OOPC Deconstruction: How do PDPs maintain meaningful differences?

Milliman

03/15/2016

Matt Kranovich, FSA, MAAA

 

Many standalone Medicare Part D Prescription Drug Plan (PDP) sponsors exhibit significant variation in formulary coverage among plan offerings in a given service area. This variation is driven in part by the Centers for Medicare and Medicaid Services (CMS) requirements for “meaningful differences” between PDPs offered by the same PDP sponsor in the same region.

 

Meaningful differences are assessed using the CMS Part D out-of-pocket cost (OOPC) model. The CMS OOPC model accounts for a PDP’s formulary coverage as well as plan benefits (e.g., deductible,  copay,  coinsurance, etc.) to estimate an average Medicare beneficiary’s OOPC with that PDP. In 2016, CMS requires at least an $18 PMPM difference between a PDP sponsor’s basic PDP OOPC and enhanced PDP OOPC in the same region. For PDP sponsors offering two enhanced plans in a region, CMS requires at least a $30 PMPM difference between the first and second enhanced plans’ OOPC. At the time of writing, these minimum thresholds increased to $23 and $34, respectively, in the Advance Notice for 2017 PDPs, though those thresholds are not yet final until the Final Rate Announcement in early April.

 

PDP sponsors can vary plan benefits and/or formulary coverage to achieve these required meaningful differences between their plan offerings in a given region. We examined eight of the largest national PDP sponsors in 2016 to illustrate approaches used in varying benefits and/or formulary coverage to comply with meaningful difference requirements.

 

Our analysis indicates that strategies vary significantly among the large national PDP sponsors. In 2016, half of the PDP sponsors studied relied mostly on formulary changes to meet meaningful difference requirements between basic and enhanced plans, while the remaining PDP sponsors relied mostly on benefit design. Key findings include:

 

• Humana and UnitedHealthcare had the smallest percentages of OOPC difference met by benefits of the PDP sponsors analyzed, indicating that they use formulary to drive OOPC differential more than the others do.
• CVS Health and WellCare used the same formulary for both basic and enhanced plans, generating the required OOPC differential purely through plan benefit variation.
• Envision also had sufficient benefit variation to comply without varying formulary coverage, though it did also use different formularies for its two products.
• No PDP sponsor had a zero or negative percentage of OOPC difference met by benefits (i.e., no plans relied solely on formulary coverage variation to generate the differential needed).
• Several high-OOPC-impact medications were added to enhanced formularies by multiple PDP sponsors in our study, helping their plans meet the meaningful difference threshold in 2016. These included Nexium, Ventavis, Gamunex, and Vytorin.

 

DIVERGENT STRATEGIES FOR MEANINGFUL DIFFERENCE COMPLIANCE

 

We calculated the OOPC differential between each PDP sponsor’s plans holding formulary fixed and compared the OOPC differential from benefit differences with the required OOPC differential. We assumed that the remaining meaningful difference requirement was achieved via formulary differentiation. Figure 1 summarizes our findings and demonstrates the variations in PDP sponsors’ reliance on formulary and benefits to meet 2016 OOPC differential requirements.

 

 

 

These results indicate that PDP sponsors employ different strategies to ensure compliance with meaningful difference requirements. Some PDP sponsors may place a greater priority on formulary differentiation to achieve meaningful difference requirements because of inherent limitations in the CMS OOPC model. For example, the model does not account for substitution between similar products within a therapeutic class. That is, the CMS OOPC model assumes that members will pay 100% of the cost of drugs that are removed from a PDP sponsor’s formulary rather than assuming that those members will shift their utilization to other covered drugs. Therefore, the CMS OOPC model may overestimate the OOPC associated with drugs that are not covered by a formulary.

 

In addition, the CMS OOPC model is based on utilization data that is four to five years old, which may result in OOPC values that are over- or understated based on more recent drug use patterns. This is often exacerbated in therapeutic classes that include recently launched medications with little or no market share in the experience underlying the model. These model limitations lead to surprising results when certain medications are not covered on a formulary, which creates opportunities for PDP sponsors to comply with meaningful difference requirements with a mitigated impact on the plan’s required member premium.

