Introduction

Once a health plan has successfully stood up a Medicare Advantage and Part D (MAPD) plan, a natural next question is, “Should we launch a standalone Part D Prescription Drug Plan (PDP)?” The individual PDP market remains one of the most difficult corners of the health insurance market to compete in, so this question should always be immediately followed by, “Why should we launch a standalone PDP?”

Why should we launch a standalone Part D Prescription Drug Plan ?

There are four reasons we see commonly used to justify launching a PDP and they are not mutually exclusive.

The first two reasons are strategic in nature and center on the business as a whole:

1. The health plan believes adding a PDP fits into their broader Medicare Portfolio and bolsters their offering in aggregate;

2. The health plan intends to eventually be acquired and believes the additional PDP lives improve their position in the market.

The last two reasons are operational in nature:

3. The health plan has negotiated favorable Pharmacy Benefit Manager (PBM) contract terms;

4. The health plan already has a significant membership base in their Medicare portfolio resulting in administrative cost efficiencies which would help the PDP compete in the market.

Medicare Portfolio Strategy

The health plan believes launching a PDP can result in conversion of members to an existing MAPD product that is profitable.

• This requires an active marketing effort and does not happen by osmosis
  
• Additionally, a PDP must be offered to the entire state, so if your MAPD plan only exists in a few select counties, there may be some members which cannot transfer 

The health plan has, or plans to have, a Medicare Supplement product and believes pairing a PDP can boost Medicare Supplement sales and/or reduce medical cost on Medicare Supplement members by increasing medication adherence:

• The insurer should have conversations with their brokers prior to the launch to understand their perspective on how this pairing bolsters their offering
  

If the health plan is provider owned and has members in either a Medicare Shared Savings Program (MSSP) or an Accountable Care Organization Realizing Equity, Access, and Community Health (ACO REACH) then there’s an opportunity to more wholistically mange the members’ care through increased medication adherence while being able to ensure coding accuracy for members in the PDP (an advantage not afforded to other PDP sponsors).

Growth Strategy for Potential Acquisition

The insurer wants to boost their total enrollment as a means to make an acquisition more attractive.

While adding a PDP will increase top line revenue, it will decrease bottom line profits in early years; these two opposing forces must be weighed against each other.

Well-negotiated PBM Contracts

The health plan has a favorable PBM contract which will result in positive PDP margins.

It is oftentimes the case that even the best contracting for a regional PDP fails to compete with what large PBM-owned / PBM-aligned health plans are able to contract for their own PDPs; the assumption that PBM contract terms are generous should always be objectively pressure-tested.

Administrative Cost Efficiencies

The health plan already has a significant membership base in their Medicare portfolio resulting in administrative cost efficiencies which would help the PDP compete in the market.

As discussed later, to compete in the PDP market, administrative costs have to be extremely low, and due to the large allocation of PBM expenses to Part D, if meaningful fixed costs are allocated to the PDP line of business, the chances of breaking even decrease significantly.

What are the levers of profitability for a PDP product?

Once you’ve determined your “why”, it is important to think through what factors are available to reduce potential losses on a PDP product and move towards breakeven. In the MAPD world, there are two meaningful levers available to affect profitability that are not available in the PDP market:

• Increasing your STARs score in the MAPD market can result in a meaningful increase in revenue. While a PDP contract does receive a STARs score, it has zero financial impact and is only utilized for display purposes on Medicare Plan Finder.
• Improving the accuracy of risk adjustment can have a significant impact on revenue in MAPD. The Part D risk-adjusted direct subsidy has dwindled in recent years. This has led to diagnoses coding accuracy being an unimportant lever for Part D. However, under the Part D benefit redesign in 2025 brought forth by the Inflation Reduction Act, there will be a significant increase in direct subsidy in Part D.

Unfortunately, since a health plan largely cannot affect the diagnoses coding accuracy of standalone PDP members, this lever remains limited to only the PDP members who also have coverage in other products in your Medicare portfolio.

