The Managed Care Landscape

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THE MANAGED CARE

LANDSCAPE

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3Managed CarePPTRNZNSUS0141 12/14

MANAGED CARE LANDSCAPE

Table of Contents

Introduction ................................................................................................................................................4

Learning Objectives..................................................................................................................................4

Managed Care Structure .........................................................................................................................5

Stakeholders ...........................................................................................................................................5

Purchasers ...........................................................................................................................................6

Managed Care Organizations ......................................................................................................7

Providers ..............................................................................................................................................8

Health Plan Members ......................................................................................................................9

The Accountable Care Model ...........................................................................................................9

Managed Care Products .................................................................................................................. 10Benefit Design .....................................................................................................................................14

Actuarial Value ................................................................................................................................ 15

Carve-outs ........................................................................................................................................15

Benefit Design Reforms ...............................................................................................................16

The Essential Health Benefit ...................................................................................................... 18

Medicare’s Part D Program .........................................................................................................18

Cost-Containment Strategies ........................................................................................................ 20

Formularies ......................................................................................................................................22

Prior Authorizations ......................................................................................................................25

Reduced Fee Schedules ..............................................................................................................26

Specialty Pharmacy Provider (SPP) .........................................................................................26

Drug Utilization Review (DUR) .................................................................................................. 26

Drug Utilization Evaluation (DUE) ...........................................................................................26

Summary ................................................................................................................................................... 27

References ................................................................................................................................................. 28


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4Managed Care

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MANAGED CARE STRUCTURE

Introduction The managed care landscape found in today’s changing health care environment is

a very complex topic. This module will clarify the many features of that landscape,including the primary stakeholders, how accountability is apportioned among

stakeholders, benefit design, and the flow of health care dollars.

In a system originally designed as a means for delivering services, managed care has

evolved into a payment system subject to the actions of and reactions to many different

influences. For instance, the private insurance process is heavily influenced by such

federal government programs as Medicare and government legislation, including

the Affordable Care Act (ACA) of 2010. However, there is an underlying foundation

of concepts that remain consistent; these are the cornerstones of the managed care

landscape. This module gives an overview of those foundational concepts.

Learning Objectives

Upon completion of this module, you will be able to:

List the stakeholders in managed care delivery

Define the term “accountability”

Describe how accountability is apportioned within the managed care system

Understand the design of health care benefits

Recognize cost-containment strategies


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Managed Care Structure

Stakeholders There are many important stakeholders in the managed care delivery system, all of

whom influence your success. The better you understand the roles, motivations, and

interactions of these stakeholders, the better you will be able to appropriately engage

them in the sales process. As shown in Figure 1, the primary stakeholders we will

discuss are:

Purchasers

Managed care organizations (MCOs)

Providers

Health plan members, who ultimately receive the health care benefits

delivered by the system


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6Managed Care



Figure 1. Primary Stakeholders in the Managed Care Delivery System

Purchasers

Many payment transactions occur during the delivery of health care. An important

concept to define here are the payments that introduce money into the health care

system. In the United States, those payments come predominantly from the government

or private employers. They are the primary purchasers of health care in today’s managed

care environment.

In 2013, individual states and the US federal government paid for about 45% of all

health care services in the United States. This figure is projected to reach 50% by 2021.1

In fact, the Centers for Medicare & Medicaid Services (CMS) is one of the largest

purchasers of health care in the world.2

In the private sector, employers have been the primary source of funding for health

care since the post-World War II era. Health care benefits continue to serve as animportant recruiting and retention tool in most industries, and represent a significant

investment by individual corporations. They also pay a significant percentage of the

dollars sent to MCOs.

Purchasers

Motives:

• Cost control

• Positive outcomes

Motives:

• Reasonable reimbursement

• Few restrictions

Motives:

• Membership/revenue

• Protected profits

• Customer satisfaction

Motives:

• Low out of pocket costs

• Freedom of choice

• High quality care

Providers and PharmaciesMCOs

Members

l

• s it ive outcomesP

Motives:

• Reasonabl reimburseme

• Few restric ionst

Motives:

• ip/revenueMembershi

• rofitsProtected

• atisfactionCustomer

Motives:

• ostsLow out o pocket c

• Freedom of choice

• Hi h ual it care

Provider and PhMCOs

Members


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Alternatively, larger corporations may choose to be “self-funded” (also called “self-insured”).

Rather than pay an MCO to be accountable for paying for the employee’s health care,

some companies will establish a fund to directly pay for services provided. With respect

to dollar flow, the end result is virtually the same; money is transferred from thecompany into the health care system. The concepts of “accountability” and

“self-funded” plans will be covered more in-depth later in this module.

Managed Care Organizations

Historically, the primary role of MCOs is to assume accountability. They are paid a

negotiated premium to assume accountability and administer benefits as agreed

upon with the purchaser. Those administrative duties include establishing a network

of providers, negotiating with facilities such as hospitals, handling the claims process,

and directly paying the health care providers. Table 1 offers a few examples of MCOs.

Table 1. Examples of MCOs

The term “payor” is often used interchangeably with MCO. It may also be spelled as

“payer” in the literature. This nomenclature probably derives from the concept that the

MCO controls much of the money flow in the US system, and “pays” other stakeholders

as appropriate.

