1. Avalere Health LLC | The intersection of business strategy and public policy The Impact of Enrollment in the Medicare Prescription Drug Benefit on Premiums November 1, 2005 Jon Blum and Jennifer Bowman Avalere Health LLC

2. © Avalere Health LLC Page 2 Overview of the Study  Conducted by Avalere Health LLC on behalf of the Kaiser Family Foundation Study, released October 28, 2005 »http://www.kff.org/medicare/7423.cfmhttp://www.kff.org/medicare/7423.cfm  Examine the effects of participation assumptions on monthly premiums and federal costs of the Medicare prescription drug benefit, particularly if beneficiaries with relatively low drug spending do not enroll  The analysis solely focuses on the impact of various enrollment scenarios, based on beneficiaries prescription drug costs »The analysis holds constant other factors that could affect average Part D premiums, including drug prices, utilization, and other market forces

3. © Avalere Health LLC Page 3 Key Findings of the Study 1. Average premiums for the Medicare prescription drug benefit could be significantly higher in 2007 than current federal projections if enrollment is significantly concentrated among beneficiaries who have high expected drug spending 2. If enrollment is limited to the highest spending 20 percent of beneficiaries in three important groups, the average Part D premium could be as much as 42 percent higher than expected 3. Enrollment levels do not significantly alter the federal costs of offering the Medicare prescription drug benefit

4. Background The intersection of business strategy and public policy

5. © Avalere Health LLC Page 5 CBO Assumptions about Part D Enrollment (1) Small group of beneficiaries do not enroll in Part D  6% of Medicare beneficiaries who do not participate in Part B  7% of beneficiaries enrolled in Part B who are either: »Active workers receiving drug coverage through employers, or »Beneficiaries receiving coverage through federal programs (veterans, federal retirees, and military retirees)

6. © Avalere Health LLC Page 6 All retirees either receive drug coverage through an employer, or enroll in a Part D plan  30% of beneficiaries enrolled in Part B receive coverage through a former employer »Two-thirds of those beneficiaries will see their employers take the retiree drug subsidy and receive drug benefits through the employer »One-third are expected to enroll in Part D plans CBO Assumptions about Part D Enrollment (2)

7. © Avalere Health LLC Page 7 All remaining Medicare beneficiaries (25.8 million) are expected to enroll  Dual eligible beneficiaries (6.4 million)  Medicare Advantage enrollees (5.5 million)  Beneficiaries currently receiving Medigap coverage (3.2 million)  Beneficiaries currently without drug coverage (7.7 million) Overall, CBO assumes 80% of Medicare beneficiaries will enroll in Part D or receive benefits through a former employer that takes the retiree drug subsidy CBO Assumptions about Part D Enrollment (3)

8. © Avalere Health LLC Page 8 Choosing to Enroll in the Medicare Drug Benefit Is a Complex Decision  Beneficiary decision includes considering: »Current drug coverage’s formulary, premium and cost-sharing offerings »Eligibility and application for low-income assistance »Comparing plans (many more PDP and MA-PD plans than expected)  CMS plan comparison tools will enable beneficiaries to compare: »Pharmacy networks »Formulary, including drug list and management tools »Premiums »Coinsurance or copayment

9. © Avalere Health LLC Page 9 Experience with MMA Thus Far: Enrollment in the Medicare Replacement Drug Demonstration *According to Avalere Health email communications with Sharon Cardinale, MRDD Outreach Coordinator, March 29, 2005

10. © Avalere Health LLC Page 10 Enrollment in the Medicare Drug Discount Card Has Also Been Lower than Expected Source: CMS Press Office.

11. Methods The intersection of business strategy and public policy

12. © Avalere Health LLC Page 12 Methodology  Model uses some CBO assumptions for enrollment » Expected to Enroll in Part D: Dual eligibles and Medicare Advantage enrollees » Expected Not to Enroll in Part D: Active workers receiving employer-sponsored insurance and those receiving drug coverage through a government retiree health insurance program  Enrollment scenarios focused on 3 subgroups of Medicare beneficiaries: 1.Low-income subsidy eligibles 2.Beneficiaries projected to lose retiree health benefits 3.Beneficiaries currently enrolled in the traditional fee-for-service program who do not qualify for the low-income subsidies  Groups were divided into quintiles based on expected drug spending  Estimated premiums and federal program costs based on enrolling the 20%, 40%, 60%, 80%, or 100% of beneficiaries with highest drug spending of all 3 groups

