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Perspectives

Medicare Part D vs. the exchanges: with so many similarities, why have the two programs fared so differently?

Health Care Current | June 12, 2018

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My Take

Medicare Part D vs. the exchanges: with so many similarities, why have the two programs fared so differently?

By Sarah Thomas, Managing Director, Deloitte Center for Health Solutions, Deloitte Services LP

During my career, I have been able to study and learn from a number of health care financing initiatives. This has allowed me to look at various programs that have similar characteristics and elements and see how they have fared.

One interesting comparison is the experience health plans and pharmacy benefit managers (PBMs) have had with Medicare’s Part D drug program versus their experience in the individual market. For one, Medicare Part D and insurance exchanges serve different populations and cover different benefits.

Another difference affecting risk is the structure of the penalties. Medicare beneficiaries who don’t enroll in Part D when they are eligible can face future premium increases for the rest of their lives. This has helped keep participation levels high. On the exchange side, the individual mandate and penalty were not strongly enforced and individuals had many exceptions to the rules regarding choosing coverage during the annual open-enrollment period, which allowed some individuals to enroll in coverage only when they needed health care services. Additionally, some healthy members opted to pay the penalty rather than buy coverage.

That said, Congress established both Part D and the exchanges as bidding programs, which include similar risk-mitigation strategies to attract bidders. While health plans and PBMs have generally fared well in Part D, it has often been a different story with the exchanges, as we show in our recent report.

Key similarities between Medicare Part D and the exchanges 

  • Bidding, subsidies, and risk mitigation: In both Medicare Part D and the exchanges, health insurers take on risk for covering a defined set of benefits. They submit premium bids, which become the basis for determining the government subsidy individuals receive. In the initial years of each program, health plans were unsure about the risk of a newly insured population. In response, similar measures were taken in both programs to mitigate the uncertainty and to encourage health plan participation.
  • Pricing and cost-containment strategies: Initially, most health plans set their bids/prices low in an effort to attract as many new enrollees as possible. Health plans also have implemented cost-containment strategies. Part D plans often focused on formulary designs to reduce costs, while exchange-based plans were often built around narrow provider networks. Both strategies create leverage with manufacturers and providers, and can influence consumers to choose lower-cost products and services.

Given these parallels, one might expect that health plans participating on the exchanges could have experienced a level of success on par with Part D plans. But while Part D plans have continued to offer choices to beneficiaries, and have kept premium growth to a minimum, many health plans’ experience on the exchange have not fared as well.

It is worth noting that even before the Affordable Care Act (ACA) went into effect in 2010, the individual market was generally not profitable for health plans. Beginning in 2014, the year the exchanges began operating, health plans collectively saw underwriting losses increase, despite enrollment growth.

Our recent analysis of health plan experiences in the individual market, which includes coverage sold on and off the exchanges can be summed up in the following chart:

Why? Because the exchange premium-stabilization programs were less effective

Our recent paper describes how some features of the exchange program might have contributed to the results that some health plans experienced. Of the three premium-stabilization programs created by the ACA—reinsurance, risk adjustment, and risk corridors—the reinsurance program was most effective at helping health plans contain their losses on the exchanges. By contrast, the potential of the risk-corridor program was blunted by low payouts.*

Those three programs, collectively referred to as the 3Rs, were similar to policies developed for the Part D program. They were designed to help stabilize premiums and support the transition to a competitive and stable insurance market by protecting health plans against adverse selection. Similar programs helped to steady premiums during the initial years of Medicare Part D.

So why didn’t the premium-stabilization policies work as well for the exchanges? Let’s take a closer look at each of the three Rs:

Reinsurance: Reinsurance was a three-year program designed to protect health plans from excessive losses resulting from high-cost enrollees in the individual market. In 2014, reinsurance payouts improved the aggregate underwriting margin by almost 12 percentage points. However, by design, the program was gradually phased out between 2014 and 2016. As reinsurance payouts became lower, they did less to reduce aggregate losses. In 2016, for instance, this program improved the aggregate margin by just five percentage points.

Risk corridors: Under this program, health plans that overpriced their products paid into a common fund created to offset losses among health plans that had underpriced their products.1 However, this program did little to help health plans. Between 2014 and 2016, many health plans set their premiums too low. As a result, claims under the risk-corridors program totaled $11.3 billion ($2.5 billion in 2014, $5.3 billion in 2015, and $3.5 billion in 2016) while collections amounted to just $500 million.