Premium: Payment whereby one party

pays another for loss due to

specified event(s)

Aetna Founded in 1853 in Hartford, Connecticut; one of the

leading providers of health care, dental, pharmacy,

group life, and disability insurance in the nation3

UnitedHealth Group (UHG) One of the largest publicly-traded MCOs in the county,

serving more than 85 million people worldwide4

Independence Blue Cross (IBC) Regional MCO serving the southeastern Pennsylvania

area; serves more than 7.5 million people nationally;5

though IBC does not have national impact, it may have

just as much influence in their service area as Aetnaor UHG


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8Managed Care



Other examples of organizations involved in the delivery of health care include:

Third Party Administrators (TPA): These entities process claims on behalf of their clients. They

are not true insurance companies, because they are not paid a premium

to assume the financial accountability of providing health care. They provide an

administrative service to accept claims from providers, adjudicate them, and approve (or disap-

prove) payment. Often, self-funded corporations will outsource administrative tasks to a TPA.

Pharmacy Benefit Manager (PBM): These organizations contract with MCOs to administer

and manage prescription drug benefits. PBMs wield significant influence on prescription drug

pricing and use. According to some estimates, PBMs manage the administration of prescription

drug programs for more than 220 million Americans.6 Some large self-funded companies offer

these prescription benefits separate from the medical benefits provided to employees. This is

called a pharmacy carve-out, through which employers may contract directly with a PBM in a

way that bypasses the MCO.

Specialty Pharmacy Provider (SPP): These pharmacies provide the services necessary to

facilitate access to pharmaceutical and biotech products that have high acquisition costs, are

difficult to ship and store, and/or present reimbursement challenges.

INSIGHT

Impact on the Manufacturer

A Pharmacy Benefit Manager (PBM) or a Specialty Pharmacy Provider (SPP) may purchase

drugs directly from a drug manufacturer and distribute them to patients who require

long-term medications. One key difference between PBMs and SPPs is how access is

controlled: the PBM may enforce a formulary restriction on a specific product, whilethe SPP normally follows the formulary of the MCO that manages the pharmacy

benefits of the health plan.

Providers

This stakeholder category encompasses all individuals and systems that directly

provide health care-related services to plan beneficiaries and receive reimbursement

for those services. The physician in a private practice is just one example; hospitals are

also considered providers. This is true for both individual facilities as well as large

institutional chains like the Hospital Corporation of America (HCA) which has

165 hospitals and 115 free-standing surgery centers.7

Carve-out:

Health care services that are

separated from a contract

and paid under a different

arrangement


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INSIGHT

Impact on Your CompanyThis broad definition of “provider” reflec ts the large variation in the impact providers

have on the use of products. The physician in private practice may be constrained by

the external formulary decisions made by the MCO. In other settings, the physician is

an integral part of the MCO, and essentially works for the company that makes the

formulary decisions.

Health Plan Members

The focus of the entire health care system is the individual health plan member. The

term “beneficiary” is applicable because it points to the fact that these individuals

receive benefits defined in their plan. The term “patient” best applies when the

individual enters the provider network for treatment of a specific condition.

Like the purchasers described above, beneficiaries also introduce money into the

US health care system. These payments take the form of a co-pay, coinsurance, or

deductible as required by the written policy. Beneficiaries often contribute money

by paying some of the monthly premiums for the insurance policy.

The Accountable Care Model

MCOs are an integral part of the health care system because they are willing to be

held accountable for the quality and cost of delivering health care services to patients.

Individuals and small companies cannot afford the accountability associated with

providing all the care a person or employee may need over the course of a lifetime.

The cost of routine care and regular checkups in not onerous; however, the cost of a

serious condition like cancer experienced by a single employee could eliminate all

profit from a small company. In return for the payment of a monthly premium, the

MCO agrees to be held accountable for the quality and cost of providing a company’s

healthcare needs.

In today’s health care landscape, accountability for managing health care is shifting.

Instead of just MCOs being held accountable, more and more providers are assuming

that responsibility. The concept of sharing accountability for the management of

healthcare is a prime driver of health care reform. As such, many of the topics introducedin the following discussions will be proposed in terms of their impact and relevance

to the Accountable Care Model.

Beneficiary: Person designated to receive

the advantages of a health

care policy


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10Managed Care



Managed Care ProductsIt is too simple to say managed care companies provide “health insurance.” Most MCOs

carefully design a portfolio of products tailored to the marketplace and their customer’sindividual needs (MCO customers include both employers and plan members).

For example, labor unions have traditionally had the ability to negotiate extensive

benefit plans with their employers (who then must pay the premium for them), while

small companies have more limited budgets and commensurately smaller employee

benefit packages. Because of dissimilarities such as this, the MCO must offer distinct

products that meet the different needs of their various customers.

INSIGHT

MCO PortfoliosNot all MCOs have a full product portfolio. National companies like Aetna and

UnitedHealth Group are likely to have a wide selection of products to choose from,

while regional MCOs may not have as wide a selection.

Each product represents a balance between choice (by the patient) and cost control

(by the MCO). To set the scale, consider traditional indemnity plans. These plans

represent “non-managed care plans” in that there may not be any control of health

care services used by the patient. A beneficiary could choose to visit any physician

or facility and be reimbursed by the plan administrator for any charges incurred. The

percentage of reimbursement may vary, but the bottom line is that the patient could

choose his/her provider, and the insurance company agrees to pay at least part of thecosts. It is easy to see the lack of cost control exerted by the insurance company. In

fact, an agreement may not even exist between the MCO and provider regarding

what constitutes a reasonable charge for a specific service.

