San Francisco Health Service System Health Service Board

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1 San Francisco Health Service System Health Service Board City Plan (UHC) Retirees with Medicare Pharmacy Benefit: Employer Group Waiver Plan (EGWP) May 10, 2012 Prepared by Aon Hewitt Health and Benefits

2 City Plan (UHC) Retirees w/ Medicare Executive Summary Recent federal legislation provides employers the opportunity for additional savings under employer group Medicare pharmacy benefits. Employers who convert their pharmacy benefit for Medicare enrolled to an Employer Group Waiver Program (EGWP) Prescription Drug Plan (PDP) will benefit from the following: CMS Direct Subsidy - the amount of monthly prepayment that CMS remits to PDPs, approximately 74.5% of the cost of the basic coverage; 50% discount for brand drugs in the coverage gap; and 80% CMS paid coinsurance for costs that exceed the annual catastrophic level. Aon Hewitt evaluated the impact of replacing the RDS Plan with a fully insured EGWP. Our findings projected an estimated saving of $2,325,000 annually by moving from an RDS Plan to a fully insured EGWP PDP Plan. While there will be some member formulary disruption because the EGWP PDP is a Medicare-based plan regulated by CMS, the impacted member population is small. Aon Hewitt recommends converting to a fully insured EGWP PDP. This recommendation includes using the UHC Traditional formulary with the recommended grandfathering to minimize disruption. The supporting data can be found in this report. 1

3 City Plan (UHC) Retirees w/ Medicare RDS vs. EGWP Current HSS RDS Rx Plan Proposed EGWP PDP Rx Plan Catastrophic Coverage ($4,750 for 2013 in copays and Pharma discounts only. Not gross cost) Member pays $5/$20 Retail Copay* Government pays 80% Plan pays remainder Member pays $5/$20/$45 Retail Copay* Plan pays remainder Coverage Gap ($2,970 for 2013, includes the total gross cost of the medications) Member pays $5/$20/$45 Retail Copay* Plan pays rest of GENERICS Pharma discounts brand 50% Plan pays remainder Initial Coverage Period Member pays $5/$20/$45 Retail Copay* Plan pays remainder Current RDS Rx Plan has $5 / $20 / $45 (retail) $10 / $40 / $90 (mail order) Copay Plan Design Proposed EGWP PDP Rx Plan has the same $5 / $20 / $45 (retail) $10 / $40 / $90 (mail order) Copay Plan Design (at catastrophic coverage level: only 2 copays - generic/brand) Outcome: Member costs are same or better; Plan costs are lower * Retail copays are used in the graphical example but mail order copays also apply ($10/$40 mail order at catastrophic level) 2

4 City Plan (UHC) Retirees w/ Medicare Administrative Comparison Current RDS Plan HSS pays the full cost of the prescription (minus copay) and later receives a RDS subsidy payment directly from CMS and drug manufacturer rebates from UHC Drug Manufacturers rebates are paid directly to HSS from UHC on a quarterly basis RDS subsidies are received up to 18 months after the end of the plan year Proposed Fully Insured EGWP PDP Plan HSS pays a flat premium to UHC that includes the following savings: CMS Direct Subsidy - the amount of monthly prepayment that CMS remits to PDPs, approximately 74.5% of the cost of the basic coverage Drug rebates - the same rebates that are presently paid directly to HSS (estimated) Manufacturers 50% discount on brand drugs in the coverage gap 80% CMS paid coinsurance for costs that exceed the annual catastrophic level GASB 45 liability RDS Subsidies are not factored into the liability therefore the fully insured EGWP will reduce HSS s liability 3

5 City Plan (UHC) Retirees w/ Medicare Financial Impact RDS SAVINGS RDS subsidy $3,500,000 Estimated Rebates $2,300,000 Total savings $5,800,000 Fully Insured EGWP Up front credit for Rx rebates $2,300,000 Upfront credit for catastrophic claims in excess of TrOOP 1 $3,000,000 Credit for CMS direct subsidy $1,750,000 Credit for 50% manufacturers rebate in coverage gap $1,075,000 Total $8,125,000 Net benefit to go to EGWP over RDS $2,325,000 HSS will realize potential savings to the City Plan (UHC) of $2,325,000 over the current drug costs which include the RDS subsidy and drug rebates. Notes: 1 TrOOP (catastrophic coverage) is True out-of-pocket maximum. This value is defined each year by CMS. When the combined cost of copays paid by the member and pharmacy discounts received in the coverage gap exceed this value, CMS pays 80% of any additional gross prescription costs. 4

