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BRIEFING SUMMARY
"Managing Insurance Risk in a Medicare
Prescription Drug Benefit"
December 19, 2002
The Alliance to Improve Medicare (AIM) and the Progressive Policy
Institute (PPI) hosted a Congressional staff briefing to examine financial risk sharing models for a stand-alone Medicare prescription drug benefit. Speakers included Ian Spatz, Merck & Co., Inc; Jonathan
Blum, Democratic Staff, Senate Finance Committee; John McManus, Majority Staff, House Ways & Means Health Subcommittee; and Steven M. Lieberman, Congressional Budget Office. Julie James, Health Policy
Alternatives, Inc., served as moderator for the briefing.
Ms. James outlined the briefing goals of providing an overview of the
various risk concepts and an understanding of the debate surrounding risk in a Medicare drug benefit.
She also provided a brief description of three basic risk models: 1) insurance risk in which a private entity sets premiums based on estimates of coverage expense for an entire subscriber group ; 2) selection risk or utilization risk in which a private entity seeks to ensure a broad range of participants of all age groups and health status; and 3) performance or administrative risk in which payments to a private entity from the federal government are based on how efficiently the benefit is delivered. Ms. James also noted that most Medicare drug benefit proposals include some form of risk sharing arrangement.
Mr. Spatz noted that, in contrast, the traditional Medicare
fee-for-service program is social insurance as the risk is fully borne by the federal government and taxpayers.
He then outlined the value of insurance risk to government, providers, and beneficiaries. To government, risk represents an opportunity to control costs which helps to ensure program sustainability. To providers, shared risk concepts offer opportunities for reduced government micro-management and greater flexibility in plan design. Providers and beneficiaries also benefit from shared risk concepts through better competition and differentiation in premiums. Beneficiaries can also realize lower costs through shared risk concepts. Finally, shared risk permits government, providers and beneficiaries to better align incentives.
Outlining the range of risk models, Mr. Spatz noted that the full
capitation model is currently evidenced in the Medicare+Choice program and he stated that no Medicare drug benefit proposals have utilized the full capitation model. Next, Mr. Spatz discussed the reinsurance
model and noted that the 107th House-passed Medicare drug bill (H.R. 4954) utilized this model by providing subsidies to all beneficiaries.
Mr. Spatz then cited the risk corridor model and the Federal Employee Health Benefits Plan (FEHBP) model. He noted that these models are similar in that plans are permitted flexibility in setting premiums based on estimated coverage costs. The difference, he noted, is that under the FEHBP model, plans do not realize true profits or loses as profits are held in account by the government. Plans in a risk corridor model realize only limited losses or profits depending on a present risk window. Finally, Mr. Spatz outlined the performance risk model and noted that this model does not necessarily require cost sharing but most often includes cost savings realized through incentives to the plan without insurance risk.
Mr. Spatz then outlined provider industry problems with shared risk
models. First, pharmacy benefit management companies (PBMs) are not insurance companies. Second, the population that would participate in a Medicare drug benefit is unknown and it is unclear what type of
plan may be most attractive. Third, utilization patterns are unknown, in part, because one-third of Medicare beneficiaries currently lack drug coverage. Fourth, a large amount of money is at stake in a
high volume business with traditionally low margins. Finally, private entities have not had good experiences in past government partnerships and state governments as partners are unknown entities.
Finally, Mr. Spatz outlined misconceptions about risk in a Medicare
drug benefit, noting that the benefit design will not resemble the Medicare+Choice program.
He also noted that there is no logical reason for premium or cost sharing to vary by region as plans would have incentives to offer the lowest premium possible to attract patients and such regional variations do not exist in the private marketplace. Mr. Spatz stated that adverse selection is a manageable problem. Most important, Mr. Spatz noted that this should not be a political issue because risk assumption and divisions are invisible to beneficiaries.
Mr. Blum then reported on "intense bipartisan discussions to find a
compromise" on a Medicare drug benefit.
He noted two outstanding issues: the cost of a benefit, which will be relatively easy to set, and the delivery mechanism for a benefit, which is far more complex and difficult to design.
Mr. Blum stated that the first question to address in any new benefit
is how to ensure private plan participation. Recognizing insurer and provider concerns outlined by Mr. Spatz, Mr. Blum noted that insurers had expressed lukewarm endorsements but had not as yet guaranteed
participation.
In response, Mr. Blum noted possible ways to address provider concerns including allowing a one-time only enrollment option, providing generous government subsidies, utilizing a reinsurance model, and implementing a risk corridor model.
A risk corridor model, Mr. Blum noted, would allow plans to set a
premium based on estimated costs and would ensure the plan would not suffer losses or realize gains beyond a set window of the estimated premium. For example, a two percent risk corridor would protect a plan
against expenses of more than 102% of estimated costs with the government reimbursing the plan for expenses above that amount.
If the plan's costs were below 98% of estimate, the government would receive the additional savings. Advantages of the risk corridor model, according to Mr. Blum, include a symmetrical risk sharing arrangement, an ability to phase in greater risk sharing, and an ability to cap a plan's overall risk exposure. Citing a consensus among House, Senate and White House officials that a Medicare drug benefit system must utilize a shared risk model, Mr. Blum noted that while Senator Baucus does not necessarily support a risk corridor model, the Senator is "interested in the model as a way to bridge the gap" and encourage early provider participation in a Medicare drug benefit.