INSIGHT

ACOs

The Accountable Care Organization, or ACO, is a prime example of providers being held

accountable for the management of health care delivery. When an MCO collects a

premium from an employer, they have agreed to be held accountable for managing

healthcare quality and costs. In turn, the MCO may reach an agreement with a group

of providers that shifts some accountability to them. This shift of accountability is

becoming more common through the process of health care reform. The ACO model

will be described later in this module.

Indemnity plan:

Type of health insurance in

which a member can choosethe hospital and provider,

and the insurer reimburses

the member or provider for a

set percentage of the cost


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The typical range of products offered by an MCO includes the preferred provider

organization (PPO), the point of service (POS) plan, the exclusive provider organization

(EPO), the group model health maintenance organization (HMO), and the staff model

HMO (see Figure 2). Each of these will be discussed in relation to how much choicethey offer the patient versus how much they allow the MCO to control the associated

costs.

Figure 2: Relationship of MCO Accountability and Patient Choice

High choice

Low choice

Low control,

higher cost

$$$$$

High control,

lower cost

$$


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12Managed Care



Preferred Provider Organization: The PPO is a health care team organized into

network by the MCO. Physicians, hospitals, and other providers sign contracts

with the MCO agreeing to an established fee schedule and guidelines for

delivering care. This gives the MCO some degree of cost control compared with

indemnity plans, which has no agreed-upon fee schedule.

On the other hand, the PPO offers beneficiaries the highest degree of choice

among all managed care plans. Members have the freedom to visit any provider

whenever they feel necessary, usually requiring a small co-pay. The MCO then

covers a set percentage of the costs according to whether the provider is

in-network or out-of-network.

Because the MCO is accountable for paying for a beneficiary’s health care when

that patient has control of who they visit and how often, the MCO charges a

relatively high monthly premium. For this reason, a PPO can be one of the more

expensive managed care plans available.

Point of service: Similar to the PPO plan, the POS plan includes a network of

providers contracted by the MCO. This network is comprehensive, with a large base

of primary care and specialty physicians spread over a wide geographic area.

With a POS plan, the MCO is better able to control costs through the establishment

of a “point of service.” This point of service is generally a primary care physician (PCP)

who controls the patient’s medical care through the referral process.

Because the PCP makes the referral decisions, the patient has less freedom to visit

providers at their discretion. Therefore, POS patients have less choice than in the

PPO plan. They still have the option to visit out-of-network physicians, but theMCO will often require the patient to handle extensive paperwork and possibly

submit claims for reimbursement.

Overall, the POS plan gives the MCO more control of costs, thereby reducing their

accountability as compared with the PPO plan. Because there is less accountability,

the monthly premium is lower, making this POS plan attractive to patients who are

willing to concede a degree of choice in provider selection.

Exclusive Provider Organization: Like the POS, the EPO requires the policyholder

to choose a PCP to handle their medical issues. The primary difference is that

referrals made by the PCP are almost exclusively restricted to in-network

physicians. This restriction gives the MCO a much greater degree of cost control

compared with either the PPO or POS plan. The restriction to in-network physicians

obviously reduces the amount of choice afforded to the policyholder.

Network:

A defined group of physicians,

hospitals, and other health

care providers who contractto provide health services to

persons covered by a

particular health plan

Fee schedule:

A listing of accepted fees orestablished allowances for

specific medical procedures;

usually represents the

maximum amounts to bepaid for specified procedures


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Monthly premiums are low with an EPO, partially because there is less chance of

patients visiting out-of-network providers. Another reason for lower premiums

is the savings the MCO can realize by negotiating lower payment rates with

network providers. Some physicians and hospitals are willing to accept a lower

reimbursement rate if the MCO can ensure their policyholders will exclusively

use their services.

Health Maintenance Organization: An HMO plan limits its members to seeing a

small network of physicians who have agreed to accept a lower reimbursement

rate in return for higher patient volume. Though the lines of separation are fluid in

today’s health care environment, the HMO should not be equated with the MCO

itself. Generally, the MCO does not include health care providers as part of its

internal corporate structure. Depending on how it is constructed, the MCO may

consider its providers as business partners or employees.

From the provider’s perspective, the HMO sometimes represents a fundamental

shift from the previous organizations discussed. The PPO, POS, and EPO offer

reimbursement based on a discounted fee-for-service. The discount itself is the

primary focus for contract negotiations that establish those networks. Providers

in an HMO are sometimes paid a capitated rate per member per month (PMPM).

No matter how many health care resources a single policyholder demands, the

capitated payment remains the same. This significantly reduces the accountability

of the MCO because most their total cost of health care can be calculated simply

by adding up the monthly payments contained in the provider contracts. Note

that accountability is not eliminated in this arrangement; it is simply transferred

from the MCO to the physicians who comprise the HMO network.

While the MCO’s accountability is reduced in the HMO structure, the policyholder’s

choice remains essentially the same as that seen in the EPO where the PCP manages

all medical issues to ensure the minimal use of out-of-network physicians.

