Academic journal article Applied Health Economics and Health Policy

Value-Based Insurance Design in Medicare

Academic journal article Applied Health Economics and Health Policy

Value-Based Insurance Design in Medicare

Article excerpt

1. Medicare Part D Background

The introduction of the Medicare Part D prescription drug plan in 2006 for senior citizens and the disabled in the US was largely successful. The percentage of Medicare beneficiaries without prescription drug coverage dropped from 24% to 7%, with little crowd-out of private drug coverage.[1] In 2009, 26.7 million Medicare beneficiaries had Part D drug coverage, while 14.1 million had other private drug coverage (such as retiree coverage from their employer, subsidized by Medicare).[2] Part D is administered by private plans, which can be either stand-alone prescription drug plans (PDPs) or Medicare Advantage plans, such as health maintenance organizations (HMOs) that offer inpatient, outpatient and drug coverage. The drug benefits offered by these private plans vary greatly. However, within a region they must all offer at least one benefit package that is actuarially equivalent to a standard benefit designed by Medicare, while additional packages may include enhancements over the standard benefit. In 2009, the standard benefit entailed a $US30.46 monthly premium, a $US295 deductible, a 25% co-insurance rate below $US2700 in total spending, with 100% co-insurance between $US2700 and $US6153.75, commonly referred to as the 'donut hole'. Above $US6153.75, the co-insurance rate was 5% or a minimum copayment per prescription of $US2.40 for generics and $US6.00 for all other drugs.[3] In 2007, 61% of PDP enrollees had a benefit actuarially equivalent to the standard package. While 39% of PDP enrollees were in enhanced plans, only 9% were in PDPs that offered extra coverage over the donut hole.[3] In 2007, about 18.5% of patients reached the donut hole, with 11.6% of those spending past the donut hole into the 5% co-insurance coverage regime.[4]

Despite great flexibility in designing their own drug benefits (such as copayment tiers, formularies and step therapies), most of the Part D plans, like the commercial non-Medicare plans, have not been able to control costs and have subsequently raised premiums and cost sharing. In 2008, the average Part D premium increased 17%, while in 2009, premiums jumped 24%. In 2009, the median PDP copayment increased 40% for generics and 27% for preferred brand drugs, and specialty drug co-insurance rates increased 10%.[3] Such large increases in patient cost sharing have been seen before in the commercial non-Medicare sector. Between 2000 and 2006, in employer coverage, copayments increased 57% for generics, 85% for preferred brand drugs and 124% for non-preferred drugs.[5] Much of this was in response to drug price increases, which tend to have a bigger effect on the elderly. Between 2003 and 2006, prices for drugs used more heavily by the elderly grew 24.2%, compared with 18.8% for those less heavily used.[6] Competition among PDPs was expected to keep prices down. Indeed, this was the case initially. By April 2006, premiums were 32% lower than originally forecast.[7] While most beneficiaries have a choice of 49 PDPs, most of the PDP enrolment is concentrated in a few plans, with 23% enroled in United-Healthcare/PacifiCare, another 18% in Humana and 11% in Universal American/MemberHealth in 2008.[3] As a result, prices may continue to rise as the plans become more consolidated over time. Thus, it is not surprising that Medicare Part D is following in the steps of the commercial non-Medicare sector in terms of rising costs and subsequent increases in patient cost sharing.

2. The Value-Based Insurance Design (VBID) Movement

Such increases in patient cost sharing have been shown to reduce drug use and expenditures.[8] In fact, many employer health plans have now begun to worry about the long-run effects of reducing drug use, especially for preventive-care drugs that might avoid costly hospitalizations. Some innovative employers have begun to experiment with value-based insurance design (VBID), in which copayments are reduced to zero for important preventive-care drugs, while copayments for drugs with less value are increased. …

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