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Maximize Value February 24, 2015

Point of View: Why It’s Important to Play in the Medicare Part D Market

Global Head, Health Services, Oliver Wyman

Medicare Part D presents a bit of a conundrum for health plans. It’s in high demand and a gateway to larger opportunities, yet significant profitability challenges make it difficult to run solo. In the new paper “The Part D Dilemma,” Oliver Wyman Partner Jim Fields describes why Part D is so difficult and how health plans can minimize the risk and maximize the benefit of remaining in this essential line of business. Three questions for Fields:

  1. Why should health plans offer a prescription drug plan?

    Part D is an essential tool in establishing a relationship with seniors—a relationship that can in the long run be used to introduce them to a whole array of higher-margin products such as Medicare Advantage and Medicare Supplement plans. Remember, Part D is the only commercial product in Medicare that requires seniors to make a decision or face a penalty. For many, it is their first real contact with Medicare and the first time that they need to ask what they need out of Medicare and what other products they might require. In our research, 73 percent of seniors who buy a PDP plan buy some other product from the same payer. No one can pass up that kind of marketing opportunity.

  2. Why is Part D so hard for smaller health plans?

    An under-sized, free-standing PDP by itself is a very difficult business to be in. Part D plans don’t bring in much revenue—only about $75 per member per month, compared to $750 per member per month for Medicare fee-for-service. But it costs roughly as much to run a PDP plan as to run a Medicare Advantage program. You have similar regulatory costs, similar legal and actuarial costs, similar customer service costs. But you only have a dime to pay for them, where a Medicare Advantage plan would have a dollar.

  3. Is that why you say that health plans need partners for Part D?
    Yes. There are a number of alternatives to drive greater scale but they disproportionately require partnership. For example, Humana partnered with Walmart on a Part D plan. That yielded access to drug sourcing, distribution methods, and preferred networks, plus the benefits of an instantly recognizable name. That kind of partnership is largely out of reach to individual PDPs, but there are real possibilities for health plans that band together in coalitions.
Part D is an essential tool in establishing a relationship with seniors—a relationship that can in the long run be used to introduce them to a whole array of higher-margin products. – Oliver Wyman Partner Jim Fields

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