Two primary examples of HMOs are the group model and the staff model:

Group model: An HMO seeking to offer all specialty health care services to their

policyholders may need to contract with several specialty practices or one larger

multi-specialty group. The practice will be paid a capitated PMPM rate to care for

the HMO’s patients. Importantly, the practice maintains the latitude to see

non-HMO patients when the caseload permits.

Staff model: In this structure, all providers are employees of the HMO. Often the

entire group of physicians is contained in one facility, with a primary care

department as well as specialty departments, such as OB/GYN and rheumatology.

The staff model can be restrictive from the policyholder’s perspective, as they may

not even have the choice of which PCP will be managing their care. Kaiser

Permanente can be considered an example of a large staff model HMO.

Capitation: Fixed “per capita” amount

that is paid to a hospital,

clinic, or doctor for each

person served

PMPM:

The usual unit of measure

for capitated paymentsthat MCOs negotiate with

providers


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14Managed Care



HMOs and PPOs are currently the most common plans chosen by patients across the

US. Although the number of plans available is similar, almost twice as many consumers

choose PPO plans compared with HMOs (see Table 2).

Table 2: PPO Plans Compared With HMOs (2013)8

HMO PPO

Enrollment 80,100,000 152,800,000

Available plans 438 465

Benefit DesignDesigning benefits requires balancing the needs of the health plan member, the

purchaser, and the MCO. In general, the plan member wants high-quality care withminimum out-of-pocket expense. The purchaser wants good outcomes at a low cost,

while the MCO wants to generate a positive net income while keeping all its customers

satisfied. Meeting all these needs requires a precise structural design.

A typical benefit design will include two common structural elements:

Medical benefits: This is the largest category of health care benefits and typically

includes such elements as:

- Preventive care services

- Ambulatory (outpatient) services

- Hospital (inpatient) services

- Emergency room visits

Physician services are part of the medical benefits defined in most plans. When

a physician administers a drug in his/her office as part of a member’s treatment

plan, that drug is also covered under the medical benefit. Under Medicare, Part A

and Part B can be considered the medical benefits offered by the government.

INSIGHT

Components of Medicare include:

Part A: covers inpatient carePart B: covers outpatient care and doctor’s servicesPart C: a “managed care” version of Part A and Part BPart D: covers prescription drugs(See below for more information on Part D)


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Pharmacy benefits: Despite some apparent overlap in the physician-administered

drug example cited above, the pharmacy benefit is a distinct component of a

benefit design package. With a few exceptions (such as some oral oncology

prescription drugs), medications that are self-administered by the patient fall into

the pharmacy benefit category. This category even includes injectables if the

product label does not require a health care professional to administer the

medication. Under Medicare, Part D can be considered the pharmacy benefit.

Actuarial Value

As MCOs create insurance policies to offer for sale in the marketplace, they keep a

constant eye on how much it may cost them to provide the benefits described in the

policy contract. One metric used by MCOs in the benefit design process is “actuarial

value.” The actuarial value of a policy measures the relative generosity of the benefits

it offers,9 and is often stated as a percentage of costs. Determining a policy’s actuarial

value requires calculating the average share of medical spending estimated to bepaid by the MCO, and comparing it with spending that is estimated to come out of the

beneficiary’s pocket. This calculation takes into account cost sharing features such as

deductibles, coinsurance, copays, and max out-of-pocket limits. Any specific policy may

have an actuarial value of somewhere between 60% and 90%10 which represents the

overall share of costs estimated to be paid by the MCO. Of course, some policies fall

outside this range, depending on their design.

The actuarial value of policies is a critical element of information that must be shared

by the MCO for any product it sells on the Health Insurance Exchanges (HIX) that are

part of Health Care Reform. These concepts will be discussed later in this module.

Carve-outs

Carve-outs are tools used to redirect accountability for delivering health care to a

different stakeholder. They are not always used to remove a type of benefit from a

beneficiary’s plan. Instead, carve-outs allow flexibility in negotiations between relevant

parties to spread payment and accountability.

Pharmacy carve-outs are not uncommon. An employer may pay an MCO to provide for

all the health care needs of its employees. In turn, the MCO may not be in the best

position to provide the pharmacy benefit to the health plan members. In these cases,

they may transfer accountability by carving the pharmacy benefit away from their

agreement with the employer and paying a premium to a PBM to accept accountability.


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16Managed Care



Benefit Design Reforms

The benefit design elements just discussed can deliver good quality health care to

beneficiaries in a way that makes accountability palatable to all the parties involved.Medical benefits, pharmacy benefits, and carve-outs can all be considered effective

tactics that get the patient the care they need when they need it. In a strategic sense,

however, new approaches are needed to control the spiraling costs to the entire health

care system. Policymakers are trying to answer important questions such as:

Are benefits optimally designed to offer the maximum coverage to patients?

Do current structures create appropriate incentives to providers to deliver better

health care at a lower cost?

Although there are many possible approaches, two strategies currently being tested in

the system include the consumer-driven health plan (CDHP) and value-based benefitdesign (VBBD).

Consumer-driven health plans: CDHPs encourage the patient to become more

aware of health care costs and take more control of expenditures. The two major

features of a CDHP are a high-deductible health plan combined with a health

savings account (HSA). The “consumer” can spend monies in the HSA first, but then

must pay out of pocket for care up until the high deductible is met. These plans

have resulted in reduced spending on drugs as well as fewer office visits. However,

those reductions have reduced the use of health care resources that provide high

value, not just low value.

