Wednesday, November 14, 2007

Part D Medicare Drug Plans See Major Price Increases--Why?

The Part D Medicare drug program's weighted average monthly premiums will increase 17% in 2008 and 23% since the program's January 2006 inception. The 2008 increase is well above basic pharmacy cost trend meaning the insurers are doing some rate catch-up. The average is weighted by actual enrollment.

Premiums for the top two Part D Plans (PDPs) by enrollment are up dramatically. According to a study by the Kaiser Family Foundation, the top two plans, that account for one-third of 2007 enrollment, are the United AARP "MedicareRx Preferred" plan and the Humana "PDP Standard" plan.

The United/AARP plan will see a 16% increase over 2007 rates and will increase by 23% over its original January 2006 rates.

The Humana "PDP Standard" will see its rates rise by 71% in 2008 and that plan is up 272% since its original launch in 2006.

Even after these increases, these plans are still affordable. The United/AARP plan still has an average monthly cost of $32.33 while the average cost of the Humana "PDP Standard" is $25.82 per month.

Under all of their plans, United and Humana hold 44% of the Part D market. Humana's "PDP Enhanced" rates will rise 63% between 2006 and 2008. The "AARP/Saver" plan offered by United actually had a rate decrease in 2007 but is now facing an increase of 65% from $14.43 to $23.85 in 2008.

There are also some relatively hidden increases as co-pays go up, formularies are tightened, and name-brand gap coverage has all but evaporated.

Part D will continue to be a very competitive market. A few plans are actually seeing a decrease--Universal American's basic plan will get a 12% cut in 2008. Ninety percent of seniors will actually be able find at least one plan in their market that will be cheaper than their current choice.

Why are the rates rising so much?
  • First, most players priced their programs at "break-even" when the program was launched in 2006. They did so to grab market share correctly believing it's easier to hold on to existing market share then take it away from someone else later in the product cycle.
  • Most of these increases are actually in line with pharmacy trend over a two-year period. The first year increases were light and the second year increase often makes up for that.
  • Many competitors also believed that Part D provided a valuable entry to the more lucrative Medicare Advantage market later on as plans tried to upgrade customers to the broader private Medicare coverage. Now, Medicare Advantage enrollment growth is likely going to slow down from initial levels and the imperative for insurers to "grease the skids" with more competitive Part D rates is not so appealing a strategy.
  • If Medicare Advantage margins are going to come down then Part D margins have got to go up. The insurers understand the extra payments that have made Medicare Advantage so profitable are not going to last much longer (why Wall Street doesn't see that is another issue) and Part D needs to stand on its own. Medicare Advantage is also going to suffer some natural margin slippage as Medicare trend and scheduled payment levels cause challenges anyway.
  • The 2008 Part D price increases are not likely to drive many seniors away because seniors don't like to make plan changes and the new premiums are still quite affordable.
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