Former Centers for Medicare & Medicaid Services (CMS) administrator, Tom Scully, laid to rest many of the ghosts surrounding Medicare reform in a keynote presentation at this year’s conference organised by IMS business unit, Cambridge Pharma Consultancy. Scully, a close confidant of President Bush on healthcare issues and one of the architects of Medicare reform, joined a distinguished faculty of speakers at Cambridge’s annual New York event, where the Medicare drug benefit was high on the agenda. Neil Turner, Editor of IMS Pharma Pricing & Reimbursement, reports.
Medicare Part D
According to Scully, the driving force behind “the biggest government programme for 40 years” was the desire to curb healthcare inflation, which he blamed on “single payer government price fixing” for services in the Medicare sector. “The best hospital in New York and best doctors are paid the same as the worst,” said Scully. This distorts the market and “creates no incentive for efficiency or change”.
Worse still, the Medicare sector has an uneven pull on resources, accounting for 50% of consumption but only 18% of patients. With a disproportionate share of provider revenues coming from the CMS, it is difficult for commercial insurers to drive change. The dominance of CMS has driven many insurers to surrender to government rate setting. “Insurers piggy back on the Resource-based Relative Value Scale [RBRVS, the physician payment schedule for Medicare] and Ambulatory Payment Classifications [APCs, the out-patient payment schedule for Medicare],” said Scully.
The solution is to deregulate the Medicare market, which covers 41 million seniors and disabled people at an annual cost of $330 billion. Scully likened it to the “East German model of government-run social insurance”. Two issues, in particular, drove the Medicare Modernization Act (MMA). First, 11 million seniors had no prescription drug coverage and another 10 million had weak coverage. These cash-paying seniors were paying the highest prices in the US – up to 20% more than other patients – because very few were in efficient group purchasing plans. Second, as a matter of ideological principle, the Republicans were deeply suspicious of the type of price regulation seen in Medicare.
Private provision
But what the Republicans really wanted was to drive seniors into the kind of private health plans offered by preferred provider organisations (PPOs), which cover 70% of the population aged under 65. This would provide seniors with a real alternative to the existing options: fee-for-service (FFS), covering around 89% of the Medicare population, and health maintenance organisations (HMOs) covering the remaining 11%. “Risk-based PPOs were the vehicle of choice [for Medicare reform] from day one,” acknowledged Scully.
Medicare Options for Seniors
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Source: Tom Scully
The contention is that commercial insurers operating in a competitive environment will use resources more efficiently than CMS tax dollars because capital is at risk. “Who will get a better deal – CMS or First Health, Caremark or Express Scripts?” asked Scully.
Not only that but commercial insurers “can direct care to better hospitals, doctors and providers. Insurers and educated patients can drive better performance, better outcomes and better quality.” And seniors will be incentivised to join the best plan, with the best coverage and to then remain in those plans – and benefit from the improved quality of care – beyond retirement, with the government picking up the premiums. In this respect, the drug benefit is being used to drive fundamental change in the healthcare market – change that goes well beyond drug coverage. But as Scully concedes, “it will take 15 years for the full effect”.
Performance to date
“Despite all the whining, [Part D] is going well,” said Scully. “After four months of chaos, the smoke is clearing with patients, pharmacists and CMS. We have huge enrolment numbers, bigger rebates and discounts than expected, and stronger commercial networks from new volume.” More than that, drug plan premiums for seniors are averaging $31, versus an estimated $35 – evidence, according to Scully, that competition will drive value for patients.
As for the pharmaceutical industry, much was made of the MMA’s stipulation that the federal government cannot negotiate volume drug discounts. This was widely seen as a concession to industry by the business-friendly Bush Administration. “Do you really believe the pro-market rhetoric?” asked Scully. “Markets can be much crueller than bureaucrats. Power has been handed to third party purchasers who will make tough calls.”
With their own dollars at risk, the Medicare Prescription Drug Plans will adopt aggressive formularies, prior authorisations for appropriate use and incentives for generics. “Look out if you are not an innovator,” warned Scully, hinting at what might happen when the statins go off patent. The stakes will be high for industry, with more volume and better financed seniors and disabled patients, but much greater price pressure. “Change starts with the ending of price fixing,” closed Scully.
For more information on Cambridge Pharma Consultancy, contact Martine Betton via e-mail or call +44 (0)1223 273437.