The Impact of Enrollment in the Medicare Prescription Drug Benefit on Premiums November 1, 2005

1. The Impact of Enrollment in the Medicare Prescription Drug Benefit on PremiumsNovember 1, 2005 Jon Blum and Jennifer Bowman Avalere Health LLC

2. Overview of the Study • Conducted by Avalere Health LLC on behalf of the Kaiser Family Foundation Study, released October 28, 2005 • http://www.kff.org/medicare/7423.cfm • Examine the effects of participation assumptions on monthly premiums and federal costs of the Medicare prescription drug benefit, particularly if beneficiaries with relatively low drug spending do not enroll • The analysis solely focuses on the impact of various enrollment scenarios, based on beneficiaries prescription drug costs • The analysis holds constant other factors that could affect average Part D premiums, including drug prices, utilization, and other market forces

3. Key Findings of the Study • Average premiums for the Medicare prescription drug benefit could be significantly higher in 2007 than current federal projections if enrollment is significantly concentrated among beneficiaries who have high expected drug spending • If enrollment is limited to the highest spending 20 percent of beneficiaries in three important groups, the average Part D premium could be as much as 42 percent higher than expected • Enrollment levels do not significantly alter the federal costs of offering the Medicare prescription drug benefit

4. The intersection of business strategy and public policy Background

5. CBO Assumptions about Part D Enrollment (1) Small group of beneficiaries do not enroll in Part D • 6% of Medicare beneficiaries who do not participate in Part B • 7% of beneficiaries enrolled in Part B who are either: • Active workers receiving drug coverage through employers, or • Beneficiaries receiving coverage through federal programs (veterans, federal retirees, and military retirees)

6. CBO Assumptions about Part D Enrollment (2) All retirees either receive drug coverage through an employer, or enroll in a Part D plan • 30% of beneficiaries enrolled in Part B receive coverage through a former employer • Two-thirds of those beneficiaries will see their employers take the retiree drug subsidy and receive drug benefits through the employer • One-third are expected to enroll in Part D plans

7. CBO Assumptions about Part D Enrollment (3) All remaining Medicare beneficiaries (25.8 million) are expected to enroll • Dual eligible beneficiaries (6.4 million) • Medicare Advantage enrollees (5.5 million) • Beneficiaries currently receiving Medigap coverage (3.2 million) • Beneficiaries currently without drug coverage (7.7 million) Overall, CBO assumes 80% of Medicare beneficiaries will enroll in Part D or receive benefits through a former employer that takes the retiree drug subsidy

8. Choosing to Enroll in the Medicare Drug Benefit Is a Complex Decision • Beneficiary decision includes considering: • Current drug coverage’s formulary, premium and cost-sharing offerings • Eligibility and application for low-income assistance • Comparing plans (many more PDP and MA-PD plans than expected) • CMS plan comparison tools will enable beneficiaries to compare: • Pharmacy networks • Formulary, including drug list and management tools • Premiums • Coinsurance or copayment

9. Experience with MMA Thus Far: Enrollment in the Medicare Replacement Drug Demonstration * According to Avalere Health email communications with Sharon Cardinale, MRDD Outreach Coordinator, March 29, 2005

10. Enrollment in the Medicare Drug Discount Card Has Also Been Lower than Expected Source: CMS Press Office.

11. The intersection of business strategy and public policy Methods

12. Methodology • Model uses some CBO assumptions for enrollment • Expected to Enroll in Part D: Dual eligibles and Medicare Advantage enrollees • Expected Not to Enroll in Part D:Active workers receiving employer-sponsored insurance and those receiving drug coverage through a government retiree health insurance program • Enrollment scenarios focused on 3 subgroups of Medicare beneficiaries: • Low-income subsidy eligibles • Beneficiaries projected to lose retiree health benefits • Beneficiaries currently enrolled in the traditional fee-for-service program who do not qualify for the low-income subsidies • Groups were divided into quintiles based on expected drug spending • Estimated premiums and federal program costs based on enrolling the 20%, 40%, 60%, 80%, or 100% of beneficiaries with highest drug spending of all 3 groups

13. Total Population and Average Prescription Drug Spending per Beneficiary for Categories of Beneficiaries with Varying Enrollment Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

14. The intersection of business strategy and public policy Results

15. Impact of Varying Enrollment of Low Income Beneficiaries Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

16. Impact of Varying Enrollment of Dropped Retirees Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

17. Impact of Varying Enrollment of Non-Low-Income Beneficiaries Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

18. Non Low-Income Percent Increase in Average Monthly Premium, Compared to Full Enrollment Low-Income Dropped Retirees Impact of Varying Enrollment of Low Income, Non-Low-Income and Dropped Retirees on Average Monthly Premiums Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

19. Total Enrollment (Millions) Enrollment of Three Sub-Groups Under Five Possible Scenarios Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

20. Percent Change in Average Premium Compared to Full Enrollment Percent Increase in Premiums Relative to 100 Percent Enrollment Under Five Possible Scenarios Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

21. Estimated Federal Costs Based on Enrollment, Ranked by Drug Spending Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

22. Policy Implications • CBO’s monthly premium estimate of about $37 is based upon robust participation • The average monthly premium for 2007 could be dramatically higher if only those beneficiaries with expected high prescription drug costs enroll in 2006 • To keep premiums affordable, enrollment of higher-income beneficiaries with low prescription drug spending is critical • The success of CMS and other stakeholders’ outreach efforts to this group will keep premiums affordable • Federal costs of the Medicare prescription drug benefit are largely unaffected if enrollment is limited to only the most expensive beneficiaries • Robust enrollment is critical to keep premium and federal costs manageable, and to keep Medicare prescription drug benefit plans participating in the program

23. For a copy of the paper, entitled The Impact of Enrollment in the Medicare Prescription Drug Benefit on Premiums, visit: www.kff.org or www.avalerehealth.net