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Medicare Drug Plans Shifting Cost-Control Tactics, Study Says

By John Reichard, CQ HealthBeat Editor

November 24, 2010 -- More and more of the prescription drug plans competing in the Medicare program are experimenting with new cost-control methods, says a new study by the Washington, D.C., consulting firm, Avalere Health.

The changes reflect growing efforts by the plans to gain an edge in the Medicare market by negotiating better deals for the generic drugs and specialty drugs that they include in their formularies—their list of covered products. Specialty drugs include biotech products that cost thousands, if not tens of thousands, of dollars per year.

Avalere President Dan Mendelson noted that companies offering drug plans use the Medicare market to test coverage changes that they then adapt in the commercial marketplace for younger Americans.

"These Medicare products are the cutting edge of formulary design, coming soon to a commercial plan near you," he said.

One of the biggest changes for next year is the number of Medicare plans switching to "five-tier" coverage as a way to steer beneficiaries to particular drugs on which they have negotiated volume discounts. The experimentation reflects the competitive nature of the market, in which price-sensitive seniors compare monthly premiums in choosing a plan.

The tiers vary by the type of drug—whether brand-name, generic, or specialty—and the amount out-of-pocket charges enrollees must pay. "This is a very dynamic market," Mendelson said. "What's happening is the plans are trying to force a better deal for consumers."

Many of the drug plans offered in the Part D prescription drug program in Medicare are changing their out-of-pocket charges, which means seniors will have shop carefully to get the coverage that best suits them, he said.

In some cases, the changes may be a shock.

For example, Humana is offering a plan that relies on Walmart pharmacies to keep down costs and charge low premiums and out-of-pocket expenses. But enrollees who try to fill their prescriptions at a pharmacy other Walmart's may face much higher charges.

Thus in the case of the arthritis drug Enbrel, the Humana enrollee pays $588 out of pocket per prescription at Walmart and $849 at another pharmacy.

"Consumers interested in the lower premiums offered by this plan need to understand that their costs—particularly on injected and specialty pharmaceuticals—may be significantly higher if they don't shop at the pharmacy designated by the plan," Mendelson said.

Plans structure their coverage in tiers. Three tiers used to be the norm—one for generic drugs, preferred brand name drugs, and non-preferred brand name drugs. The generic tier had the lowest co-payment per prescription. The brand name drug had a higher co-payment and the non-preferred brand, an even higher copayment. The aim: encourage enrollees to use lower cost drugs.

Three tiers then became four tiers, reflecting the addition of a tier for specialty drugs. Now five tiers is the trend. In 2011, 41 percent of plan offerings will have at least five tiers, up from 27 percent in 2009.

Mendelson says there are two main types of five tier plans. One type has preferred generic drugs, non-preferred generic drugs, preferred brand name drugs, non-preferred brand name drugs and specialty drugs. Another type has generic drugs, preferred brand name drugs, non preferred brand name drugs, preferred specialty drugs and non-preferred specialty drugs.

Plans negotiate volume discounts for preferred generics or preferred specialty drugs, and drive enrollees to them by charging lower out-of-pocket charges than for their non-preferred counterparts.

Mendelson says that plans are changing which drugs they cover in addition to tinkering with out-of-pocket charges. A United Healthcare plan for example is retooling its formulary to reduce the number of covered drugs by 25 percent. That means seniors have to make sure that the drugs they rely on are covered when they pick a plan.

But Mendelson noted a reduction in the number of covered drugs doesn't necessarily hurt consumers because it could mean a plan is simply dropping coverage of a brand name drug and maintaining coverage of its less pricey generic alternative.

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