A Bitter Pill.

HMOs look for ways to cut prescription drug costs so they can stay in Medicare.

The interlocking relationship of the managed-care business and the federal Medicare program is in a growing state of turmoil. Rising costs have convinced many health maintenance organizations to leave Medicare and are forcing those that remain to cut back on coverage in a variety of ways.

At least 65 HMOs will leave the Medicare program when their contracts expire in 2001, leaving almost 1 million beneficiaries looking for other coverage options. The rest are coming up with solutions for how they can afford to remain in Medicare.

Prescription drug programs are emerging as a favorite target for cutbacks, and with good reason. A survey by the Washington, D.C.-based Center for Studying Health System Change found that health-care costs in the United States spiked upward by 6.6% in 1999, compared with an average 2.4% rise each year between 1993 and 1997. The main culprit is prescription drug costs, which accounted for 44% of 1999's price hike.

Barry Sheur, a health-care consultant with Sheur Management Group, said HMOs are trying a variety of strategies to survive in the Medicare environment, but prescription drug is cost one area where they don't have much leeway.

"You can't control that much in prescription drugs," he said. "Most HMOs have abandoned drug benefits anyway. Some are covering only a few very specific drugs. You have to limit your formulary very specifically, because there's just no way that HMOs can influence the cost of drugs."

The fragmented nature of the HMO sector makes it difficult to get a clear picture of prescription drug trends, but overall, HMOs appear to be cutting back on coverage, analyst Jeffrey L. Pittsburg of Pittsburg Institutional Inc. said.

"I think they all have been working to cut costs," he said. "It's hard to follow, since different HMOs are following different strategies. Some companies, like Humana, have basically downsized; others, like Aetna, have to go through a total restructuring because of all the acquisitions they made."

Stress and Strategies

Karen Wintringham of Aetna Inc.'s Medicare division said prescription drug costs are "one of the primary drivers of HMO premiums" under Medicare, and the only element of coverage borne almost entirely by the member. "Trends in pharmacy costs are unfortunately going up," she said.

John Bertko, chief actuary for Humana Inc., said federal funding for Medicare has increased about 2% a year in the past few years for most markets, not enough to keep up with rising costs. "This is a very careful game we have to play," he said. "Most HMOs have increased premiums in most markets, and we've had to change our benefit structure."

Aetna's strategy, put into play several years ago, was to introduce a triple copay system in its Medicare plans for prescription drugs, offering unlimited choice across generic brands and imposing certain limits on brand-name drugs.

"We went from unlimited drugs to unlimited generics and limits on brand drugs," Wintringham said. "Many other HMOs have since followed suit."

For group Medicare plans, Wintringham said Aetna left the choice of drug coverage to the employer, which must pick up the tab not covered by Aetna for brand drugs.

In 2001, Aetna will introduce a new drug plan in some of its Medicare markets, said Wintringham. "We will be offering discount drug rates in some areas, rather than a drug copay," she said. "It's not a drug benefit, but members can go to certain pharmacies and pay a discounted rate through our plan."

Like Aetna, Humana has introduced a three-tier copay structure in most markets for its prescription drug coverage. There are different rates for generic drugs, single-source brand names and multiple-source brand names. "We have various tiers to allow people a choice, while giving them options on cost," Bertko said.

Coverages vary by market, depending on that market's dynamics. "In some markets, we only offer generic drug coverage," Bertko said.

Bertko said Humana has a new version of its prescription drug plan for Medicare, due out in 2001, but he declined to elaborate.

Another strategy Humana follows to try to keep a lid on Medicare prescription drug costs, Bertko said, is to put caps on benefits. Those caps vary from market to market.

"We use annual caps in some markets," he said. "Some markets are even capped at a monthly level. It keeps the cost trend to a reasonable level."

Sheur said HMOs in the Medicare world can manage their overall costs by monitoring the efficiencies of provider networks--that is, choosing their health-care providers carefully. They also can emphasize disease-management products and planned treatment protocols for chronic conditions.

Rising Cost of Care

Prescription drug price increases led rising health-care costs in 1999. About one-third of the increase was due to higher drug prices; the rest to new drugs and increased use of existing drugs, according to the Center for Studying Health System Change.

Prescription Drug Physician Hospital Inpatient Hospital Outpatient
       32%           44%           21%                 3%
Source: Milliman & Robertson Health Cost Index
($0 deductible)

Insurers File for Medicare Rate Hikes

Health maintenance organizations say that if they are going to be able to stay in the Medicare program, coverage is going to cost more. Here are just a few examples of recent rate-hike announcements:

* Anthem Blue Gross & Blue Shield of Maine filed for a 13.5% rate increase on its Medicare supplement insurance products because of increasing costs and utilization of health care, according to Maine's bureau of insurance.

* Kaiser Permanente said it has told its roughly 800,000 Medicare members they will have to pay a monthly premium beginning Jan. 1. The announcement followed recent approval from the federal Health Care Financing Administration for Kaiser to charge premiums ranging between $20 and $50, the insurer said.

* PacifiCare said that next year members of its Medicare+Choice HMO, Secure Horizons, will begin paying higher monthly premiums ranging from $19 to $99, depending on where they live.

* Highmark Blue Cross Blue Shield of Pittsburgh said it is asking for Medicare+Choice rate hikes after deciding not to join the mass exodus of HMOs from the program.

* RightChoice Managed Care of St. Louis is seeking to increase premiums by 10% this year, hoping to capitalize on upheaval in the Missouri health-care market, where other providers are running multimillion-dollar deficits.