Quantitative data analyzed by the Medicare Payment Advisory Commission (MedPAC) show higher payment rates in private health insurance (virtually all of which is managed care) for both physicians and hospitals. An analysis of claims data by Hogan conducted for MedPAC estimates that private insurers paid 25 percent higher rates than Medicare to physicians in 2001. MedPAC staff analysis of the American Hospital Association's Annual Survey shows that private insurers paid 14 percent higher rates for hospital care than Medicare in 2001 (Report to Congress March 2003). An important factor behind this trend of payment rates by private insurers increasing in relation to Medicare rates is a trend of tightening capacity. Our 2000-2001 round of site visits found much greater pressures on hospital capacity. Many hospital executives indicated that lack of excess capacity had given them the leverage to decline managed care contracts with unattractive payment rates (see Health PlanProvider Showdowns on the Rise, HSC Issue Brief No. 40, June 2001). HSC's physician survey has shown a strong trend of increasingly tight physician capacity. Waiting times for appointments are increasing and fewer physicians are accepting all new patients. These trends are similar for Medicare and privately insured patients (see Growing Physician Access Problems Complicate Medicare Payment Debate, HSC Issue Brief No. 55, September 2002). 2) How do private plans' ability to negotiate lower rates vary across the country? For physician payment, we see large variation in payment rates for private plans relative to Medicare FFS across the 12 communities we track. In our 2000-2001 site visits, we found that in Miami, northern New Jersey and Orange County, California, private insurers' physician payment rates relative to Medicare are relatively low compared with other communities. For example, in Miami, private payments range from 80 to 108 percent of Medicare physician payments. In northern New Jersey, private rates ranged from 95 to 105 percent of Medicare payments. In contrast, Boston, Cleveland, Greenville, Little Rock and Seattle have private rates that are much higher than Medicare. For example, private payments in Little Rock range from 120 to 180 percent of Medicare physician payments and from 100 to 150 percent in Boston. This pattern of relative differences across markets has remained stable over time. Those markets that are typically more generous than Medicare have maintained these higher rates over the last 8 years of our study. Similarly, the communities with the lowest rates have consistently paid lower rates than other communities. This pattern of variation in the ratio of private payments to Medicare payments is seen in hospitals as well. Interviews with insurers in the California market indicated that the Sacramento area has payment rates that are much higher than in San Francisco, which in turn are much higher than those in Los Angeles. The ratio of private insurance payment rates to Medicare FFS payment rates is likely to be particularly unfavorable in rural areas. Although HSC does not collect this type of data for rural areas, managed care industry sources have reported that lack of competition among providers in rural areas results in little ability of private insurers to obtain discounts from charges. 2 This variation in payment ratios across communities suggests that there are likely to be some areas in which private plans can negotiate rates that are lower than Medicare FFS, but in most areas the opposite is true. But the trends are towards fewer areas in which the private plans have lower rates than Medicare FFS. Consequently, the presence in a few communitics of PPOs that appear to have potential for lower costs than Medicare FFS is not an indication that this could happen in most areas. 3) What is the current trend of preferred provider organizations' (PPOs') ability to control and reduce their enrollees' health care utilization of hospital and physician services? Our site visits show a broad decline in recent years in efforts by all managed care plans to reduce their enrollees' health care utilization. This is a reflection of the backlash against the restrictions of managed care. Indeed, this has been augmented by enrollment changes away from HMOs towards PPOs, as consumers seek broader choice of provider as well as fewer administrative controls. PPOs are the choice for those who are willing to spend more for health care in order to have less interference in their choice of provider and use of care. Today, PPOs are engaged in few activities to manage care. Their main cost containment focus is on obtaining discounted rates. Their broader provider networks and their enrollees' ability to go out of network for some of their care makes it much more difficult for them than for HMOs to attempt to manage the utilization. For example, they cannot make physicians accountable for a patient's care when there is no requirement that patients see a single primary care provider as their initial point of contact in the health care system. An implication of this is that Medicare PPOs will inevitably be less