Managed Care Digest Series®

Key Findings

Medical Benefit Summary

HMO Industry Overview

HMO enrollment continued trending downward in 2008, to 77.1 million from 78.3 million in 2007, or –1.5%. Enrollment losses and consolidation activity further reduced the number of HMOs, to 440 from 443 in 2007.
The Medicare Prescription Drug Modernization and Improvement Act of 2003 (MMA)—which increased Medicare reimbursement and encouraged private insurers to offer Medicare Advantage plans—continued to drive Medicare HMO enrollment (up to 6.23 million in 2008) as well as the number of Medicare HMO plans (up to 239).
HMO penetration rates dropped in every state except Hawaii and North Dakota, bringing the portion of the overall U.S. population enrolled in HMO plans to 25.4%—down 10 percentage points from the 2000 level (35.3%).

HMO Government Payers

The number of government beneficiaries enrolled in HMOs increased marginally between 2007 (23.3 million) and 2008 (24.1 million). Of this 24.1 million, 68% (16.4 million) were Medicaid recipients.
While enrollment in Medicare HMOs continues to expand, due in large part to the effects of the MMA, changes in Medicare payment rates may mitigate this growth. Medicare payment reform, which goes into effect in 2010, should dramatically slow the annual hike in county benchmarks and assumes a 21% cut in Medicare reimbursement to physicians.

HMOS In Integrated Systems

While enrollment in Medicare HMOs continues to expand, due in large part to the effects of the MMA, changes in Medicare payment rates may mitigate this growth. Medicare payment reform, which goes into effect in 2010, should dramatically slow the annual hike in county benchmarks and assumes a 21% cut in Medicare reimbursement to physicians.

HMO Physician Reimbursement

In 2008, the share of reporting HMOs using fee-for-service to reimburse physicians fell for the sixth consecutive year, to 66.4% from 73.1% in 2002. The share of HMOs using bonus programs likewise increased during this time, to 16.8% in 2008 from 7.5% in 2002.

HMO Provider Contracts

Consolidation among HMOs contributed to an increase in the average number of specialist contracts per plan, to 5,287 in 2008, a 13.2% increase from 2007 (4,670). Use of ancillary services also increased, indicated by the growing share of plans that contract with ancillary providers such as nursing homes (96.2%), home health agencies (95.2%) and pharmacies (88.8%).
In 2008, the number of employer groups contracting with HMOs fell 2.7%, to 815,458. This marks the first drop in the number of employer groups contracting with HMOs since 2004. Corporate-affiliated HMOs, in spite of a 14.2% drop in the average number of enrollees per plan, still averaged the highest number of enrollees (5,242).
Due to increased membership of Medicare beneficiaries and Medicaid recipients, the standard HMO plan share of total HMO enrollment decreased 2.9 percentage points, to 37.7% in 2008 from 40.6% in 2007.

The number of physician encounters per HMO member rose 5.3% between 2007 (3.8) and 2008 (4.0), perhaps suggesting an increased focus on preventive medicine.
Due to additional treatment needs when compared to other HMO membership groups, Medicare HMO members experienced an average length of stay that was 2.1 days longer (6.0 days versus 3.9 days) than both commercial and Medicaid HMO members.

HMO Premium Rates

In an effort to keep pace with rising health care costs, HMOs increased average monthly premium rates in 2008: individuals paid 9.4% more per month ($343.91 versus $314.28 in 2007) and monthly family premium rates reached $900.64 in 2008 (up 7.2% from $839.95 in 2007).

PPO Industry Overview

Increased unemployment in 2008 may have impacted PPOs, which lost 3.0% of enrollment between 2007 (156.4 million) and 2008 (149.7 million), compared with a 1.5% drop at HMOs.
For the tenth consecutive year, the total number of operating preferred provider organizations (PPOs) fell, to 539 in 2008 from 572 in 2007—a 5.8% drop.
PPOs may have expanded specialized service offerings in 2008 to neutralize enrollment losses and generate additional revenue; the percentage of PPOs offering specialized services generally increased, regardless of type of service.

PPO membership size correlated strongly to the use of fee caps among PPOs reimbursing physicians. A notable 94.3% of PPOs with one million or more members used fee caps, indicatinπg how larger PPOs used membership numbers to their advantage when negotiating fees.
PPOs were more likely to use reimbursement models that encouraged cost efficiency in 2008. The share of PPOs using discounted fees fell while per diem and DRG-based reimbursement gained in popularity.

PPO Medical Utilization

An increased number of average physician visits per member per year in 2008 (to 5.1 from 4.1 in 2005), as well as a slightly longer average length of stay (to 4.2 days in 2008 from 3.9 in 2005) indicated PPOs used additional time with providers to prevent costly hospital readmissions.

Fees Charged

Total fees per PPO member per month grew 3.7%, to $6.81 in 2008 from $6.57 in 2007. Members of plans with one million or more members paid the most in 2008, at $9.95 per member per month.

By lowering average tier-one prescription drug copayments and raising copayments slightly for tier-two and tier-three drugs in 2008, HMOs promoted greater use of generics.
The percentage of HMOs placing caps on individual drug benefits nearly doubled between 2005 (9.5%) and 2008 (18.4%). However, the average cap limit also grew over this period, to $3,271 in 2008 from $1,947 in 2005.