The exchange corridors program was modeled after a successful provision of the Medicare Part D program. Unlike the Part D program, a provision included in a late 2015 budget deal required the exchange program to be budget-neutral. As of 2018, health plans that underpriced their products have received only about 16 percent of the risk-corridor funding from the 2014 plan year.2 Health plans that underpriced their products in 2015 and 2016 have not yet received any payouts.

Risk adjustment: Although the risk-adjustment program was, in aggregate, net neutral, it had large distributional consequences. The flow of payments generally came from smaller health plans that had less market experience and more limited historic claims data about members when compared to many of the larger health plans. The largest health plans received 39 percent of total risk-adjustment claims in 2014, increasing to 59 percent in 2016. These large health plans contributed 27 percent of total risk-adjustment payouts in 2014, declining to just 7 percent in 2016.

Risk selection likely played a role in determining the flow of risk-adjustment payments during this period. Larger, more established health plans likely attracted higher-risk enrollees, due to their market reputation.3 In addition, newer market entrants likely kept their premiums low to attract new members. As a result, these new players might have attracted a disproportionately higher share of healthier enrollees.4

Many other state and federal issues have affected health plans selling coverage on the exchanges—particularly through 2017 and 2018, and potentially in 2019. We can take up those issues in future analyses.

Returning to the comparison between exchange-based plans and Part D plans, I think another reason for the stability of premiums in Part D plans has been funding streams that are above and beyond premium payments and subsidies from individuals and the Medicare program. Part D plans receive rebates from pharmaceutical manufacturers, which might contribute to helping these types of plans succeed in the market. Interestingly, these rebates have recently come under scrutiny from the administration and could be changed in the future.

Going forward, I think we can take lessons from both programs. Risk mitigation matters when we ask entities to take on risk in the face of a lot of uncertainty.

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* Under the risk-corridors program, a health plan calculates the “target amount” of medical expenditures it expects for its covered risk pool—equivalent to total premiums collected minus an allowed amount for administrative costs and profits. If a plan’s “allowable costs” (the actual expenditures for medical care for its enrollees) exceed the target by at least 3 percent, the health plan will receive a payment from the risk-corridors program. If the health plan’s allowable costs are lower than the target by 3 percent or more, it must make a payment to the risk corridors program.

1Sarah Thomas, James Whisler, Lee Resnik, Claire Boozer Cruse et al, The 10 percent problem: Future health insurance marketplace premium increases likely to reach double digits, Deloitte Center for Health Solutions, 2014, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/life-sciences-health-care/us-chs-ten-percent-120114.pdf, accessed April 27, 2018
2Based on Deloitte analyses of health plans’ MLR filings
3Bob Herman, “ACA risk adjustment program endangers some exchange plans,” Modern Healthcare, July 2016, http://www.modernhealthcare.com/article/20160709/MAGAZINE/307099939, accessed April 27, 2018
4American Academy of Actuaries, Insights on the ACA Risk Adjustment Program, April 2016, http://actuary.org/files/imce/Insights_on_the_ACA_Risk_Adjustment_Program.pdf, accessed April 27, 2018

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In the news

OIG: Payments for Part-D brand-name drugs increased even as the number of prescriptions decreased

On June 4, the Office of Inspector General (OIG) released a report showing a 77 percent total spending increase for all brand-name drugs in the Medicare Part D program (from $58 billion in 2011 to $102 billion in 2015). When adjusted to account for manufacturer rebates, OIG determined that payments increased by 62 percent. During the same five-year period, the total number of prescriptions for these drugs decreased by 17 percent.

According to the OIG report, Part D unit costs for brand-name drugs rose nearly six times faster than inflation from 2011 to 2015. During the same period, the percentage of Medicare beneficiaries with at least $2,000 in out-of-pocket costs doubled.

