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
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.
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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.
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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.
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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.
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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).
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Counties w/Medicare HMOs, 2001
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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.
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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.
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How To Measure Benefit?
Consumer Surplus:
P
Amount above actual
premium that
P*
beneficiaries would
have been willing to
spend.
S
D
Q
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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).
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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.
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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.
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Simulation Results:
Market Shares
FFS
only
HMO
Mgap
24.0
23.3
52.7
Mgap
+PDP
PDP
only
All
PDP
Actual
1999-2001
2006
22.8
39.2
Simulation
Low-benefit PDP
10.3
21.5
27.7
29.6
10.9
40.5
High-benefit PDP
9.9
20.8
27.6
31.1
10.6
41.7
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Simulation Results:
Benefits and Costs
Baseline
Consumer
Surplus
Cost
$2.18
Billion
Cost/DCS
$0
$0
HMO
Expansion
$2.24
Billion
PDP
Expansion
$2.48
Billion
$170
Million
$2.84
$350
Million
$1.19
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Cost/Dollar of Added
Consumer Surplus
$3
$2.84
$2
$1.19
$1
$0
HMO Expansion
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PDP Expansion
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.
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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
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