Value-based benefit design: VBBD results from the conclusion that the health care system

cannot afford every innovative therapy introduced. Implementing the VBBD involves the

MCO encouraging enrollees to:

Focus on the appropriate use of only high value services, including drugs

Adopt healthy lifestyles

Use high-quality providers who adhere to evidence-based medicine

Related Care Models

CDHPs and VBBDs are both concepts that rely on recognizing and promoting the use

of value-based care. Recognizing value-based care is itself an extensive effort, and

includes initiatives like evidence-based medicine and comparative effectiveness

research. Two additional initiatives designed to promote the use of value-based care

are currently underway: the Patient-Centered Medical Home (PCMH) and the

Accountable Care Organization (ACO).

Evidence-based medicine:

Judicious use of the best

current evidence in makingdecisions about the care of

the individual patient


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The PCMH creates a single point of coordination for all health care, including

specialists, hospitals, and post-hospital care. A PCP is offered supplemental

payments to coordinate all levels of care, though no standard pay system has been estab-

lished. Implementation of the PCMH model has been difficult because the PCP often has

limited ability to coordinate care outside his/her office.

The ACO is a variation of the PCMH with the similar goal of coordinating care.

However, there is much more structure between provider elements. Established ACOs will

include PCPs, specialists, and hospitals integrated together, usually into a single business

entity. This integration solves the primary obstacle to success seen with the medical home:

the PCP coordinating care DOES have the ability to affect care outside his/her office. The

ACO is legislatively defined by the ACA of 2010. Mergers between physician practices and

hospital systems are already occurring in each sales territory, with the intent to create ACOs

that are either in compliance with the ACA or are capable of contracting with commercial

insurers as an integrated health care system.

These new models are having an impact on the carve-out arrangements referred to

earlier. A well-run PCMH model is an efficient way to manage chronic disease conditions.

If an MCO is able to institute such a program, it is less likely to pay an outside vendor

to care for its chronic care patients.

INSIGHT

The Center for Medicare and Medicaid Innovation

The Center for Medicare and Medicaid Innovation (CMMI) has been formally established

by CMS. Created by the ACA legislation, the CMMI identifies, evaluates, and disseminates

new models for delivering care and paying providers. The intent, as with many otherreform efforts, is to improve quality while reducing costs.


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18Managed Care



The Essential Health Benefit

The benefit design reforms described above seek to control some of the spiraling

costs of health care. The Affordable Care Act contains regulations that prevent thosecost-cutting measures from leading to insurance policies that fail to offer adequate

health care services. To ensure policies sold to individuals and small businesses cover

a core package of services, the federal government has defined the Essential Health

Benefit (EHB). Under the law, the EHB package must include coverage within at least

the following 10 categories10:

1. Ambulatory patient services

2. Emergency services

3. Hospitalization

4. Maternity and newborn care

5. Mental health and substance use disorder services

6. Prescription drugs

7. Rehabilitative and habilitative services and devices

8. Laboratory services

9. Preventive and wellness services and chronic disease management

10. Pediatric services, including oral and vision care

Federal laws such as the ACA have significant impact on benefit design. Beyond listingthe 10 “essential” services of the EHB package, the ACA also dictates the actuarial value

of policies sold on the individual and small markets.10 In addition, the ACA also requires

payers achieve certification of the policies they offer in the exchanges (also called

“Marketplaces”) from an accrediting agency such as the National Committee on Quality

Assurance (NCQA) and the Utilization Review Accreditation Commission (URAC).10

Medicare’s Part D Program The Medicare program was briefly described earlier in this module. Medicare serves as

a good case study for benefit design because it considers all the elements of a

comprehensive policy:

Part A—covers inpatient hospital care, skilled nursing facility care, hospice care,

home health care, prescription drugs provided during an inpatient stay

Part B—this voluntary programs requires a small premiums and covers doctors’

visits, outpatient hospital care, home health care, durable medical equipment,

some preventive services, most provider-administered drugs


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Part C—also called Medicare Advantage, includes services covered by Parts A and

B and usually includes prescription drug coverage

Part D—covers most outpatient prescription drugs. It is an optional benefit forbeneficiaries, who must pay premiums, deductibles, copayments, and coinsurance.

Part D is provided through prescription drug plans (PDPs) or Medicare Advantage

prescription drug plans (MA-PDs)

Part D Formularies

CMS establishes a standard benefit design for Part D coverage, and the plans themselves

are offered by private payers. Plans vary in terms of the pharmacies used, the drugs

covered, and the amount charged. Each MA-PD or PDP has a list of prescription drugs

(a formulary) that it covers. The formulary must include a variety of drugs in commonly

prescribed categories and classes. Many Medicare PDPs and MA-PDs place drugs in

tiers with generics in tier 1, preferred brands in tier 2, non-preferred brands in tier 3,

and specialty drugs in a specialty tier (or tier 4). Plans may require prior authorization,

step therapy, or quantity limits.11 The tiered formulary and other cost containment

devices are discussed later in this module.