HMO Pharmacy Benefit Premiums

Rising drug costs led to increased monthly pharmacy benefit premiums for all HMOs, most notably not-for-profit HMOs, which raised family premiums nearly 35% in 2008, to $90.32.

HMO Pharmacy Utilization

Medicare Part D prescription subsidies implemented in 2003 continued to impact pharmacy utilization. The numbers of prescriptions dispensed PMPY to Medicare HMO members rose a notable 32.7% between 2003 (20.5) and 2008 (27.2).

In 2008, the vast majority (97.2%) of HMOs contracted with a network of pharmacies for pharmacy services.
A higher percentage of HMOs used mail-service pharmacies in 2008 (83.0%) than in 2007 (81.0%). A notable 90.5% of plans with at least 250,000 members used mail-service pharmacies in 2008, indicating these plans used economies of scale to improve the cost efficiency and convenience of mail-service pharmacies.

HMO Generic Substitution

Between 2006 (47.9%) and 2008 (52.4%), the share of HMO prescriptions filled by generic drugs rose four percentage points, a trend that will likely continue as HMOs and consumers look toward generics to reduce drug costs.

HMO Drug Expenditures/Purchasing

Spurred by enrollment increases related to Medicare Part D, drug utilization in HMOs increased, as has the availability of specialty drugs. These factors, in turn, drove up the PMPY cost of drugs for HMOs, to $469.50 in 2008 from $394.72 in 2006. However, drug costs as a portion of operating expenditures fell between 2007 (14.1%) and 2008 (13.8%).

PPO Pharmacy Providers

Increased drug utilization also drove up the average number of prescriptions dispensed per PPO member per year in 2008, to 11.9 from 11.5 in 2007, or 3.5%.
On average, PPOs dispensed a higher percentage of brand name drugs (50.1%) than HMOs (47.6%), perhaps as a result of the share of HMO members (95.2%) who were bound by generic substitution policies.

In spite of the increased cost efficiencies gained by using mail-service pharmacies, contracted retail pharmacies filled the vast majority (93.5%) of PPO prescriptions, versus 6.3% filled through mail service. This indicates PPOs may need to improve incentives to encourage mail service use.

Retail Drug Overview

The prevalence of high blood pressure (approximately 73.6 million Americans over age 20 have the condition) drove up the total number of retail hypertension prescriptions, to 619.1 million, making this drug class the most widely dispensed among the 12 drug classes profiled in this Digest.
For all 12 drug classes, third-party payers accounted for the highest share of retail drug spending. However, third parties took a smaller share of retail drug prescriptions at midyear 2009 than at midyear 2007. Conversely, the Medicare Part D payer shares increased in all 12 drug classes studied.

Branded Vs. Generic Retail Drug Use

Generic drugs comprised more than a 50% share of prescriptions in eight of 12 common drug classes. For patients paying cash, generic drugs were more likely to be dispensed than brand name drugs in all but one drug class (asthma).
Total retail drug spending was higher for brand name prescriptions than their generic counterparts in each of the 12 drug classes studied. While generic drug use has become more prevalent across the health care industry, increased use of new brand name drugs greatly expanded retail prescription spending.

At midyear 2009, hypertension drugs cost less out-of-pocket per prescription ($12.35) than any other drug class profiled. However, the continual treatment needs of hypertension patients ensured multiple prescriptions per year, making hypertension drugs the most expensive when calculated on a per member per year (PMPY) basis, at $67.44.

Third-Party Retail Drug Overview

At midyear 2009, third-party spending was highest for hypertension and cholesterol drugs (at $11.9 billion and $11.8 billion, respectively). Hypertension drugs also reported the highest drug utilization, at 401.7 million prescriptions per year. Cholesterol ranked third for third-party drug utilization, at 157.5 million prescriptions per year. Although oncology drugs had the fewest third-party prescriptions (10.0 million) at midyear 2009, this drug category is expected to drive specialty drug spending with worldwide sales of oncology medications estimated to reach $80 billion by 2012.

Third-Party Retail Drug Utilization

Between midyear 2008 and midyear 2009, generics accounted for a higher share of third-party prescriptions than their branded equivalents in all but two drug classes (asthma and gastrointestinal drugs excepted). With Fosamax coming off patent, the share of third-party osteoporosis prescriptions filled with generics jumped to 42.9% from 13.3%.

Antiretroviral drugs were prescribed to HIV patients more often between midyear 2007 and midyear 2009. For example, prescriptions for Atripala—a drug that combines three HIV medications into one pill—more than doubled in number over this period, to 703,686 from 309,006.

Specialty Drug Retail Utilization

Third parties paid for a considerable share of specialty drugs prescribed to treat arthritis and cancer. Third-party payer shares exceeded 66% for all five of the drugs studied in these two specialty drug categories at midyear 2009. Third-party payer shares of these drugs will likely grow as these conditions become more prevalent.

Specialty Drug Retail Spending

Specialty drugs used to treat multiple sclerosis reported the highest retail costs per prescription, exceeding $2,200 for each of the four drugs listed in this specialty drug class.
For patients being treated with any of the 21 specialty drugs studied in this Digest, those covered by Medicaid paid lower out-of-pocket costs at midyear 2009 than patients covered by third parties or Medicare Part D.

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US.NMH.10.01.016 Last Update: August 2010