Available from Research-Statistics-Data-and- Systems/Statistics-Trends-and- Reports/ReportsTrustFunds/ Downloads/TR2015.pdf 11 Hoadley J. Medicare Part D spending trends: understanding key drivers and the role of competition [Internet]. Menlo Park (CA): Henry J. Kaiser Family Foundation; 2012 May [cited 2015 Aug 12]. (Issue Brief). Available from: foundation.files.wordpress.com/ 2013/01/8308.pdf October :10 Health Affairs 1687