Patient Share of Costs

In the standard Part D benefit design, there are 4 phases of coverage. Patient cost shar-

ing varies according to the phase of coverage. In 2015, patients must pay the first $320

in drug costs out-of-pocket. After paying this deductible, they enter the initial coverage

phase when they will pay 25% of drug costs. The initial coverage phase ends when the

patient reaches a total drug cost of $2,960. Patients then enter the phase called the

coverage gap or “donut hole”. After this point, the patient enters the final phase, called

the catastrophic phase, when he or she pays 5% or less for the remainder of the year.12

INSIGHT

The Shrinking Part D Donut Hole

The coverage gap described in the paragraph above was called the “donut hole” because

the original benefit design meant most Medicare beneficiaries got zero insurance cover-

age for drugs during this phase. This coverage gap no longer exists. The Affordable Care

Act created a benefit where there was none by requiring pharmaceutical manufacturers

to offer a discount on drugs prescribed during the donut hole. In addition, the insurance

company became obligated to pay some of the cost as well. In 2015, the patient’s share of

cost in the coverage gap is 45% until the patient’s total drug costs reach $4,700. By 2020, patient coinsurance in the coverage gap will be reduced to 25%.13 It is therefore fair to say

the donut hole in the traditional sense no longer exists at all, because there is now some

amount of drug benefit throughout the Part D design.


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20Managed Care



Health plans may adopt the standard Part D benefit design or one that offers enhanced

benefits. Most plans opt not to offer the standard benefit design and instead incorporate

a tiered cost-sharing approach.14 In 2013, the average PDP beneficiary paid a monthly

premium of $338.54. Nearly all Part D plans use cost sharing with about 66% of planshaving 5 tiers. Cost sharing averages $2.00 for generics, $40 for a preferred brand, $85

for a non-preferred brand, and 26% of cost for specialty drugs in PDP plans in 2013.13

Low-Income Subsidy (LIS)

The Part D Extra Help program, also known as the low-income subsidy, is available for

individuals with low income. The federal government pays plans for the monthly pre-

miums, deductibles, and coverage gap expenses of LIS beneficiaries. These beneficia-

ries pay low copayments for on-formulary prescriptions and the full cost of drugs not

of their plan’s formulary. Both full and partial LIS subsidies are available.15

Cost-Containment Strategies

Rising costs are a concern for every participant in the health care delivery system.

Because pharmaceuticals are a significant cost item for MCOs, there is a concerted

effort to contain them.

At some MCOs, the beginning of the cost-containment process involves setting priority

levels based on drug class. Though individual drugs can be expensive, an MCO may be

more concerned about high-volume drugs or specific disease states that require high

drug spending to manage. Figure 3 is one example of how a traditional managed care

pharmacy may prioritize drug classes that require cost-containment strategies. A drug

or a disease state attached to the higher end of the scale will become a cost-containmentfocus for the MCO. In the example shown in Figure 3, diabetes and high cholesterol

are two diseases that represent high costs for the MCO. Therefore, the MCO may put

stronger cost containment measures on drugs used to treat those diseases.

After prioritizing a drug or disease state, most MCOs apply a similar set of cost-containment

strategies. These include formularies, step edits, quantity limits, prior authorizations,

reduced fee schedules, specialty pharmacy, and drug utilization reviews and evaluations

(see Figure 4).


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Figure 3: Drug Class Management Priority Levels

Low(1)

2.7Repetitive stress injury

Obesity

Women’s health

CHIF

Men’s health

Hepatitis C

Asthma

Substance abuse

Cancer

Metabolic syndrome

Rheumatoid arthritis

Multiple sclerosis

Diabetes

Osteoporosis

Common bacterial infections

Elevated cholesterol

Smoking cessation

Transplants

GI conditions

Influenza

Sleep disorders

Depression/Anxiety Cardiovascular disease

Dermatology

Psychiatric disorders

Migraines

Arthritis

Hypertension

Back or chronic pain

COPD

Allergies

3.3

3.1

3.4

3.6

4.1

4.5

4.7

4.6

4.8

4.4

3.5

3.7

High

(7)

5.0

5.2

5.7

5.9

5.8

5.4


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22Managed Care



Figure 4: Cost-Containment Strategies

Formularies

Formularies are by far the preeminent cost-containment tool used by MCOs. “Closed”

formularies were an early attempt to exclude the use of expensive treatments that

were not seen as cost-effective in the eyes of the MCO. However, the denial of accessto specific drugs was seen as a denial of care in some legal settings, leading to the

reduced prevalence of the closed formulary. For example, with limited exceptions, CMS

offers Medicare beneficiaries coverage for almost all drugs approved by the US Food

and Drug Administration (FDA) for their indicated use.

Today, the tiered formulary is the most commonly used structure because the MCO

does not want to be seen as denying treatment options to its beneficiaries. There are

generally 3 to 4 tiers defined, although some MCOs have added 2 to 3 more tiers to

allow greater variation in patient cost sharing (see Figure 5). A tiered formulary

represents a balance between patient choice and accountability. From the MCO

perspective, the possibility of a patient (and his/her provider) choosing expensive

drugs is mitigated by the higher cost sharing required for tier 3 (or tier 4) drugs.

