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Smooth Sailing in Medicare Drug Benefit May Not Last, Wall Street Seers Say

June 22, 2006 -- An annual event that typically gives Washingtonians blinkered by spin and ideology a bracing dose of business perspective on health care lived up to its reputation Wednesday.

Among the blunt assessments offered by Wall Street analysts at the event: the commercial insurance industry has given up trying to control health costs; much of the enrollment growth in the private plan side of Medicare is in plans that do little if anything to actually try to manage care; Medicare drug plans are going to set premiums for 2007 with basically no clue about whether they are running profits or losses in 2006; and starting in 2008, those plans are likely to cover a much more limited range of drugs.

Much of the focus of this year's "Wall Street Comes to Washington Conference" was on the first year of the Medicare drug benefit, a reflection perhaps of the much greater impact that private sector behavior has on Medicare since the passage of the Medicare overhaul law (PL 108-173) in 2003.

Wall Street types noted the drug benefit has commanded center stage in the health care investment community, even though it has about as much impact on the overall earnings of the companies that offer those benefits as the price of paper clips, said Douglas Simpson, an analyst at Merrill Lynch.

But Wall Street's growing focus on Washington seems less surprising due to the larger trend suggested by the Medicare drug benefit—the growing use by Republicans of private or public–private approaches to health care ills that policy makers more traditionally have targeted with government solutions.

Insurance industry analyst Robert Laszewski noted there are now three "important experiments" testing those approaches—the Medicare drug benefit, health savings accounts, and the new Massachusetts law requiring individuals without insurance to buy private coverage, in some cases with the help of government subsidies.

The result of those experiments tilting toward the private sector may be known within a few years, when the health care cost crisis may be reaching the boiling point nationally, Laszewski suggested, hinting at the possibility of dramatic government intervention in health care if those experiments don't work out well.

'Training Wheels' on Rx Benefit
Laszewski said Medicare drug plans won't have enough data on claims this year to make their premium bids for next year anything other than guesswork. He said one plan told him that premium bids for 2007 would be nothing more than "a crapshoot."

But Christine Arnold, a managed care analyst with Morgan Stanley, noted that the drug benefit comes with "training wheels" for drug plans. She was referring to reinsurance provisions and "risk corridors" that cushion plans against losses, particularly in 2007.

But those wheels start to come off in 2008, with plans absorbing a larger share of any losses they occur that year, Arnold said. The result is that plans will have more restrictive formularies that year to rein in costs, she predicted. Plans also may be in a much tighter cost control mode because they tried to get a larger market share at the start of the benefit by charging low premiums, analysts suggested.

Because enrollment surpassed their projections, the analysts suggested that "adverse selection" would not be a big problem in the first year of the benefit. Adverse selection is when so many people with high health costs sign up for coverage that it forces the plan to charge sharply higher premiums the following year. This causes enrollees with relatively low costs to seek a better deal and creates a continuing spiral of rising premiums that makes the plan unaffordable.

Analysts suggested that enough healthy people are enrolling to keep that from happening, but they expressed some caution. "I think it's way too early to know anything," said Laszewski, referring to a lack of data on claim costs.

"It doesn't look like adverse selection was an issue per se," said Matthew Borsch, an insurance analyst with Goldman Sachs. But Borsch said he'll be interested to see how high premiums are next year in drug plans with more comprehensive coverage that are more attractive to seniors who expect to fully utilize the drug benefit as compared with low premium plans offered by Humana that were expected to attract relatively healthy seniors.

'Policy Mess' in '08?
Laszewski suggested that the drug benefit's future may not be serene. "What happens when the federal government makes up for all the underpricing" by drug plans in early premium-setting? he asked.

If risk corridors entail much added federal spending to bail out plans with losses, and if plans also have to boost premiums 25 to 30 percent [in 2008] "to make up for all of this, you've got a policy mess on your hands," he said. "I think there's a real issue in terms of long-term policy sustainability of the program."

Arnold agreed with Laszewski that managed care plans in Medicare, called Medicare Advantage plans, will have to trim benefits because strong reimbursement by the federal government since passage of the Medicare overhaul law won't continue.

Medicare Advantage enrollment is up by about a million since then, but Laszewski expressed surprise that growth hasn't been greater because of the extra benefits and lower-cost sharing offered by those plans. The plans are a "fantastic deal" for seniors but "the leap was just too much" out of traditional Medicare for many seniors, he said.

Much of the enrollment growth in Medicare Advantage has been in "private fee-for-service" plans, which allow enrollees to see the providers of their choice without financial penalty while also getting good coverage of costs not covered by traditional Medicare, analysts said. But there is little management of care in the plans. It's unclear how sustainable the plans will be, said Borsch, apparently referring to their cost to taxpayers.

'Boring' Consolidation
Simpson said consolidation in the insurance industry has been "huge" and will continue over the next several years. Other analysts agreed, saying the trend is troubling. "I don't like it—I just get bored," Arnold said, complaining that she has just five big companies to follow and they have stopped innovating.

"When has anything interesting ever come out of a huge company trying to integrate 30 others," she said.

Insurers are so big that they cope with Wall Street pressure for near-term earnings growth not through innovations in cost control but by acquiring other companies, Laszewski said. "It's never been so boring—or profitable. The industry has given up on managing care and controlling costs," he said. "We have a lot of people making themselves really rich and selling their industry down the river," he said of insurance company executives. "I think my industry is on a long walk off a short pier."

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