Beyond that, beneficiaries are still getting used to the new program. Plans are only now starting to manage the new lives they have enrolled. And manufacturers are watching script trends carefully to see what impact plans are having in moving market share among brands. (See "Big Pharma’s Secret Weapon: Part D Starts to Pay Off—Quietly," in this issue Also see "Big Pharma's Secret Weapon: Medicare Starts to Pay Off-Quietly" - Pink Sheet, 1 July, 2006..)

But in another sense, the focus has already shifted to 2007 and beyond. Bids to offer the benefit for 2007 were due June 5. Plans had to finalize formularies for year two in April, and then decide how aggressively to price their products for the new year.

That is where the rules governing dual eligibles come into play. Plans have every incentive to price their offerings to attract enrollees. But a large portion of the Part D market—about 6 million enrollees in stand-alone plans—are governed by a different set of rules. These dual eligibles were automatically assigned to plans on January 1 to ensure that they did not lose coverage. (See "Medicare Market Share: Drug Plan Starts With Big Four," IN VIVO, October 2005 Also see "Medicare Market Share: Drug Plan Starts With Big Four" - In Vivo, 1 October, 2005..)

Only those plans that offered premiums below the average in their state were able to participate in the auto-assignment. The government picks up most of the cost of the "dual eligibles," so it doesn’t want to fund high-cost plans.

For 2007, plans that enrolled duals will keep them—as long as they offer an insurance product with a premium that is still below the benchmark. If they bid wrong and come in above the average for any state, the duals from that state will be randomly reassigned to a new plan. Conversely, plans that are new to the market or that hope to make inroads into regions where they did not attract duals need to be below the benchmark in order to capture any reassigned lives.

In other words, a lot of plans want their premiums to be below average. That is a recipe for intense price competition.

But it also had the makings of potential headache for CMS. The original Medicare rules stipulated that the benchmark for 2007 would be weighted by enrollment. So bids from large plans like United would count more than bids from potential new entrants like Express Scripts Inc.

However, the Part D market ended up being highly concentrated, with United and Humana Inc. controlling almost half of the enrollment. And, in many states, the two plans have an even larger combined share. (See "Medicare Part D Enters Phase 2: Land Rush Gives Way to Claim Jumping," The RPM Report, June 2006 Also see "Medicare Part D Enters Phase 2: Land Rush Gives Way to Claim Jumping" - Pink Sheet, 1 June, 2006..)

That would mean, almost by definition, that the two market leaders could not both retain their dual eligible enrollees in every state. That might be welcome news to smaller plans hoping for a second chance to grab a larger slice of the market. But it would be a potentially significant setback to one or both of CMS’ biggest partners in Part D.

Beyond that, the prospect of hundreds of thousands of dual eligibles who are just now settling into Part D plans being randomly reassigned to new plans on January 1 is not a scenario that CMS or any advocates of Part D want to see. The focus is on continuing to build support for the benefit now that it is up and running.

So CMS took a mulligan. The agency decided it would calculate the benchmark premium for 2007 the same way it did in 2006, by giving equal weight to all PDP bids regardless of enrollment. In other words, United’s bid will count the same as Express Scripts’.

Protecting the Big Plans

The change is certainly good news for the leading plans, since it reduces the risk that they will lose a block of enrollees. It is probably particularly good for United, since Humana has been the price leader in most markets and so was probably less likely to find itself on the wrong side of the benchmark.

Humana CEO Michael McCallister discussed the tradeoff during the Goldman Sachs health care conference June 15. "This is largely neutral for us," he said. "Had they gone to a weighted formula, I think we would have picked up a few dual eligible members as companies struggled with meeting that benchmark."

However, "the positive is the noise around the program is going to be dramatically reduced by not having people forced to change," McCallister said. "I think we find ourselves in pretty much the same market position."

Humana’s focus for year two, McCallister said, is on enrolling the roughly 4.4 million seniors who did not choose to join Part D in 2006. "You are going to see a really significant portion of those people make a decision" next year, he predicted. "This program is becoming socialized now, and neighbors and friends and others are getting experience with it."

The change, though, hurts other plans that wanted to make aggressive moves in the new year. Sierra Health Services Inc. looks like one example. (See "So Long, Sierra?" in this issue. [A#2006500116])

Premiums Expected to go Down

The most important implication of CMS’ decision to change the rules for 2007, however, may be as a sign of the agency’s confidence that it can forego the potential savings from pushing the benchmark as low as possible and still have a good news story to tell in the second year of Part D.

As with most health insurance products, the model for Part D assumes premiums increase every year. The program is designed with an inflation adjuster intended to assure that the government contribution does not grow more rapidly than the cost sharing imposed on beneficiaries. Even the most optimistic advocates of private drug plans’ ability to contain prescription drug spending do not believe that plans can reduce spending from year to year; merely restrain the rate of increase.

But most observers expect year two to be an aberration, and predict that premiums will actually go down.

One reason is competition that may start to border on desperation. More than 50 insurers entered the Part D market in 2006, and, if anything, even more are likely to participate in 2007. No one expects 50 companies to stay in the market for the long haul. Assuming there will be a shakeout starting in 2008, plans are looking at the coming year as potentially a last chance to carve out a long-term position in Part D. (See "Awaiting the Part D Shakeout," The RPM Report, April 2006 Also see "Awaiting The Part D Shakeout" - Pink Sheet, 1 April, 2006..)

Gorman Health Group president John Gorman, speaking at a recent industry conference, noted another reason bids will be unusually low in 2007: it is the last year that plans will be protected from big losses under Part D with special protections known as "risk corridors." Those serve as "a big financial backstop on PDPs," allowing them to bid more aggressively, Gorman said. When the protections start to get smaller in 2008, premiums will go up to offset the higher risk.

So Gorman expects to see stand-alone drug premiums "coming down a bit in actual dollars" in 2007.

Alston & Bird Senior Counsel Tom Scully agrees. "The bids that went in…are going to be at least another 5% to 8% lower than last year," he predicts. Scully was the administrator of CMS when the Part D law was enacted, and he is also a board member for MemberHealth, one of the biggest PDPs. (See "Part D: A Big Chance for Small PBMs," The RPM Report, April 2006 Also see "Part D: A Big Chance for Small PBMs" - Pink Sheet, 1 April, 2006..).

Those predictions are good news for CMS and advocates of Part D. Premiums in 2006 were already lower than projected, and even lower premiums in 2007 would make the benefit that much more attractive politically—both to beneficiaries who would see evidence of cost savings from Part D, and from budget-conscious legislators concerned about soaring federal health care spending.

During a House Ways & Means Committee hearing on Part D, CMS Administrator Mark McClellan announced dramatically lower 10-year cost projections for Part D. While the new benefit is still a huge drain on the Treasury, the projected cost has dropped from $926 billion over the next decade to $746 billion.

If indeed premiums do come down in 2007, CMS should be able to announce a similar reduction in long-term cost projections next year—despite absorbing some additional costs from the change to the benchmarking approach.

McClellan noted that the good news about the cost of Part D "does not eliminate the substantial issues with Medicare in general." However, the perception that the private-sector run drug benefit is driving down costs while the government-run portion continues to soar out of control could prove critical as Congress considers options to reform the program as a whole. (See "Tsunami Economics," in this issue Also see "Tsunami Economics: The Wave is Coming " - Pink Sheet, 1 July, 2006.).

For that reason alone, supporters of the Part D benefit—and brand name pharma companies are among those with the most at stake—should cheer the agency’s decision to put a premium on stability in the second year of Part D.

Preparing for Year Two of Part D: CMS Puts a Premium on Stability

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