 

Please note that the values in Figure 1 were estimated by comparing each PDP sponsor’s basic plan benefits to enhanced plan benefits (or first enhanced plan benefits to second enhanced plan benefits when applicable) in the CMS OOPC model (2016 OOPC Plan Model Version 1), without varying the formulary. The formulary from the less enhanced plan was always used (so the basic formulary was held constant for comparisons between basic and enhanced plans, and the first enhanced formulary was held constant for comparisons between first and second enhanced plans).

 

The OOPC differentials were then divided by the required OOPC threshold (e.g., $18 between the basic and the first enhanced plan in 2016) to derive the percentages of OOPC differential from benefit differences shown in the rightmost column of Figure 1. We assumed that any remaining OOPC differential requirement was achieved via formulary differences.

 

For simplicity, we ignored the impacts of enhanced gap coverage and regional variations in benefit design within any one PDP sponsor’s plans, selecting one representative benefit design for each PDP sponsor’s basic plans, another for that sponsor’s first enhanced plans, and (if applicable) a third for that sponsor’s second enhanced plans.

 

COMMON APPROACHES TO FORMULARY DIFFERENTIATION

 

Figure 2 displays the three medications with the largest estimated OOPC impact used by each PDP sponsor to vary formulary coverage between each PDP sponsor’s basic and enhanced plan offerings.

 

Figure 2
Largest 2016 OOPC Impact Drugs Added to Enhanced Formularies
PDP Sponsor	Top 3 Drugs by OOPC Impact	Average OOPC Value
Aetna	VENTAVIS	$4.41
	DEMSER	$2.58
	BENICAR HCT	$0.79
Aetna - Enhanced	NEXIUM	$6.70
	LANTUS	$3.95
	GAMUNEX	$2.80
CIGNA	NEXIUM	$6.70
	TRACLEER	$3.74
	DETROL LA	$1.51
Envision	OMEPRAZOLE	$0.71
	MESALAMINE	$0.64
	LANSOPRAZOLE	$0.55
Express Scripts	VENTAVIS	$4.41
	GAMUNEX	$2.80
	VYTORIN	$2.18
Humana Inc.	ADVAIR DISKUS	$6.43
	VENTAVIS	$4.41
	NASONEX	$0.84
Humana Inc. - Enhanced	NEXIUM	$6.70
	GAMUNEX	$2.80
	VYTORIN	$2.18
United Health	VENTAVIS	$4.41
	JANUVIA	$2.30
	OXYCONTIN	$1.71

 

 

Please note that the OOPC values for individual medications in Figure 2 are not specific to the PDP sponsor’s plan design, as they were all estimated using one representative benefit design across all sponsors. This figure therefore demonstrates the relative magnitude of the OOPC impacts for each medication rather than the absolute values particular to any one PDP sponsor. Actual impacts for a particular medication will differ between plans due to differences in benefit and formulary design.

 

FUTURE CONSIDERATIONS

 

These results suggest that there is no one dominant strategy used by national PDP sponsors to ensure compliance with CMS meaningful difference requirements, though most use formulary differentiation to drive at least part of the difference. The strategy employed by PDP sponsors such as CVS Health and WellCare (using the same formulary for both basic and enhanced plans, and varying only plan benefits to meet meaningful difference) could become more difficult to execute in the future as the coverage gap continues to close between now and 2020. If CMS does not reduce the minimum thresholds for meaningful difference over time, it may become increasingly difficult to meaningfully enhance a plan beyond the basic level of benefit. This may cause certain PDP sponsors to re-examine their PDP product strategy and either develop separate formularies for each product or consolidate certain plans.

 

Please note that the opinions stated in this article are those of the author and do not represent the viewpoint of Milliman.

 

Matt Kranovich, FSA, MAAA, is a consulting actuary with the Chicago office of Milliman. Contact him at matt.kranovich@milliman.com.