Insurance Companies Betting on Government Health Plans

Today's Managing Health Care Costs Indicator is
$3.8 billion

 

Source (click image to enlarge)

Cigna agreed last week to purchase HealthSpring, a Medicare and Medicaid health plan based in Tennessee, for $3.8 billion.  This prompted Wall Street analysts to increase the valuation of Medicare and Medicaid health plans --which it says are now worth $6000 per enrollee (Medicare) and $1200 per enrollee (Medicaid.)

This is a big bet - the insurers are wagering that the Medicare HMOs will continue to be paid a hefty amount (12-13%) more than traditional Medicare on a risk-adjusted basis, leaving a nice profit margin even after accounting for costs of marketing, enrollment, and network contracting that indemnity Medicare doesn't have to worry about.

The Affordable Care Act lowers Medicare Advantage plan reimbursement by $130 billion over 10 years, and past deficit reduction bills had additional cuts, although no one is sure what the "supercommittee" will suggest, if it suggests anything at all.

Medicaid plans are being cut by all 50 states, but many of them hope to wring out some savings through sending more members into managed care, leaving this an area of potential growth.  Medicaid should also enroll an extra 16 million members as a result of health care reform - although that's been in some jeopardy due to state cuts as well. Most states intend to move more Medicaid beneficiaries into managed care - which means plans with a track record of good Medicaid management should be especially valuable.

Wall Street financiers have an incentive to project hefty insurance plan profits from government health plans in the future.  This helps convince the big four (or five) health plans to open up their wallets (reserves) and pay high valuations for other companies, which leads to higher transaction fees.  The Affordable Care Act offers some tax advantages to nonprofit health plans, but that is also apparently not making investers any less skittish about putting their dollars into health plan stock.  Government cannot keep paying more and more for health care, though, and I think fee cuts for these health plans are highly likely in the coming years.

I believe that we're likely close to the top of this market, and health plans will have to show a genuine ability to lower health care costs while satisfying their members to justify such high valuations in the future.

Pay for Performance Comes to Ambulatory Pharmaceuticals

The New York Times reports today that two pharmaceutical companies are entering the “pay for performance” market to preserve lower patient copayments for their expensive brand name medicines and maintain or grow market share. This is modeled after a Johnson and Johnson deal with the British NHS to offer refunds for an expensive oncology medicine if it did not shrink an individual patients’ tumor(s). See an earlier blog on how the British comparative effectiveness program led to this discount offer.

Merck will give discounts to the insurer Cigna on its diabetes medicine Januvia (and combination pill Janumet) if Cigna patients in the aggregate have lower blood sugars, and the makers of Actonel, an osteoporosis medication, will give a small insurer cash payments for adherent patients on this medication who have osteoporosis-related fractures. There are alternative far cheaper generic medications that can readily substitute for Actonel and Januvia/Janumet.

The Times does not mention that drug companies are subject to a “most favored nation” clause which guarantees Medicaid programs the lowest price – so that any price concession to even a small insurer can lead to large rebate checks for every state Medicaid programs. In general (and counterintuitively), this most favored nation arrangement keeps prices unnecessarily high – since it enforces price discipline among the pharmaceutical companies. My sense is that a refund for nonperformance would not “count” as a discount, and therefore this approach allows the pharmas to offer lower rates to the most price-sensitive health plans without jeopardizing Medicaid rates.

On one hand, this is a good move. Pharmaceutical companies are selling a result (lower blood sugars and fewer nonspine fractures) rather than selling a pill.

Will this lead to lower health care costs? My guess is “no,” since these are very expensive drugs, and even discounts or refunds are not likely to bring them down to the true cost of generic alternatives. There is a better argument that Januvia represents a real advance over other oral diabetes medicines. However, I doubt that the incremental value of Januvia, even with the discounts Cigna will obtain, will be cost-saving, as opposed to cost-effective. This also leads to some opacity in the pharmaceutical market, which will allow for more price discrimination and likely yield higher pharma margins. Even if this yields higher overall costs and higher pharma margins, though, it might lead to increased value in the health care delivery system.