13. © Avalere Health LLC Page 13 Total Population and Average Prescription Drug Spending per Beneficiary for Categories of Beneficiaries with Varying Enrollment Beneficiary CategoryDrug Coverage StatusTotal Beneficiaries (Millions) Average Prescription Drug Spending Per Beneficiary Low Income4.5$2,301 With Current Drug Coverage 1.1$3,222 Without Current Drug Coverage 3.4$1,999 Dropped Retirees2.7$3,803 Non-Low-Income10.0$2,145 With Current Drug Coverage 2.7$3,045 Without Current Drug Coverage 7.3$1,807 Total Enrollment17.2 Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

14. Results The intersection of business strategy and public policy

15. © Avalere Health LLC Page 15 Impact of Varying Enrollment of Low Income Beneficiaries Enrollment (Ranked by Drug Spending) Number of Low- Income Enrollees (Millions) Range of Annual Drug Spending (Low – High) Average Monthly Premium Percent Increase in Premium Relative to Full Enrollment ($34.33 Premium) 100 percent4.5$0 - $91$34.330% 80 percent3.6$92 - $765$35.423% 60 percent2.7$766 - $1,836$36.506% 40 percent1.8$1,837 - $3,846$37.178% 20 percent0.87$3,847 +$37.429% Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

16. © Avalere Health LLC Page 16 Impact of Varying Enrollment of Dropped Retirees Enrollment (Ranked by Drug Spending) Number of Dropped Retirees (Millions) Range of Annual Drug Spending (Low – High) Average Monthly Premium Percent Increase in Premium Relative to Full Enrollment ($34.33 Premium) 100 percent2.7$0 - $301$34.330% 80 percent2.1$302 - $2,154$35.002% 60 percent1.6$2,155 - $3,594$35.333% 40 percent1.1$3,595 - $6,071$35.423% 20 percent0.54$6,072 +$35.423% Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

17. © Avalere Health LLC Page 17 Impact of Varying Enrollment of Non-Low-Income Beneficiaries Enrollment (Ranked by Drug Spending) Number of Non- Low-Income Enrollees (Millions) Range of Annual Drug Spending (Low – High) Average Monthly Premium Percent Increase in Premium Relative to Full Enrollment ($34.33 Premium) 100 percent10.0$0 - $193$34.330% 80 percent8.0$194 - $755$36.837% 60 percent6.0$756 - $1,733$39.5015% 40 percent4.0$1,734 - $3,512$41.5821% 20 percent1.98$3,513 +$42.5824% Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

18. © Avalere Health LLC Page 18 Impact of Varying Enrollment of Low Income, Non-Low- Income and Dropped Retirees on Average Monthly Premiums Percent Increase in Average Monthly Premium, Compared to Full Enrollment Non Low-Income Low-Income Dropped Retirees Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

19. © Avalere Health LLC Page 19 Total Enrollment (Millions) Enrollment of Three Sub-Groups Under Five Possible Scenarios Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

20. © Avalere Health LLC Page 20 Percent Increase in Premiums Relative to 100 Percent Enrollment Under Five Possible Scenarios Percent Change in Average Premium Compared to Full Enrollment Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

21. © Avalere Health LLC Page 21 Estimated Federal Costs Based on Enrollment, Ranked by Drug Spending Enrollment (Ranked by Drug Spending) Total Federal Costs (Billions) Enrollment (Millions)Average Costs per Enrolled Beneficiary 100 percent$60.629.1$2,080 80 percent$60.826.3$2,311 60 percent$60.423.4$2,587 40 percent$58.520.4$2,860 20 percent$54.317.5$3,095 Source: Avalere Health LLC estimates using a model developed by the Actuarial Research Corporation for the Henry J. Kaiser Family Foundation.

22. © Avalere Health LLC Page 22 Policy Implications  CBO’s monthly premium estimate of about $37 is based upon robust participation »The average monthly premium for 2007 could be dramatically higher if only those beneficiaries with expected high prescription drug costs enroll in 2006  To keep premiums affordable, enrollment of higher-income beneficiaries with low prescription drug spending is critical »The success of CMS and other stakeholders’ outreach efforts to this group will keep premiums affordable  Federal costs of the Medicare prescription drug benefit are largely unaffected if enrollment is limited to only the most expensive beneficiaries  Robust enrollment is critical to keep premium and federal costs manageable, and to keep Medicare prescription drug benefit plans participating in the program

23. © Avalere Health LLC Page 23 For a copy of the paper, entitled The Impact of Enrollment in the Medicare Prescription Drug Benefit on Premiums, visit: www.kff.org or www.avalerehealth.net