Takeaway: Combination of Part D demo announced on Friday & today's PBM testimony before Senate Finance suggest acquiesence to new world order

UNH | PART D DEMO & SENATE FINANCE TESTIMONY POINT TO JAN 1, 2020 SAFE HARBOR IMPLEMENTATION - Slide1

Those of us in the Jan. 1, 2020 implementation date for the new safe harbor regulations got a little affirmation on Friday and again today during Senate Finance Committee hearings. In a letter to Plan D sponsors, CMS Administrator Seema Verma, instructed them to use the safe harbor rule in effect at the time bids are due on June 3. Further, she stated that if the safe harbor rule changes, effective Jan. 1, 2020, there would be a demonstration program to support transition to the new rebate system. Under the demonstration, the federal government will pick up 95% of losses created by benefit costs exceeding premiums above 0.5%.

Translated from government-ese:

  • Verma is suggesting that the safe harbor rule may not be finalized by June 3 when bids are due. We pointed out that tight timeline in our notes and March 28 UNH Black Book. When we looked Friday, 24,000 comments had been submitted. Many of them from bots, but still requiring review.
  • The creation of a demonstration allows plans to submit bids assuming the old rebate rule while being protected from losses. If manufacturer drug prices are higher than expected – the Office of the Actuary suggested they could rise 15% - then plans have stop-loss protection from the federal Treasury for two plan years.
  • The creation of a stop-loss demonstration indicates the rebate rule is more likely to go into effect on Jan. 1, 2020. In testimony today before Senate Finance Committee, HUM indicated that they expected Jan. 1, 2020 implementation. UNH’s OptumRX  testified that they would be taking no more clients unless rebates were offered at POS, suggesting they too see implementation as inevitable and the industry norm.

The impact of the rebate rule turns on how dependent MA-PDP and stand-alone PDP are on rebates to control benefit costs and premiums. For the large national plans, like CVS, CI and UNH which all have in-house pharmacy benefit managers and a national presence that give them strong negotiating power, rebates are a significant factor in managing premium prices.

According to state filings, UNH’s largest insurance subsidiary, UnitedHealthcare Insurance Company with $54B in premium revenue, incurred $7 billion in prescription drug claims in 2018 for its Medicare plans. This particular subsidiary has 4.7 million covered lives and 57 million-member months. Deducted from that cost was $4B in rebates. Prescription drug costs were then reduced to $3 billion. These rebates exceed by a significant amount the 24% of drug costs estimated by the Office of the Actuary.

UNH | PART D DEMO & SENATE FINANCE TESTIMONY POINT TO JAN 1, 2020 SAFE HARBOR IMPLEMENTATION - Slide2

UNH | PART D DEMO & SENATE FINANCE TESTIMONY POINT TO JAN 1, 2020 SAFE HARBOR IMPLEMENTATION - Slide3

Not only do rebates result in lower overall premiums, they also reduce price volatility. For the last ten years, the premium prices for UNH’s stand-alone PDP plans has vacillated in a narrow band $16.59 wide.

UNH | PART D DEMO & SENATE FINANCE TESTIMONY POINT TO JAN 1, 2020 SAFE HARBOR IMPLEMENTATION - Slide4

In contrast, regional players like Blue Cross Blue Shield of North Carolina and Horizon Healthcare of New Jersey have experienced greater fluctuation in premium prices. This premium fluctuation can be attributed to the plan’s reduced access to rebates and a corresponding lack of control of the prescription drug spend.

For example, in 2018, Blue Cross Blue Shield of North Carolina had prescription drug claims in its Medicare plans of $153 million and reported rebates of 57 million or 37% of drug costs. New Jersey’s Horizon Healthcare had prescription drug costs of 59 million in Medicare plans but was only able to secure $7 million in rebates or about 12% of costs.

As a result of the lack of rebate control, premium prices have fluctuated more dramatically. Horizon’s premium prices have varied as much as $37.80 over the last ten years.

UNH | PART D DEMO & SENATE FINANCE TESTIMONY POINT TO JAN 1, 2020 SAFE HARBOR IMPLEMENTATION - Slide5

The disparate use of rebates creates a political problem – one addressed by Friday’s announcement –because plans with high manufacturer rebates, like UNH’s, will experience the highest increase in premiums. The fact that plan sponsors with lower than average rebate levels will be able to decrease premiums offers some consolation to the White House. It is not enough to take the political risk presented by millions of UNH enrollees complaining about rate hikes a few months before a national election.

Additionally, a move was afoot on Capitol Hill to impose a two year delay in implementation as a budgetary offset to the surprise bill legislation. If the idea got traction, the Trump drug pricing agenda would be delayed until after the 2020 election and President Trump would have been denied a campaign trail talking point.

In steps the demo proposal, one of the more dramatic political moves in the drug price saga.

Under the demo, UNH and other rebate dependent plans will be able to keep rates lower than would otherwise be the case by shifting losses to the federal treasury. However, competing plans like the state and regional Blues will be able to lower premiums more than would otherwise be the case without the demo because they too will have their losses stopped out by the federal treasury.

How much premium prices move will depend on two things: how manufacturers handle price concessions and how much overall bid amounts change. If manufacturers lower the effective list price across the board, the low rebate plans will see benefit costs drop while the high rebate plans will see them increase. If, however, manufacturers continue to negotiate with each plan or company, adverse selection could develop as high cost enrollees flock to plans with lower cost sharing determined by lower effective net prices, something that will be reflected in premiums.

In today's testmony before the Senate FInance Committee UNH's OptumRX unit indicated that they require advance notice from drug manufacturers of price decreases. They were the only PBM to indicate that was the case. These contract provisions, assuming they are even valid given a change in federal regulation, may complicate how manufacturers negotiated with UNH while simplifying it for everyone else.

If the overall bid amounts increase, even modestly, plan sponsors with a lower dependency on rebates will see an increase in their direct subsidy which will put downward pressure on premiums. The net result in the near term is a more level playing field between local and regional plans and the national sponsors, as premium prices converge around the true cost of providing benefits.

The introduction of the demo does complicate forecasts as there are a number of behavioral changes that are hard to determine until CMS issues additional guidance, which they indicated would be forthcoming between the June 3 bid submission deadline and open enrollment in October. Testimony by PBMs before Senate Finance suggests the demo is not an answer to their prayers but "encouraging" which is what you say in Washington when you don't get everything you want.

Call with questions. 

Emily Evans
Managing Director – Health Policy



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Thomas Tobin
Managing Director


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