Finally, Mr. Blum outlined technical issues under consideration
including how to accurately set the target risk window (and, as an extension, what is the right level of profit for a plan), how the government will assess and compute profit or loss without excessive "hands-on
micro-management," and how much plans should receive for administrative costs.
Mr. McManus agreed with Mr. Blum's assessment that the drug benefit
delivery mechanism is the "biggest stumbling block" to enactment. Mr. McManus stated that the equation for a successful drug benefit would require a shared risk model, arms length
government involvement to ensure greater flexibility, adequate
incentives for negotiations between manufacturers and benefit providers, and a choice of benefit plans including a government-managed fallback option. Putting drug benefit providers at some risk, Mr. McManus
noted, would inject some government involvement to provide accountability without excessive micro-management and would allow plans some flexibility in benefit design. Further, the greater risk shared by the
benefit provider, the greater the provider's incentives to control costs through program efficiencies.
Mr. McManus outlined concerns with requiring a shared risk model
including concerns that benefit providers would be too aggressive in negotiating costs. He noted that the 107th House-passed bill addressed this issue through new protections for beneficiaries.
Additionally, he stated a concern that plans will continue to express reluctance to offer a drug benefit as long as negotiations continue on risk proposals.
Mr. Lieberman noted that the Medicare population will nearly double
within twenty years and, given that growth, federal spending on Medicare, Medicaid and Social Security programs will double as a share of the economy to nearly 15% of gross domestic project.
He also noted that the increase in Medicare, Medicaid and Social Security program spending between 2002 and 2030 will "equal exactly" the total currently spent on discretionary programs.
Addressing a Medicare drug benefit and shared risk models, Mr.
Lieberman noted that because PBMs do not normally bear insurance risk, they may be reluctant to enter the Medicare benefit market.
He stated, however, that there are larger implications for PBMs who choose not to participate including the potential loss of a $100+ billion market and the associated market power. He opined that PBMs could partner with insurers or other risk-bearing entities to help share some financial risk. Mr. Lieberman then outlined additional options for encouraging plan participation including ensuring high beneficiary enrollment, providing an integrated drug benefit in lieu of a stand-alone benefit, utilizing a performance risk model only, and providing federal reinsurance for high cost beneficiaries. Alternatively, Mr. Lieberman suggested a hybrid risk model combining individual reinsurance and a risk corridor model to provide coverage both for high cost beneficiaries and plans with unexpectedly high costs.
Mr. Lieberman outlined two hypothetical plans: one with individual
reinsurance to address concerns about high cost individuals and one with aggregate reinsurance (i.e., a risk corridor) to address high costs across the board.
He noted that risk corridor models are "enormously complicated" and present a "burdensome task to set" risk ranges appropriately. Mr. Lieberman stated that plans must predict the true point of economic loss to accurately set a risk corridor. He reported that risk corridors may encourage plan entry by limiting potential losses and by providing incentives to manage prescription drug spending. However, risk corridors add significant administrative complexity and, if risk sharing is not adequate, plans may have weaker incentives to control costs.
The panel was asked to comment on concerns that PBMs and other
benefit providers may simply push risk costs downstream to pharmacies and beneficiaries.
Mr. McManus responded that any risk sharing model must have beneficiary protections including pharmacy access, adequate formularies, and beneficiary appeals. He noted that the goals of risk sharing and a private sector delivery model were not only to get and keep down costs but also to ensure quality. Mr. Blum noted that policy options must carefully consider the effects and
incentives of risk on all entities and populations. Mr.
Lieberman responded that it is not clear that the impact of risk sharing models will be pushed downstream but noted that some populations will be effected if cost increases are higher than expected. Finally,
Mr. Spatz noted
that there is a difference between the idea that risk will be passed
along and the pain of cost sharing. He stated that shared risk will encourage tougher negotiations with drug manufactures and pharmacies.
Otherwise, he predicted, the benefit will become too costly and government will step in to set drug prices.
Mr. Lieberman was asked if any one risk model resulted in greater
sustainability for a benefit program.
He responded that CBO is currently looking at that question and noted that the effects of individual reinsurance are very different depending on the benefit structure and whether there is a gap in benefit coverage.
Mr. Lieberman was asked how realistic he believes it is to expect
PBMs and other private entities to fully reveal the impact and amount of manufacturer rebates. He responded that rebate income flow could be captured more simply than could developing a truly accurate risk
corridor model.
He agreed, however, that rebates are "absolutely an issue" that must be factored into estimating coverage costs. Mr. Spatz noted that it is an important and difficult issue but stated that rebates have encouraged innovation and cost savings in existing drug benefit programs. Finally, Mr. Blum noted that shared risk arrangements will require more government oversight and provide government with more auditing abilities than currently exist.
The panelists were asked where to locate more information about risk
sharing including reports on successful and unsuccessful experiments. Mr. Blum cited current demonstration projects underway at the Centers for Medicare and Medicaid Services which will eventually provide more
experience and data but noted that it is unlikely to be available before Congress acts on a Medicare drug benefit. Mr. McManus cited reinsurance models contained in recently approved terrorism legislation.
Additionally, an audience member noted that risk sharing and risk corridors are not new ideas in private insurance coverage. The attendee cited risk sharing by many private sector employers and noted that the primary question before policy makers should be finding the correct way to share risk and acceptable tradeoffs.
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