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Nothing For Something: Paying Twice for Drug Benefits in Medicare HMOs

Nothing For Something: Paying Twice for Drug Benefits in Medicare HMOs. Steven D. Pizer, Austin B. Frakt, and Roger Feldman* June 4, 2007. *University of Minnesota. Overview. MMA expanded benefits 2 ways: Created PDPs Hiked payments to HMOs.

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Nothing For Something: Paying Twice for Drug Benefits in Medicare HMOs

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  1. Nothing For Something:Paying Twice for Drug Benefits in Medicare HMOs Steven D. Pizer, Austin B. Frakt, and Roger Feldman* June 4, 2007 www.hcfe.org *University of Minnesota

  2. Overview • MMA expanded benefits 2 ways: • Created PDPs • Hiked payments to HMOs. • Which produced better value per dollar of spending? • Result: Spending on HMOs creates much less value for beneficiaries than spending on PDPs. www.hcfe.org

  3. Medicare Modernization Act of 2003 • To encourage entry, MMA increased HMO payments for non-Rx benefits in ‘04, ‘05, and ‘06. • ‘05 to ‘06 payment rate increase was $31 PMPM (5%). • MMA also provided payment of at least 75% of cost of Rx benefit (worth about $90 PMPM). • Total payment increase: $30 + $90 = $120. www.hcfe.org

  4. HMO Entry, 2006 • 81% of HMO entry following MMA occurred in counties that already had HMOs. • 82% of enrollees were in an HMO with Rx benefits in 2004. • The $120 payment increase induced 5.5 plans/county to enter counties that already had HMOs and paid for Rx benefits already widely available. • This is the main effect of MMA payment changes on HMO entry. www.hcfe.org

  5. Cost/Benefit Methods Cost: • Estimate payment change needed to induce one more HMO. • Use average payment for one PDP vs. none. Benefit: • Calculate HMO benefit and premium changes resulting from payment & entry. • Estimate demand model. • Use estimated model with modified data to calculate value of each expansion to beneficiaries. www.hcfe.org

  6. Estimating Cost of HMO Entry • 81% of HMO entry following MMA was in counties that already had HMOs. • To roughly match MMA and keep costs down, we focus on entry in counties with HMOs in 2001. • Marginal analysis: To evaluate this expansion path, we estimate the cost of inducing one new entrant (not 5, like under MMA). www.hcfe.org

  7. Counties w/Medicare HMOs, 2001 www.hcfe.org

  8. Estimating Cost of HMO Entry (2) • We follow Cauley, Chernew, and McLaughlin (2005). • Number of HMOs offering Rx = f(payment rate, cost factors, county characteristics). • Model estimated by “ordered probit”. • Calculate increase in payment rate necessary to move predicted number up by one ($93.98). • Change in Cost = Dpayment rate x enrolleest-1 + (rate – average cost) x Denrollees = $170M/mo. www.hcfe.org

  9. Calculating Cost of PDP Entry • Simulate entry of one PDP in each county with statutory minimum benefits. • Average PDP premium for simulation was $30 (from 2006 data on low-benefit PDPs). • PDP premiums are 75% subsidized, so cost to Medicare is $90 per enrollee. • Total cost = $90 x simulated enrollment = $350M/mo. www.hcfe.org

  10. Consumer Surplus: Amount above actual premium that beneficiaries would have been willing to spend. P P* S D Q How To Measure Benefit? www.hcfe.org

  11. Estimation Method: Demand • Standard approach is conditional logit. • Nested logit adds flexibility and passes statistical tests. • Follow methods in Pizer, Frakt, & Feldman (2007). • Nested logit demand function predicts probability of plan choice as function of premium (among other things). • Can integrate with respect to premium to get consumer surplus (Small and Rosen, 1981). www.hcfe.org

  12. Effects of Payment on HMO Benefits and Premiums • BIPA became law in December 2000. • Changed HMO payment rates after premiums and benefits had been set for 2001. This is a natural experiment. • Pizer and Frakt (HCFR, 2002) estimated effects on HMO benefits and premiums holding expected costs constant. • Also estimated effects of competition. www.hcfe.org

  13. Simulation Method: Adding PDP • Estimate choice model. • Simplify choices: “representative” PDP. • Modify data to eliminate Medigap w/drugs & add PDP. • Apply estimated coefficients to modified data and calculate results. www.hcfe.org

  14. Simulation Results: Market Shares www.hcfe.org

  15. Simulation Results: Benefits and Costs www.hcfe.org

  16. Cost/Dollar of Added Consumer Surplus www.hcfe.org

  17. Conclusions • HMO expansion was 2.4 times more expensive than PDP expansion. • HMO expansion improved benefits, premiums, competition, and consumer surplus, but at very high cost to the government. • The MMA expansions were larger than those simulated here, but conclusions ought to apply. www.hcfe.org

  18. Policy Implications • HMOs already offered Rx coverage, so MMA faced a crowd-out problem like in Medicaid and employer-based plans. • “Clawback” provision recaptures savings from Medicaid & 28% employer subsidy splits savings with employers. • What can be done? Make bidding real: Connect benchmark to bids. www.hcfe.org

  19. Nothing For Something:Paying Twice for Drug Benefits in Medicare HMOs Steven D. Pizer, Austin B. Frakt, and Roger Feldman* June 4, 2007 www.hcfe.org *University of Minnesota

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