CMS launches Medicaid and CHIP scorecards

The Centers for Medicare and Medicaid Services (CMS) unveiled a scorecard for Medicaid and the Children’s Health Insurance Program (CHIP) on June 4. The scorecard contains three categories:

  • State Health System Performance
  • State Administrative Accountability
  • Federal Administrative Accountability

The State Health System Performance measures health improvement (e.g., percent of adults with high blood pressure, percent of pregnant women receiving postpartum care, and percent of adolescents with current immunization records). The Federal and the State Administrative Accountability categories aim to reflect how well states and the federal government are working to administer the programs. States can choose which measures to submit to CMS. None of the measures were reported by all 50 states. Additionally, CMS has not ranked states, and it has not indicated how—or whether it will—use the data (e.g. when deciding to approve a §1115 waiver).

Vermont and New Jersey governors sign individual-mandate bills

Two states recently enacted individual health insurance mandates. Vermont Governor Phil Scott (R) signed H. 696 on May 28, and New Jersey Governor Phil Murphy (D) signed NJ-A3380 on May 30 (see the June 5, 2018 Health Care Current). Both bills require residents to pay a tax penalty if they do not have health coverage. Vermont’s bill will go into effect on January 1, 2020, while New Jersey’s bill will go into effect on January 1, 2019. Vermont officials have said they will conduct an outreach campaign to ensure residents know about this policy before the mandate goes into effect.

Related: On June 8, Virginia Governor Ralph Northam (D) signed a bill expanding the state’s Medicaid program. An expected 400,000 people will now receive Medicaid coverage (see the June 5, 2018 Health Care Current).

CMS releases 2018 Medicare Trustees Report

On June 5, CMS released its 2018 Medicare Trustees report, which details the latest figures and projections for the program’s solvency, spending, and enrollment. According to the agency, the Hospital Insurance (HI) Trust Fund, which funds Medicare Part A, is expected to run out of money in 2026—three years earlier than the estimate published in CMS’s 2017 report. Medicare Part A covers hospital costs, while Medicare Part B, which pays for doctor visits, is funded with premium payments. According to the report, the anticipated funding challenges are primarily due to the recent tax-reform law, which affected both financing and program spending. Consider these two factors:

  • Financing provisions include the 2017 tax law’s income tax cuts, lower payroll tax collections, and elimination of the ACA’s individual-mandate penalty.
  • Spending includes issues related to the tax law and other issues, including higher-than-expected spending in 2017. Legislation that increased hospital spending and higher Medicare Advantage payments are also expected to result in higher HI expenditures.

Some of these factors are related—the elimination of the individual-mandate penalty might lead some consumers to drop their insurance coverage. As a result, hospitals could see more uninsured patients, which would require Medicare to pay more for uncompensated health services through disproportionate share payments. The report noted that annual Medicare costs are expected to increase by 2.5 percent per year over the next 10 years. As of 2018, Medicare expenditures account for 3.7 percent of the U.S. gross domestic product (GDP). At the current pace, Medicare costs could make up 4.7 percent of the GDP in 2027, according to the report. The agency also projected the Social Security Trust Fund would remain solvent until 2034, which was predicted in the 2017 report.

Depletion of the HI would not eliminate Medicare Part A, but rather prevent the program from covering 100 percent of its costs. According to the report, Medicare would be able to cover 91 percent of its costs in 2026.

Study: Indiana’s unique Medicaid expansion produced average outcomes

Indiana’s unique Medicaid expansion plan, which requires beneficiaries to contribute to something similar to a health savings account (HSA), generated moderate improvements in coverage, according to a new study from Indiana University that appeared in the June issue of Health Affairs.

Among nonelderly adults with incomes below 100 percent of the federal poverty level (FPL), Medicaid coverage increased by 8.8 percent, and coverage of any sort grew by 6.9 percent. While Indiana saw smaller coverage gains than other Midwestern Medicaid-expansion states (e.g., Illinois, Kentucky, Michigan, and Ohio) it ranked in the middle overall, ahead of states such as Arizona, Delaware, and North Dakota.

Medicaid coverage among adults with incomes between 100 and 138 percent FPL rose by 6.7 percent in Indiana while the overall coverage rate increased by 2.9 percent.

Under the state’s Healthy Indiana 2.0 plan, enrollees must contribute 2 percent of their income to an HSA-like account each month. The program includes penalties for two categories of individuals who fail to meet this requirement. Beneficiaries with incomes below 100 percent FPL are transferred to a less-generous plan that includes copayments. Members who have incomes between 100 percent and 138 percent FPL are locked out of the program for six months if they fail to make the required contributions. The authors of the report noted they could not conclude if the program’s design affected coverage.