This leaves the following remaining levers for a health plan to pull in order to move from a loss to breakeven in a PDP product:

• PBM contracting
• Administrative costs
  
• Premium
• Benefit richness (inclusive of formulary)
  

Premium and benefit richness are largely dictated by marketplace forces, and thus, cannot be moved meaningfully to impact margin. Administrative costs are an important lever, and many successful PDP have single digit PMPM administrative costs, but there is a floor. Thus, the importance of PBM negotiation as a lever of profitability cannot be overstated in the process of launching a PDP.

Which PDP products should we offer?

There are essentially four loosely defined PDP submarkets that should be considered when designing a PDP portfolio:

A benchmark plan targeting low income enrollees

• This product offers benefits actuarially equivalent to the defined standard benefit, and receives auto enrollment if the premium is below the low income premium subsidy amount in the region. Due to the low income auto enrollment process, this is the one product that guarantees membership, but the trade-off is that the premium lever is largely unavailable to mitigate losses
  

A low premium enhanced alternative plan with a price below $20 PMPM

• This submarket emerged in recent years and now carries a substantial portion of the non-low income PDP membership. It is dominated by large nationwide insurers who are able to ascertain manufacturers’ rebates sufficient enough to offer a product with such a low premium. This is the most challenging corner of the PDP market for regional plans to compete in.
  

A mid premium enhanced plan with a price between $20 and $75 PMPM

• This submarket is a common area for regional insurers to compete. Meaningful membership can still be attained here, and the premium lever of profitability can be adjusted as experience unfolds. Unfortunately, PDP members tend to be less “sticky” than MAPD, and premium increases in excess of a few dollars may whittle down membership.

A high premium enhanced plan with a price above $75 PMPM

• This submarket tends to have the lowest membership for regional insurers, but it is commonly offered as a pairing option for Medicare Supplement product and these members tend to be “stickier” than other PDP members

It is certainly not necessary to launch a product in all four submarkets, and most regional insurers, in fact, do not. CMS also requires at least one basic plan be offered by every PDP. As such, it is very common to see insurers begin with one basic alternative plan and one enhanced plan. If MAPD conversion is the ultimate goal, then the formulary, premium, and benefits offered in each PDP product should be weighed against the corresponding MAPD product that will be targeted for conversion. This comparison should confirm parity at a minimum, and optimally, would include some increased richness on the MAPD side to incentivize conversion. The product choices must also weigh the potential for enrollment against the potential drag on profitability.

What does the PDP market look like going forward?

The Inflation Reduction Act represents the largest change to Part D since inception. In 2025, the benefit will be redesigned in such a way that Part D plans (both MAPD and PDP) will retain a substantially larger liability as a percentage of gross drug cost, due largely to the reduction in reinsurance and the $2,000 member out of pocket cap. This increase in plan liability comes with a meaningful increase in risk-adjusted direct subsidy revenue to help offset those costs.

The increase in risk adjusted revenue puts additional importance on diagnoses coding accuracy – meaning that MAPD plans have additional incentives to code accurately to remain profitable on the Part D side of the house, but PDP are potentially facing an additional headwind they’re not able to do much about. The increased liability could also mean that many PDP's will re-evaluate their formulary, benefit structure, and utilization management tactics.

Making the final decision

Ultimately, to make a decision on launching a PDP product, an actuarial pro forma must be created prior to beginning the bidding process. This pro forma is highly likely to show at least moderate losses in the first two to three years. These projected values can also be sensitivity tested to gain an understanding of the reasonable potential downside. It is also important to stay abreast of CMS margin rules applicable to the PDP market.

This loss must be then viewed as an investment in the context of your “why” - for example, if the investment is a net positive given your estimate of MAPD conversion efforts, then a PDP makes sense. If the investment is a net positive when viewed pragmatically within the context of a potential future sale, then a PDP makes sense. If this “why” cannot be answered objectively and numerically, there are several other prudent ways a health plan can invest dollars in their existing Medicare portfolio and should not proceed with launching a product in the challenging PDP market.

If an insurer moves forward with launching a PDP, they must commit to the lever changes assumed in the pro forma needed to get to breakeven and double down on their “why”. If your “why” is a transfer of members to MAPD, for example, then active marketing campaigns should immediately be designed and tracked. If your “why” is favorable PBM contract terms, the emerging experience should be closely monitored to confirm results are aligning with expectations.