Tiered Formulary

Closed

Prior Authorization

Step Edits

Quantity Limits

DUR / DUE

Cost sharing

Reduce risk

Slow uptake

Manage patient care

Manage cost

Reduce utilization


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Figure 5: Common Copayment Structure

While MCOs attempt to steer patients toward using less expensive medications by placing

higher cost sharing on nonpreferred branded drugs, manufacturers offer copay assistance and

voucher programs that help overcome the formulary barriers. Copay assistance programs are

designed to make prescriptions more affordable for patients. Often the manufacturer providescoupons, specific to one or several drugs, to providers who can then distribute them to patients

who are prescribed the drug. Some manufacturers also offer these coupons directly to patients

via the product’s website. The coupons entitle the patient to a set dollar amount off their

out-of-pocket costs when the prescription is filled at the pharmacy. Copay coupons are

generally not valid for patients with Medicare, Medicaid, or any medical or pharmaceutical

assistance programs, or for those whose insurance pays the full cost of the prescription.

Voucher programs are designed to help patients begin their treatment with little or

no cost. As with copay assistance programs, a voucher is generally not available to

patients who are covered by any type of government insurance. Depending on a drug’s dosing

regimen, voucher programs may offer to pay 100% of a patient’s copay for the first month’s

supply. Vouchers and copay assistance programs can work well together. The voucher helps the

patient get started on therapy by removing any financial barriers that may prevent the patient

from filling the prescription. Copay assistance programs can help patients fill subsequent

prescriptions by easing their share of cost.


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24Managed Care



A discussion of formularies must include computerized physician order entry (CPOE) systems

(Figure 6). CPOEs and the formulary can be used to control access to products within a particu-

lar health plan. A CPOE system is designed to facilitate the direct entry of clinical orders into a

health care system’s electronic health record (EHR). The EHR is a digital version of the patient’s

chart over multiple encounters. It can be shared with other providers in other settings as well as

with the patient. The use of EHR underpins decision making, quality management, and clinical

reporting since these systems often include clinical guidelines, decision trees, and other tools

that help direct physician care. The inclusion of clinical guidelines can mean that products not

endorsed by guidelines will be neglected by the physician who uses an EHR. It’s important

to know that CMS has created meaningful use criteria that are tied to incentive programs for

Medicare and Medicaid patients. These EHR incentive programs are meant to reward

or penalize providers for using EHR with these government-insured patient types. Meaningful

use criteria are divided into stages, and CPOE is one of the core objectives in stage 1. In stage

1, more than 30% of a provider’s patients who are prescribed medications must have at least 1

medication ordered using CPOE. The percentage increases during stages 2 and 3.16

The CPOE, because it facilitates entry of clinical orders into the EHR, is a way to improve com-

pliance with guidelines, reduce unnecessary utilization of resources, and improve formulary

compliance. A CPOE can also reduce errors, provide alerts about drug interactions and allergies,

and check dosing. The CPOE is menu driven; therefore the organization and presentation of

menu items can standardize ordering practices and promote preferred, evidence-based order

selection.17

Figure 6. An example of a CPOE system interface. 17

Computerized physician

order entry (CPOE):

The direct entry of medical

orders into a health caresystem’s EHR by licensed

providers with specific

ordering privileges

Electronic health record (EHR):

Software programs designed

for use by health care providersand health care systems to

electronically place, store, and

retrieve clinical orders, results,

notes, reports, and otherinformation related to the

care of patients


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INSIGHT

Business Impact of CPOE

A CPOE system can facilitate access to your product and help ensure its proper use if the

product is on formulary. If a competitor’s product is placed on formulary instead, the

CPOE can become a barrier to your product’s use, usually by excluding your product from

the drop-down list of medication options presented to the physician. Thus, the formulary

and CPOE system can be powerful tools to control drug utilization.

Other cost-containment devices related to formularies are the step edit and quantity

limit:

Step edit : A cost-containment strategy related to the formulary. An MCO may

designate a specific drug on its formulary as a “step edit” option. Should a physician pre-scribe one of these medications, the MCO will require a different specific drug be used first,

usually one that is a lower-cost alternative having the appropriate indication. If that drug

does not help the patient, the physician may then use the step edit drug.

Quantity limit : Can be applied for safety reasons, such as restricting aspirin-containing medica-

tions to maximum safe limits. It may also be applied for cost reasons, to avoid prescribing

multiple doses per day for medications that are indicated for once-daily use.

Prior Authorizations

Prior authorization (PA) is the second most commonly used cost-containment strategy.

PAs are effective because they can slow the uptake of the relevant drug, while stillgiving the policyholder access to the therapy. Various studies have reported that 95%

of all PAs are approved if submitted correctly.18

It is important to understand that the PA process costs the MCO money to implement.

A “run” on PAs submitted by providers demands the attention of a managed care

pharmacy and may result in a change of policy. For providers, the cost of interacting

with MCOs regarding PAs is about $69 billion annually. 19 There is also a cost for

patients—40% of prescriptions that are mandated by and MCO are abandoned by

patients.20


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26Managed Care



Reduced Fee Schedules

When drugs are acquired through the buy & bill process, reimbursement goes directly

to the health care provider who purchased the drug upon approval of the submittedclaim. MCOs have controlled the cost of buy & bill drugs by reducing the reimbursement

rates on their fee schedule. CMS led the way in this regard when the Medicare

Modernization Act (MMA) was signed into law in 2003. This led to a reduction in

profit related to the reimbursement of drug costs, which attempted to de-incentivize

physicians from directly purchasing injectable medications.

