Aaa Public Policy Report: Medicare Prescription Drug Coverage Reform

Front 1

Questions/Difficulties in Adding a Drug Coverage to Medicare:

Questions

Back 1

 How will it be funded? (government? private?)
 COB with other drug coverages?
 Who will administer it?
 One fiscal intermediary? one per geographical area? several competitors?
 Will they assume financial risk?
 Design of the drug program itself
 benefits
 cost sharing (copays)
 Risk Adjustment use?
 Which pharmacies will provide the drugs?
 Which cost incentives will be used?
 formulary
 generics cost less
 mail-order

Front 2

Difficulties

Back 2

 huge financial effect (98% of seniors are covered by Medicare)
 Some drug cost factors are out of the control of the PBM or Insurer
 the age/sex/health of insureds
 the mix of drugs on the market
 Inflation; leveraging
 Disease Mgmt programs in use by MCO’s (can increase drug use)

 Prescription drug covg is more exposed to antiselection than hospital covg
Solutions:
 make coverage mandatory
 not too many levels of options

Front 3

HOW PRESCRIPTION DRUG PRICING WORKS

Back 3

Market Structure of the Prescription Drug Industry

Manufacturer ---- Pharmacy ----- PBM ----- Insurer ----- Patient
`-----------------------^ 
`----------------------------------------’

Front 4

Pricing by Pharmacies

Back 4

 The 3 categories of drugs: single-source brand, multiple-source brand, generic
 Therapeutically Equivalent = different drugs; Bioequivalent drugs = a generic equivalent

Pricing Methods
 AWP method (Average Wholesale Price)
Pharmacy’s price = 90% AWP + dispensing fee.

 Maximum Allowable Cost method
Pharmacy’s price = scheduled price + dispensing fee

Front 5

Differences between Drug Plan Pricing and Health Plan Pricing

Back 5

 Drug claims are high-frequency, low-severity, long duration
 80/20 rule doesn’t apply to drugs.

Front 6

PHARMACY BENEFIT MANAGERS (PBM’s)

Back 6

 Fiscal intermediaries
 May or may not assume risk

Front 7

PBM’s (or MCO’s) manage drug costs & utilization in the following ways:

Back 7

 Establishing retail relationships / rebates with manufacturers
Problems with rebates:
 PBM has incentive to choose highest rebate, not cheapest drug
 disincentive to choose generic drugs
 will use its owning manufacturer.

 obtaining discounts from pharmacies
 using formularies
 open formulary, incentive formulary, closed formulary
 Closed saves cost, but is difficult to administer

Problems With Formularies:
 No standard one exists
 don’t include enough children’s drugs
 have to be modified frequently, b/c of:
 new drugs
 therapeutic equivalents (if cheaper)
 generic drugs become available

 using cost-sharing
 encouraging generic substitution (through copays)
 using mail-order pharmacies
 exclusion of “lifestyle” drugs

 using Drug Utilization Review (UR) (Drug Mgmt Mechanisms)

Prospective Drug UR
 educate patients

Concurrent Drug UR
 Prior Authorization — check for:
 dangerous drugs
 drug interactions
 expensive drugs
 new, high-demand drugs (not medically necessary)

 Maximum Dispensing limit
 prevents consumer stockpiling of pills
 Step Therapies
 use first-line drugs before intensive drugs

Retrospective Drug UR
 study the drug use over time



Problems with Drug UR (Drug Mgmt Mechanisms)
 Disruptive to the Insurer’s claims adjudication process
 consumer demand
 Requires good information systems.
 “Some drug cost factors are out of the control of the PBM” (see above).

Front 8

PATIENT COST SHARING DESIGN ISSUES
(“Motivating Patients through Cost Sharing”)

Back 8

 Coinsurance
Advantage: gives direct financial incentive.

 Deductible and Copay
Advantage: more acceptable to patients
Disadv: Leveraging
Have to be raised periodically

 Out-of-Pocket Maximum
Disadv: Leveraging
Implicitly allows manufacture of expensive drugs

 Benefit Maximums on brand drugs
Adv: Reverse leveraging
Incentive not to overuse drugs
Incentive to use generics
Disadv: Exposes insurer to antiselection

 Combinations of the above
Disadv: Patients don’t understand
obscures the incentives



Done.