6 City Plan (UHC) Retirees w/ Medicare EGWP Disruption to HSS Retirees The proposed fully insured EGWP PDP Plan is based on the same UHC formulary that is currently in place for the City Plan (UHC) called the UHC Traditional Formulary, with two exceptions: Over the past several years, HSS elected to cover 14 additional drugs that are normally excluded from the UHC Traditional Formulary. These 14 additions cannot be covered under the fully insured EGWP PDP Formulary. Current enrolled Medicare retiree users can be grandfathered indefinitely but these drugs cannot be covered for new users (see appendix for more details). CMS enforces a few restrictions that will cause disruption to a small number of HSS members if the fully insured EGWP PDP Plan is adopted: 41 drugs (1.3% of prescriptions in 7/11-12/11) will have lower copays 9 drugs (3.7% of prescriptions in 7/11-12/11, 0.04% ignoring Lipitor) will have higher copays 40 drugs (1.2% of prescriptions in 7/11 12/11) will no longer be covered (Medicare Part D plans cannot cover bulk compounds and some devices see appendix for more details). Before grandfathering, formulary disruption is summarized in this table: Number of Drugs Traditional Formulary without Grandfathering Current Plan Tier 1 Tier 2 Tier 3 Part B Not Covered Total Tier Tier Tier Total ,405 Positive Change. Drug moves to a lower tier. No Change. Drug remains in same tier Negative Change. Drug moves to a higher tier or Drug is not covered Includes the 14 exceptions that can be grandfathered plus the 26 CMS exclusions 5

7 City Plan (UHC) Retirees w/ Medicare EGWP Recommendation Aon Hewitt recommends HSS replace the current RDS Plan with a fully insured EGWP without Wrap effective January 1, Additionally, it is recommended that the Plan utilize the UHC Traditional Formulary and grandfather in the 14 drugs normally not covered under this plan. The impact from this recommendation includes: HSS will realize potential savings to the City Plan (UHC) of $2,325,000 over the current drug costs which include the RDS subsidy and drug rebates; HSS will receive all the financial cash flow advantages and costs benefit of being a group sponsored PDP immediately. This includes CMS Direct Subsides; Drug rebates; Manufacturers 50% discount on brand drugs in the coverage gap, and 80% CMS paid coinsurance for costs that exceed the annual catastrophic level; Some minimal member disruption as members move into the Retirees with Medicare Plan [96.5% of drugs (95.1% of prescriptions) will be covered at the same or lower copay levels]; and Administration and billing will be simplified. 6

8 Appendix

9 City Plan (UHC) Retirees w/ Medicare Grandfathered Drugs Detail Grandfather means that all enrolled Medicare retiree members who used a medication in the prior period will be allowed to continually refill the medication indefinitely at the same copay. The 14 drugs (1,329 prescription in 7/11 12/11) currently covered by HSS that cannot be added to the EGWP PDP Plan but all current users can be grandfathered include: 1. Amrix (cyclobenzaprine extended release) (should be avoided in the elderly) 2. Asacol HD (extended release of a generic and three times daily dosing still required) 3. Atelvia (new brand version of a generic risedronate - Actonel) 4. Caduet (combination of two generically available drugs) 5. Clobex (new brand version of a generic topical steroid) 6. Coreg CR (extended release of a generically available drug one daily versus twice daily) 7. Detrol LA (extended release of a generically available drug one daily versus twice daily) 8. Doryx (doxycycline hyclate) (a different salt doxycycline monohydrate is generic and covered) 9. Epiduo (benzoyl peroxide combination product for acne) 10. Flector (diclofenac patch) (oral diclofenac is generic and is covered) 11. Prevacid (lansoprazole) (several alternatives for esophageal reflux are covered as well as OTCs) 12. Nexium (several alternatives for esophageal reflux are covered as well as OTCs) 13. Requip XL (extended release of a generically available drug) 14. Veramyst (new brand version of a generic fluticasone, equivalent alternatives are covered) 8

