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Medicare Compliance & Reimbursement

Drug Coverage:

Big Risks Await Those Who Offer Medicare PDPs

Published on Wed Jan 26, 2005

Prescription drug plans will be unlike anything health plans or PBMs have offered before

Medicare has again become a profitable market, but it remains to be seen whether offering a prescription drug plan in 2006 will be a good business move.

With PDPs, Medicare is essentially creating a product that hasn't existed before, not even in the commercial market, says John Gorman, president of Gorman Health Group in Washington. PDPs will offer a product that offers drug-only coverage to seniors, and it will be up to the PDP sponsors to determine what type of benefits to offer and figure out how to make a profit. With no pre-existing data on similar programs as a guide, it could be a dicey proposition to figure out how to make a PDP fly, Gorman warns.

When CMS announced the forthcoming Medicare regions last month, most insiders were surprised by the fact that the number of regions for prescription drug plans outnumbered the regions for PPOs.

Having 34 regions for PDPs but only 26 for PPOs is counterintuitive, CMS Deputy Administrator Leslie Norwalk admitted at a press briefing. "Initially, we thought you could have very large PDP regions" because PDP sponsors wouldn't be forced to assemble multi-specialty provider networks, she said.

But CMS made the decision after health insurers and other companies told it that, since stand-alone drug-only coverage will be a brand-new product for which limited underwriting data exists, they fear miscalculating insurance risk and would prefer to limit exposure by handling smaller areas.

Furthermore, while only about a third - at most - of beneficiaries are projected to sign up for PPOs, some actuaries predict that nearly all ultimately will opt for drug coverage. Therefore, even serving a smaller area than a PPO could mean serving just as many or even many more beneficiaries, making it challenging to set up adequate infrastructure quickly.

The bottom line: Though health plans may be disappointed at the small number of PPO regions, they should be glad that the larger number of PDP regions will reduce the risk of participating as a drug-only plan.

It's equally unclear whether pharmacy benefit managers will want to take a chance on PDPs. PDPs are "inherently inconsistent with the PBM model," Gorman says. The reason PBMs are Wall Street darlings is that they are risk averse, taking a set percentage of deals they make with plans and pharmaceutical manufacturers. If a PBM offered a PDP, however, it would need to take insurance risk on the elderly on a product that has never been attempted before.

Also, because few if any PBMs are licensed to offer insurance, Gorman predicts that only those PBMs owned by health plans will offer PDPs.

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