The Camel of Medicare Benefit Programs
A camel is a horse designed by a committee
1. Part D is a camel – ugly, ungainly, and uncomfortable, but capable of doing amazing things
Part D was enacted in 2005 based on complex legislation passed in 2003 with intense input from patient advocacy groups, the pharmaceutical industry, the drug distribution industry, physician groups, hospitals, anti-tax groups, and anti-poverty groups. These groups, operating through the legislative process, created a wildly complex system, hoping to provide:
- Protection for seniors against the catastrophic cost of life-saving drugs – it does this very well and is worth participating for this aspect alone.
- A penalty structure to encourage young and healthy participants to pay into the system, lowering the cost for all. It has done a very good job at this, and failure to participate may produce some eye-popping rate levels in the future.
- A simple method/interface to comparison shop that allows accurate Plan comparison shopping by participants. It does this well directly at medicare.gov or through responsible agents.
- A low-cost and stable program for Seniors to purchase routine medications – it does this poorly. The design of Part D is based on pricing and formulary that plan sponsors can change with 30 days’ notice over the course of a year. This capability is designed to allow flexibility to keep costs down and is supported by a byzantine structure of regulations for consumer protections. But to a consumer, it still feels like a simple case of bait and switch.
- A joint government/industry-sponsored plan to control the relentless rise in the cost of prescription drugs – it has done a very poor job.
- A system to encourage competition at the retail level – and this it has failed completely. Part D has led to a massive consolidation of Advantage Plan carriers with retail drug outlets, leading to extreme concentration of distribution channels and reduction of consumer choice.
Participation in Part D is voluntary, and 77% of Medicare beneficiaries participate in 2022. Most of the participation is through bundled Advantage Plans. Standalone plans are purchased most by Supplement participants. Part D Plan’s confusing structure, inconsistent formulary and intra-year drug price increases make them uniquely unsatisfactory for participants – there is not a single 5 Star Part D plan in the US. Overall, Part D participation has continued to grow through Advantage Plans that bundle Part D benefits.
Part D plans are offered on a state-wide basis, and the number of plans available nationwide has declined by 23% in 2022 from 996 to 766 impacting consumer choice. Monthly plan pricing ranges from 5.50 /mo. for a plan in Colorado to $207.20 for a plan in South Carolina. Here in Nashville, we have plan options ranging from $6.50/mo. (which I use) to $144.10.
Critical Learning 1: All plans offer the same catastrophic coverage and require the same of spending ($7,050) to get to the catastrophic spending level. Above that level beneficiary spending is limited to 5% of drug cost. High premium plans offer no advantage over low premium.
We generally encourage participation in the cheapest plan available that reasonably meets consumer needs. Shopping outside the plan for branded drug (via GoodRx , WellRx, and at least 12 similar services) is frequently cheaper than prices inside the plan, and we encourage Part D plan participants to shop aggressively for best price. Remember, Part D plans are great catastrophic coverage, but frequently are mediocre coverage for everyday needs, and are, by design, undependable for specific drug pricing and availability over the 12-month period of the contract.
2. The Design of Part D is Actuarily Based, and therefore is Crazy Complex
- First, Part D is based on the concept of a Medicare-determined “model portfolio” of drugs to be included in the model formulary, and then requires all carriers offering a Part D plan to conform to this model on an actuarial basis. Part D plans must include 2 drugs in each class of therapeutic drugs required by Medicare but can change these drugs (and pricing) over the course of the year.
There are 6 classes of drugs where plans must include all drugs in the category:
- immunosuppressants for treatment of transplant rejection;
- antiretrovirals, and
- antineoplastics; except in limited circumstances.Under current policy, Part D sponsors are only permitted to impose prior authorization and step therapy requirements for beneficiaries initiating therapy (i.e., new starts) for 5 of the 6 protected classes, with no prior authorization or step therapy allowed for antiretrovirals.From a consumer perspective, this system frequently places consumers between the physician’s recommendations and the formulary of the plan. Resolution of this issue is left to a complex and time-consuming bureaucratic process, favoring plan sponsors.
- Second, Drugs on the plan formulary are dropped into Tiers based on price, generic status, and preferred status by the plan sponsor. Co-pays and co-insurance differ by tier, such that drugs in lower tiers have a much lower cost to plan participants than high-tier drugs. As an example:
Tier 1: Generic Drugs
Tier 2: Preferred brand-name drugs
Tier 3: Non-referred brand-name drugs, and
Tier 4: High cost or “specialty drugs.”
- Third, pricing and plan participation is limited by “preferred pharmacy” status. Plans contract directly with pharmacies to offer lower price points based on volume by inclusion in a preferred pharmacy network. These networks limit consumer choice and serve as competitive barriers to out-of-network pharmacies. This can be a real issue in rural areas or for low-income plan participants without access to transportation and a permanent mailing address.
- Fourth, and finally, benefits are defined by four phases or periods based on total beneficiary spending as shown below:
Crazy design. Flat out nuts – but it does provide great insurance in the catastrophic phase when Medicare provides funding for 80% of the total cost (see below).
3. The percentage of cost coverage (value to beneficiary) increases as spending increases – Cheapest Plans Rule!
For retirees with limited medication needs and not using an Advantage plan that includes a Part D benefit, or with access to pharmaceuticals offshore, we generally advise getting the cheapest plan that you can find. Just recognize that your plan is really acting as a group buying service until you hit the Coverage Gap phase, when the drug manufactures are footing most of the drug cost (see chart above). Your plan may or may not be the cheapest for any given medication at any point in time. But Part D participation is the only way to avoid the catastrophic potential cost of super-expensive drugs – like oral oncolytics.
Critical Learning 2: Due to the complex structure of Part D, lowest cost plans are normally best for retirees when all costs and risk mitigation are included.
4. The Penalties for Non-participation can be Onerous
The penalties for non-participation in Part D are 1% per month of the national base beneficiary premium (currently $33.37). This is higher than the Part B penalty (10% per year max.). For perspective, one year’s penalty ($3.33/mo.) is more than half of my current premium ($6.50). I get great coverage for catastrophic loss and reasonable coverage for other drugs that I may need over the course of the year.
Part B Medical premiums have increased by an average annual rate of 7% since 1975. If Part D premiums continue at that pace, premiums will be around $65.00 per month in 10 years. With penalties for non-participation over that period, the average plan will cost over $144.00 per month. The benefits from coverage and the penalties make a compelling case for participation – at least with a low-cost plan.
Camels are also called the ships of the desert. They are incredibly useful in the right environment/application, performing like nothing else. Finishing up with the camel metaphor, Part D coverage is uniquely capable in a dangerous environment – dealing with the risks associated with high-cost, lifesaving drugs. Like the camel, Part D coverage is ungainly, clumsy, and preposterously designed – but it works like nothing else in a very specific environment.