10 City Plan (UHC) Retirees w/ Medicare Drugs That Can Not be Grandfathered Medicare Part D plans cannot cover bulk compounds and some devices Bulk compounds are drugs in powder form used for compounding. The powder forms can be replaced with capsule/tablet forms Devices are items such as spacers for inhalers (cost for these items average $60) There are 26 compounded drugs and devices (95 prescriptions in 7/11 12/11) that will no longer be covered Inhaler Aids (Aerochamber, Easivent, Optichamber, Prochamber) Narcotic & Pain Compounds ( hydrocodone, ketamine, morphine, oxycodone, naltrexone, cyclobenzaprine, gabapentin) Hormone Compounds (estradiol, fluoxymesterone, progesterone, testosterone) Steroid Compounds ( dexamethasone, hydrocortisone, ketoprofen, budesonide) Misc Compounds (cromyolyn, fluconazole, phentolamine, vortex) HSS will work with UHC to notify the disrupted members and provide them with formulary alternatives 9

11 2012 Rates and Benefits Negotiations Glossary of Terms Administrative Service Fee (ASO) Fee paid to an insurer or other third party for processing claims, managing regulatory requirements and other tasks related to group health coverage. Benefit Parity When the types and costs of services covered by different health plans are equivalent. Blended Rate A combined insurance premium that is a composite of two or more rates. An insurer may bring two classes of members into a single risk pool, in order to offer a more equitable premium. Capitated Rate Fixed per-person payment, made by insurer to the healthcare provider. Case Management Coordination of medical services, to ensure more effective and integrated care. CMS Centers for Medicare & Medicaid Services the US federal agency that administers Medicare, Medicaid, and the Children s Health Insurance Program. Disease Management A system of coordinated health care interventions and communications, designed to enhance a patient s compliance with treatment and medication orders. Employer Group Waiver Plan (EGWP) The Centers for Medicare and Medicaid Services (CMS) make this option an attractive way to achieve significant savings to a retiree employee prescription plan. ERRP The Early Retiree Reimbursement Program provides reimbursement to participating employment-based plans for a portion of the costs of health benefits for early retirees and early retirees spouses, surviving spouses, and dependents. The program was authorized in the federal Affordable Care Act. Flat Renewal When an insurer provides the same benefits with no increase in premium rates year over year. Flex Funding Alternative form of funding for medical expenses that allows employer to pay only the true cost of the program. Generally, claims cost, administration charge, and stop loss charges. Fully Insured Plan When an employer contracts with another organization to assume all financial risk for the enrollees utilization of services and incurred administrative costs. Grandfathered Status A term used in federal health reform legislation, generally interpreted as an existing health plan that does not make significant changes to benefits, copays or premiums. HMO A Health Maintenance Organization that assumes the financial risks and responsibilities of providing comprehensive health care in a particular geographic area to HMO members in return for a fixed, prepaid fee. Financial risk is sometimes shared with physicians groups and other medical service providers. Incurred But Not Reported (IBNR) Claims reserve that is required for self funded medical benefit plans to recognize expenses that will ultimately be paid but have not yet been received by the claims administrator. Indemnity Plan A type of medical plan that reimburses the patient and/or provider as expenses are incurred. IPA An Independent Practice Association or health care provider organization composed of a group of independent practicing physicians who maintain their own offices and band together for the purpose of contracting their services to HMOs. Large Claim Pooling A system designed to help stabilize premium fluctuations in smaller insured groups. Expensive claims (those over a stated amount) are charged to a larger number of plan participants, so the costs are spread in aggregate across a greater number of plan participants. Limited Network When, to contain costs, an insurance plan offers medical service only through specific contracted doctors and hospitals. Medical Group See IPA Medicare A health insurance program administered by the federal government providing coverage to people who are aged 65 and over, or who meet other special criteria. Traditional or fee-for-service Medicare has a standard benefit package that covers medically necessary care that members can receive from nearly any hospital or doctor in the country. Medicare Part A is hospital insurance. Medicare Part B is medical insurance. Medicare Part D covers prescription drugs. Medicare Advantage With this