CMS Rulemaking and Medicare Part D: Stifling Innovation, Limiting Access, and Decreasing Quality for Seniors
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RESEARCH
CMS Rulemaking and Medicare Part D: Stifling Innovation,
Limiting Access, and Decreasing Quality for Seniors
Douglas Holz-Eakin, Angela Boothe
February 2014
Executive Summary
In January the Center for Medicare and Medicaid Services (CMS) proposed new
regulations for Medicare Part D that would limit plan options, restrict competition, and
interfere with plans’ negotiations. Under the guise of ordinary rulemaking, the proposed
regulations are a fundamental contravention of the policy principles that have made Part
D a popular, low-cost, and innovative program. If implemented, the taxpayer will face
higher budget costs, millions of seniors will lose their preferred plans, benefits will
diminish, and premiums will rise.
Introduction
Medicare Part D was created by the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (MMA) to provide affordable prescription drug insurance
coverage with a variety of benefit levels and premium costs. Over the past ten years, Part
D has developed a track record of competition among plans for seniors’ business,
controlled premium and budget costs, and excellent access and quality1.
Medicare Part D has matured into a financially successful and popular program.
However, regulations proposed by the Centers for Medicare and Medicaid Services
(CMS) in January 2014 will mean that an estimated 14 million seniors2 could lose their
current plan, beneficiaries could see premium increases of up to 21 percent, and the
changes could cost the Part D program up to $10 billion over the next ten years3. This
paper details the current success of the program and the likely impact of the fundamental
restructuring hidden within the new CMS regulation.
Background on Medicare Part D
Part D was created to fill a gap in the health care financing system for seniors: insurance
against the costs of outpatient prescription drugs. When the Medicare program was
signed into law in 1965, prescription drugs were not a prevalent part of health care4 and
long-term pharmaceutical use was less common than other treatments5. Part D addressed
the need to update Medicare to reflect the changes in the practice of medicine.
Part D is built on competition among private insurance plans. Though plans face a
minimum benefit requirement, much of the cost sharing, additional benefits packages,
and pricing structure is left to the prescription drug plans (PDPs) for development.
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Because plans have a high level of flexibility in the ways they structure their programs, a
large number of plans exist, containing a variety of premiums and benefits. This structure
was the first of its kind in entitlement programs, and at the onset of the program, there
was concern surrounding plan participation. However, Part D has proven to be an
efficient part of the Medicare program, coming in well under budget projections and the
benefit continues to be innovative and affordable.
Over the past ten years, Part D has continually performed better than projected in federal
budget costs. Estimated costs for 2012 decreased from $122.88 billion to $65.1 billion
over the 2004-2011 timespan6, and actual costs for 2012 came in even lower, at $55
billion. Along with the decrease in costs at the federal level, beneficiaries have reported
high levels of satisfaction with the program, with 17 percent extremely satisfied and 42
percent very satisfied with the program; signaling the availability of affordable, quality
coverage7.
How Part D Controls Costs
The program maintains control on budget and beneficiary costs due to its competitive
bidding and plan selection processes. Both the plans and Medicare beneficiaries have the
ability to make choices within the Part D program that they view as financially beneficial.
Each of these processes is detailed below:
• Competitive Bidding – Through an annual bidding process, Medicare calls for
bids for the 34 geographic regions across the country. Plan sponsors select the
regions for which they would like to provide a per member per month (PMPM)
plan cost or “bid” that contains a rate for coverage of standard required benefits,
and designates the cost of any additional services – plan bells and whistles.
Figure 1: Insurer Additional Benefit Explanation
CMS then announces the calculated national average monthly bid, which
designates the dollar amount of contribution (74.5 percent for Medicare/federal
share) for the program8.
• Plan Selection – Medicare beneficiaries choose from the available plans in their
region based on costs and benefits offered. Since Medicare pays 74.5 percent of
the national average monthly bid for every enrollee, Medicare beneficiaries pay
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the difference of their plan amount. Beneficiaries may choose low cost plans to
save money, or they may choose a plan that, at higher premium, provides
additional benefits, or contracts with local, convenient pharmacies as a part of
their preferred provider network. Preferred provider networks offer discounted
copayment rates to beneficiaries for using providers within the network.
Figure 2: Federal and Beneficiary Premium Share
Enrollees review and re-assess their Part D plans every year during an open
enrollment period, where they can change programs or renew their current plan.
In 2013, beneficiaries were able to choose from at least 23 different plans in each
of the Part D regions9.
Part D is designed to encourage plan competition and increases the incentive to offer
lower premiums and attract additional enrollment. Each year, the interaction between
plans and enrollees encourages market competition, a variety of plans to choose from,
and low monthly premiums.
Seniors and Proposed CMS Regulations
The new proposed regulations, entitled Medicare Program: Contract Year 2015 Policy
and Technical Changes to Medicare Advantage and Medicare Part D, alter the current
structure of the program and thus jeopardize its success and quality. The proposed rule
could result in increased premium and copayment costs, decreased continuity of care for
beneficiaries as well as fewer participating pharmacies.
The proposed rules will:
(1) Drive up cost by interfering with plans’ abilities to negotiate prices
• Interpreting the statutory non-interference clause. For the first time, CMS has
interpreted statutory non-interference in the Part D program10. Through this
proposed regulation, CMS’ interpretation allows for federal interference in
negotiations between Part D plans and provider pharmacies. Interfering in plan
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negotiations places the issuers at decreased risk, reducing their incentive to control
plan costs11 and limits plan innovation in cost sharing and benefit packages.