successful in managing utilization of services than Medicare HMOs. Indeed, in employment-based insurance today, the PPO is often looked to by employers as a preferred platform to pursue a "consumer driven" approach to health care involving substantial patient cost sharing. I would be pleased to be of further assistance to you and the Committee on these and related issues around reform of the Medicare program. Sincerely Yours, Paul B. Girsbuy Paul B. Ginsburg 3 Mr. Chairman and Members of the Committee. The National Association of Chain Drug Stores (NACDS) is pleased to submit this statement for this hearing on "Purchasing Health Care Services in a Competitive Environment." Part of this hearing will likely focus on how to assure that a quality Medicare pharmacy benefit is delivered in the most cost-effective manner. NACDS represents over 200 pharmacy companies that operate nearly 35,000 communitybased retail pharmacies. NACDS members employ nearly 100,000 pharmacists and provide about 70 percent of all outpatient prescriptions. The majority of our prescriptions are paid for by insurance companies and pharmacy benefit managers over 85 percent so we have a significant amount of experience in operating in the current pharmacy benefit marketplace. We believe that we can provide a unique perspective on what we feel will work best for Medicare program, seniors, and the taxpayers. FEHBP and DOD Use Different Approaches to Prescription Drug Benefit Design Two of the models being discussed today are the Federal Employees Health Benefits Program, (FEHBP) and the Department of Defense (DOD) Tricare program. Frankly, we believe that examining the prescription drug benefit programs in FEHBP and DOD will give policymakers ample evidence to re-evaluate some of the major models being proposed that would rely primarily on pharmacy benefit managers (PBMs) to provide a prescription drug benefit. Anyone who is following the health policy, business, and financial news would find that important public health and public policy questions are being raised about the current practices of PBMs, and whether they are holding down drug costs, or responsible, in part, for their significant increases. The experience of the government's own FEHBP should be instructive to Members of Congress as they consider the true effectiveness and competitiveness of this approach to providing a prescription drug benefit for seniors. Our analysis indicates that escalating prescription drug spending in the FEHBP program - which is administered by the same PBMs that would be used for Medicare - has contributed significantly in recent years to the sharp premium increases seen in the program. NACDS Statement on Purchasing Health Care Services For example, the Office of Personnel Management's (OPM) own data indicate that drug cost increases were responsible for 40 percent of the 10.5% premium increase in 2001, 37 percent of the 13.3% premium increase in 2002, and 30 percent of the 11.1% premium increase in 2003. Keep in mind that the average age of the FEHBP population is about 47 years of age, while that of traditional older Medicare population is about 70. Medicare beneficiaries have more chronic conditions, requiring greater drug use, which results in higher per capita expenditures than the much-younger, healthier FEHBP population. If the PBMs have not been able to manage prescription drug spending in the FEHBP program's younger, healthier population, why should we believe that they would be any more effective in the higher-cost Medicare population? PBMs' Anti-Competitive Practices Not Aligned with Goals of Payors or Medicare Many public and private payors are rethinking their PBM strategies because they recognize that PBMs have overpromised and underdelivered. The goal of payors to reduce prescription drug costs is not necessarily aligned with that of the PBMs, which is to drive manufacturers rebates to gain higher operating profits for the PBM. These rebates are generated by promoting the use of higher-cost brand name drugs. What follows is an excellent example of how rebates create perverse incentives and anti-competitive practices in the marketplace: Most PBM-administered prescription drug benefit plans have both a community retail pharmacy network and a mail order pharmacy component (i.e. Medco, Express, Advance PCS, Caremark). In most cases, these mail order pharmacies are owned by the PBM, and the PBM uses the patient-identifiable information that they obtain from processing a retail pharmacy claim, to switch patients to their own mail-order facilities. The PBMs have financial incentive to do this because they receive significant rebates from brand name manufacturers for moving (or increasing) a particular manufacturer's market share, so the more product that is dispensed through mail, the more rebates the PBM receives. This is not always cost-effective for the payor or the patient, since it increases copays for the patient and overall costs for the payor. Moreover, the retail pharmacy doesn't receive rebates and has no incentive to provide higher-cost brand name drugs. NACDS Statement on Purchasing Health Care Services Page 3 |