type of health plan, the enrollee assigns Medicare benefits to a health plan while he or she is enrolled. The federal government then pays the insurer a capitated rate, or set amount, every month for each participant. Plan enrollees receive service only from within the network contracted by the Medicare Advantage plan. Medicare Modernization Act(MMA) A federal law of the United States, enacted in It produced the largest overhaul of Medicare in the public health program's 38-year history. Its most touted change was the introduction benefit for prescription drugs, through tax breaks and subsidies. Migration Movement of enrollees between different health plans. Non-Medicare Rates Health insurance premiums for a group of enrollees who are not eligible to participate in Medicare. Network Model HMO An HMO that contracts with multiple physician groups and/or hospitals to provide services to enrollees. (See HMO.) Open Network A health plan that allows enrollees to obtain service from any doctor or hospital. Per Capita Average per person. Performance Guarantees Standard for quality of service provided by the insurer, as established by the contract with the employer. Financial penalties may be levied if the insurer fails to meet specific, required measures. Pharmacy Benefit Manager (PBM) A third party administrator (TPA) of prescription drug programs. They are primarily responsible for processing and paying prescription drug claims. They also are responsible for developing and maintaining the formulary, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers. Pooling Charge A charge assessed to self funded medical benefit plans for claims in excess of a specified threshold amount. Premium Agreed-upon fees paid for health benefits coverage during a defined benefit period. Premiums can be paid by employers, unions, or employees. Premium costs are often shared among these entities. PMPM Per member per month. Preferred Provider Organization (PPO) A Preferred Provider Organization plan is where coverage is given to participants through a network of selected hospitals and physicians. Enrollees may go outside the network, but then incur higher deductibles, higher coinsurance rates, or non-discounted provider charges. Rate Guarantee When an insurer contractually agrees to lock in premium costs for a certain period of time. Retiree Drug Subsidy (RDS) The Medicare Modernization Act of 2003 (MMA) created an outpatient prescription drug benefit (known as Medicare Part D). The law included a subsidy for employers who provide retiree drug benefits at least equal in value to the Part D benefits. The subsidy was intended as an incentive for employers to continue to provide benefits. The subsidy reimbursed employers 28 percent of the cost of actual spending on prescription drugs for Medicare eligible retirees. Renewal Continuing insurance coverage with an existing insurance plan by contractual agreement. Re-rating While negotiating premium rates, an insurer calculates the probability of how much utilization is likely to occur by a particular group. If a significant factor changes, such as the number of expected enrollees, the insurer may recalculate the rates. Risk In general, risk is the probability that a return on investment will be lower than expected. With regard to health insurance, risk is based on the amount of money assigned to meet the care needs of a pool of covered individuals, and which party agrees to assume responsibility for any financial shortfall. Request for Proposal (RFP) A Request for Proposal clearly defines criteria for comparison that allows providers of a product or service to bid on the right to supply that product or service. SB 946 Requires carriers to offer coverage for behavioral health treatment for members with autism spectrum disorders (ASD). Self Insured Plan (Self Funded) This refers to the funding mechanism for a health plan in which the employer assumes the costs of health care and administrative services for individuals in the plan. Senior Advantage See Medicare Advantage. SSSG Similarly Situated Subscriber Group enrollee groups that have very similar characteristics, such as equivalent demographics and utilization. Staff Model HMO A type of HMO where patients receive service in the HMO s own facilities from health care professionals who are employees of the HMO. (See also HMO.) Stop Loss A form of reinsurance for self-insured employers that limits the amount the employers will have to pay for each person s health care (individual limit) or for the total expenses of the employer (group limit). Trend Future projections based on factors, such as enrollment, utilization, service and administrative fees, which impact health plan risk and premium costs. Utilization The extent to which an insured group uses a particular health care service in a specified period. The data is typically expressed as the number of services used per year per 100 or per 1000 persons.