Specialty Pharmacy Provider (SPP)

SSP as a cost-containment device relates to expensive prescription drugs as well as

buy & bill drugs. An MCO may set a policy that precludes the provider from purchasing

drugs related to his/her patient’s therapy. This policy may dictate that a specific SPP

must supply all injectables prescribed for its policyholders. Cost savings are realizedby the MCO because the SPP may accept lower reimbursement for a drug compared

with the provider. This is possible because of the ability of the SPP to negotiate lower

acquisition costs through volume discounts with the drug’s manufacturer.

INSIGHT

Relative Impact on Product UsageThere is variation in how these cost-containment strategies affect the use of different products.

PA, formularies, and tiered formulary positions can have significant impact on the sale of

prescription medications. Reduced reimbursement/fee schedules and SPP processes have more

influence on sales of buy & bill products.

Drug Utilization Review (DUR)

The DUR is a retrospective tool that assesses past claims (a quantitative data source).

It allows the MCO to see which drugs were most prescribed and determine the direct

costs. With this information, the MCO can alter policy as appropriate.

There are distinct limitations to the DUR. Because it uses retrospective claims data,

there is no correlating information on the patient’s overall condition, disease, or

appropriateness of care. Therefore, the DUR is not an ideal tool for customers to use

in evaluating your products.

Drug Utilization Evaluation (DUE)

Unlike the DUR, the DUE uses a qualitative data source. It can be considered a therapeutic

review, because it prospectively defines disease states, patient types, adverse events

of interest, etc., as part of its evaluation criteria. DUEs are used less often than DURs,

primarily because of the costs involved.

Buy & bill:

The acquisition process

wherein a provider buysdrugs that are administered

by a health care professional

Medicare Modernization

Act (MMA):

This landmark legislation

provided seniors andindividuals with disabilities

with a prescription drug

benefit, more choices, and

better benefits underMedicare


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Summary

There are many stak eholders in the health care delivery system, including purchasers,

MCOs, providers, and health plan members. The term payor is used in many ways, oftento describe the insurance company as the entity that pays the providers for their services.

It is important to understand that purchasers introduce funds into the US health care

system. This includes employers as well as the state and federal governments.

Members add copays and coinsurance to the pool of money that covers the cost

of health care.

The term MCO includes PBMs, HMOs, and other health care entities that establish a

network of providers, negotiate with facilities such as hospitals, handle the claims

process, and directly pay the health care providers. Beyond those administrative duties,

the primary function of MCOs is to assume accountability for providing health care.

Accountability is the central concept behind benefit design. MCOs create managed

care products based on how much accountability they are willing (and paid) to as-

sume, balanced by the member’s desire for choice. The range of products generally

includes the PPO, the POS, the EPO, and HMOs.

Benefit designs usually include two common structural elements: the medical benefit

and the pharmacy benefit. Drugs covered under the medical benefit are normally

administered by a physician, who will buy and then bill for the drug. The Medicare

program generally covers physician-administered drugs under Part B and other

outpatient drugs under Part D.

“Carve-outs” are tools used to allocate accountability between stakeholders. Drugsare normally part of carve-out agreements such that an MCO may assume the

accountability of providing medical benefits to their members, but pay a PBM to

assume the accountability for the member’s pharmacy benefits.

Cost containment strategies are applied to help reduce the accountability of providing

pharmacy benefits. Those strategies include formularies, PAs, step edits, quantity limits,

DURs, and DUEs.

CPOE and EHRs are meant to reduce errors and aid in clinical decision making. At times,

they may also affect prescribing habits through the use of clinical guidelines and menu

choices that promote formularies.


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28Managed Care



References

1. Centers for Medicare & Medicaid Services (CMS). National Health Expenditure Fact Sheet. 2013. http://www.cms.gov/

Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet.html.Accessed December 4, 2014.

2. Centers for Medicare & Medicaid Services. CMS Financial Report. Fiscal Year 2013. http://www.cms.gov/Research-

Statistics-Data-and-Systems/Statistics-Trends-and-Reports/CFOReport/Downloads/2013_CMS_Financial_Report.pdf.

Accessed December 1, 2014.

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5. Independence Blue Cross. Company Information. http://www.ibx.com/company_info/our_company/index.html.


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by William J. Kilberg. June 19, 2014. http://www.dol.gov/ebsa/pdf/ACKilberg061914.pdf.


7. Hospital Corporation of America (HCA). About our Company. http://hcahealthcare.com/about/.


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2014HMOPPORxDigest/files/assets/common/downloads/publication.pdf. Accessed December 1, 2014.

9. American Academy of Actuaries. Actuarial Value under the Affordable Care Act. July 2011. http://actuary.org/

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10. Center for Consumer Information & Insurance Oversight. Essential Health Benefits Standards: Ensuring

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Part-D-Outlook.php. Accessed December 4, 2015.

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medicare-part-d-pdp-marketplace-2013-and-trends1.pdf. Accessed December 4, 2014.

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design-and-cost-sharing/. Accessed December 4, 2014.

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16. CMS. An Introduction to Medicare EHR Incentive Program for Eligible Professionals. http://www.cms.gov/

Regulations-and-Guidance/Legislation/EHRIncentivePrograms/downloads/beginners_guide.pdf.

Last updated April 2014. Accessed October 15, 2014.

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http://www.psychiatrictimes.com/articles/prior-authorization-prescribed-drugs-cost-effective.


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modernmedicine.com/medical-economics/content/tags/insurance-companies/prior-authorization-

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Accessed December 4, 2014


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The Managed Care Landscape

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