The plan was designed by now-CMS Administrator Seema Verma and signed into law by the state’s former governor.

What explains the drop in net drug prices? Do copay accumulators play a role, or is it competition?

According to a June 5 analysis from Sector & Sovereign Research (SSR), actual U.S. drug prices (net of discounts and rebates) fell 5.6 percent in the first quarter of 2018, compared to a 1.7 percent drop during the same period in 2017. SSR posits that one reason for the price drop might be pharmacy benefit managers’ (PBMs) adoption of copay accumulators.

Some pharmaceutical manufacturers offer copay assistance cards to help consumers reduce out-of-pocket costs. These cards can give consumers an incentive to obtain expensive medications, even when less costly options are available. Copay accumulators prevent payments made via copay assistance cards from contributing toward patients’ deductibles. As of January 2018, approximately 17 percent of employer-sponsored health plans with 5,000 or more employees were using copay accumulators. In an effort to avoid losses from copay accumulator programs, some pharmaceutical manufacturers have begun providing patients with prepaid debit cards, which PBMs cannot track.

There might be other reasons for the drop in drug prices, including increased competition for specialty drugs, such as biosimilars, as well as new products receiving approval and entering the market.

AHRQ: Reductions in hospital-acquired conditions saved 8,000 lives and $2.9B

In a June 5 press release, CMS shared results from the Agency for Healthcare Research and Quality (AHRQ) National Scorecard on Hospital-Acquired Conditions, which show an overall decline in patient hospital-acquired conditions (HACs) and related deaths, in addition to increased savings in annual health care costs.

AHRQ developed the National Scorecard in 2011 to help the US Department of Health and Human Services (HHS) track HAC rates from 2010 through 2014. According to the updated National Scorecard, there were 350,000 fewer HACs in 2015 and 2016 than in 2014. From 2014 to 2016, the overall HAC total dropped by eight percent, which might have prevented 8,000 patient deaths and saved $2.9 billion in health care costs.

Breaking Boundaries

Microhospitals might be breaking the bigger-is-better mold

Health systems around the country are viewing microhospitals as a strategy to expand without having to raise funding for a major capital project, such as building a traditional large hospital. The growing trend is driven in part by changing payment models and recent health care mergers (see Deloitte research on Hospital mergers and acquisitions). Microhospitals typically focus on outpatient or short-stay services and have fewer than 50 beds. They can tailor their services to the specific needs of a community.

Dignity Health recently built its first microhospital in Arizona and expanded to Las Vegas. The health system already had a large network of physicians and owned ambulatory and acute-care facilities. Dignity wanted to continue its value-based contracting strategy while targeting unmet needs in the community. The new microhospitals in Las Vegas now handle 25 percent of the system’s total emergency room volume in Nevada, and less than 6 percent of the microhospital emergency room volume requires transfer to a higher level of care. The health system is seeing similar results in Arizona. Moreover, patient experience and satisfaction scores have been positive.

These facilities generally have one or two providers per 12-hour shift, including support staff, such as nurses, radiation technicians, phlebotomists, hospitalists that cover for inpatient census, physician extenders, and registration staff. The facilities are designed to treat and either release, admit, or transfer patients to facilities that can handle more complex care.

The University of Michigan’s Michigan Medicine is completing construction of a microhospital in a suburb of Detroit. The facility will include multiple exam and operating rooms, a pharmacy, and will provide both pediatric and adult services. Additionally, the facility plans to provide specialty services such as musculoskeletal health care, ophthalmology, radiology and diagnostic imaging, and pathology and comprehensive cancer treatment.

Other health systems have opened facilities for specific health services, such as sports-oriented rehabilitation, specialized wound care, and outpatient lactation centers. These facilities coordinate with post-acute and primary health care providers in external practices to take a more holistic approach to patient care (rather than the single episode of care model of the past). Keeping overhead costs low can encourage the health systems to invest in more population health-based activities, such as cooking classes for patients who have diabetes.

(Source, Beth Jones Sanborn, Health Care Finance News, Dignity Health forecasts big returns on microhospital investment as facilities meet demands of underserved communities, April 9, 2018; Rita E. Numerof, Microhospitals and healthplexes offer a peak at the future of health care, STAT News, April 10, 2018)

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