• Limiting the number of bids per PDP Issuer. The regulation adds requirements
limiting the number of plans that can be offered in one of the given 34 regions12.
All issuers are limited to offering one plan that only contains the standard benefits
and another plan that offers enhanced benefits. Limiting the number of plans per
firm to two restricts beneficiary options which will inevitably increase the costs in
all regions.
• Creating uncertainty for 2015. Finally, the new Part D regulation impacts
insurance plan markets by creating uncertainty and instability in the 2015 plan
year. In order to protect their organizations, issuers will provide fewer options for
beneficiaries at higher rates due to the plans’ inabilities to predict costs in the
2015 market.
(2) Decreases Access to Services
• Any willing provider. The proposed “any willing provider” provision means
plans would be required to accept any provider into their network that is willing to
meet the terms and conditions of the plan’s contract. The addition of the any
willing provider requirement could cause fourteen million seniors to lose their
current plan within a preferred provider network, disrupting the continuity, quality
of coverage, and increasing costs through the removal of discounted membership
rates13.
Preferred provider networks have proven to be a mechanism through which Part
D has been able to achieve great cost savings. As reported in a study by Milliman,
the continuation of preferred provider networks would save the federal
government an estimated $9.3 billion over the next ten years14.
• Crowd out of employer insurance. The regulation creates incentives for employers
to get rid of their employer sponsored retiree pharmaceutical benefit, in exchange
for sending their retirees to the Medicare Part D program for coverage, increasing
costs for the program.
Conclusion
The proposed regulations will likely increase costs for seniors and the federal
government. Interference in plan-provider negotiation inhibits innovation, limiting the
number of plans that can be provided in a region decreases competition – in turn driving
up costs.
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Part D is a program that came in under cost projections over the last ten years, provided
affordable coverage for seniors, and continues to encourage lower costs of prescription
drug plans. The implementation of these regulations would negatively impact the market-
based design and the popularity of the Part D program.
1
Book, Robert A. Ph.D., Holtz-Eakin, Douglas, Ph.D., Competition in the Medicare Part D Program.
September 2013.
2
Based on 2014 enrollment in Medicare Part D prescription drug plans with preferred pharmacy networks
as reported by the Drug Channels Institute. Fein, Adam J., Ph.D., “For 2014, Three out of Four Seniors
Choose a Narrow Network Medicare Drug Plan–and Humana, United Healthcare Win Big. Drug Channel
Institute. Jan 2014. http://www.drugchannels.net/2014/01/for-2014-3-out-of-4-seniors-choose.htm
3
Based on estimated ten-year savings from preferred pharmacy networks as reported by Kaczmarek,
Stephen J., Sheldon, Andrea, Liner David M., “The Impact of Preferred Pharmacy Networks on Federal
Medicare Part D Costs,” 2014-2023. Milliman, October 2013.
4
Kuttner, Hanns. Introductory Essay in Hanns Kuttner and Tevi Troy, eds., The Medicare Drug Benefit
Five Years Later: Is it working? Hudson Institute, December 2011.
5
Terence Kealey, The Economic Laws of Scientific Research, St. Martin's, 1996, gives the example of
histamine-2 blockers replacing surgery for the treatment of gastric ulcers, pp. 226-228. This is just one
example of a larger trend. One more recent example is that of infliximab (Remicade), which reduces the
percentage of ulcerative colitis patients requiring a colectomy from 17 percent to 10 percent. Sandborn,
W.J. et al., “Colectomy Rate Comparison After Treatment of Ulcerative Colitis With Placebo or
Infliximab” Gastroenterology, 2009; 137: 1250 –1260.
6
Kuttner, op. cit., p. 7, citing Trustees' Reports from various years.
7
Kuttner, op. cit., citing KRC Research, “Seniors' Opinions About Medicare Rx: Sixth Year Update,”
October 2011.
8
MedPAC, “Part D Payment System,” Payment Basics, revised Oct. 2012.
9
Medicare Payment Advisory Commission, “Report to the Congress: Medicare Payment Policy,” Chapter
15, March 2013, p. 344.
10
Medicare Program: Contract Year 2015 Policy and Technical Changes to Medicare Advantage and
Medicare Part D, CMS-4159-P § III (2014).
11
Congressional Budget Office. Letter to Congress. Re: Removal of the Non-Interference Clause. January
2004.
12
Medicare Program: Contract Year 2015 Policy and Technical Changes to Medicare Advantage and
Medicare Part D, CMS-4159-P § III, 79 FR 1962, (2014).
13
Based on 2014 enrollment in Medicare Part D prescription drug plans with preferred pharmacy networks
as reported by the Drug Channels Institute. http://www.drugchannels.net/2014/01/for-2014-3-out-of-4-
seniors-choose.html and estimated ten-year savings from preferred pharmacy networks as reported by
Kaczmarek, Stephen J., Sheldon, Andrea, Liner David M., “The Impact of Preferred Pharmacy Networks
on Federal Medicare Part D Costs,” 2014-2023. Milliman Report, October 2013.
14
Kaczmarek, Stephen J., Sheldon, Andrea, Liner David M., “The Impact of Preferred Pharmacy Networks
on Federal Medicare Part D Costs,” 2014-2023. Milliman Report, October 2013.
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