Part D Squeeze Play: It’s Getting Even Harder to Survive in PDP Market

By James Gutman - August 28, 2014

It used to be pretty easy to be an operator of stand-alone Medicare Prescription Drug Plans (PDPs). An insurer didn’t need a partner, could offer as many product designs as it wanted and could vary the premiums for them as much or as little as it wished. The sponsor also could decide to skip the low-income-subsidy (LIS) PDP market and still wind up with lots of profitable enrollees.

The fact that those days are over was driven home again in the 2015 Medicare Part D benchmarks unveiled by CMS recently. For the second straight year, there was a big decline in the average monthly bid amount submitted by plan sponsors. And even though the reinsurance subsidy that offsets some costs when a PDP member has out-of-pocket costs that go beyond the amounts in the so-called “doughnut hole” coverage gap, sharply rising specialty pharmaceutical costs are almost certain to mean dropping profit margins for PDPs, actuaries tell AIS. This is especially true since CMS now limits the number of products PDPs may offer in their service areas and again has cut the amount that Total Beneficiary Cost can rise from the year-ago level.

So why is the benchmark cut happening, and what does it mean? First of all, the big insurers in PDPs have discovered that they can make up in volume what they may give up in per-customer profits if they offer low-priced PDPs, especially if they have a big retail partner like Wal-Mart (Humana Inc.’s PDP ally). Second, the big plans have enough customers that they can negotiate desirable “preferred cost sharing” as CMS now calls preferred-pharmacy arrangements. Third, if a PDP sponsor wants to get more customers, perhaps in hopes that it can later convert them to more profitable products such as Medicare Advantage plans, it can bid low enough to qualify for auto-assignment of LIS beneficiaries.

But the perils of the bid-low strategy are becoming more and more apparent. WellCare Health Plans, Inc., for example, recently acknowledged it underpriced PDPs for 2014, contributing to a net loss in the second quarter and the cutting in half of its full-year earnings guidance. And smaller PDPs, which don’t have the clout to get very favorable pricing in preferred-pharmacy arrangements, face the dilemma of either finding a bigger partner or getting out of the business.

Where do you think this situation will lead, and is that a good thing? Do the lower premiums consumers get as a result of preferred-pharmacy arrangements and limits on out-of-pocket cost increases offset the impact of less competition and fewer options? When will the trend of declining Part D benchmarks end, and who will be left standing when the music stops?

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