Issue Brief: Unique Incentives in Medicare's Stand-Alone Drug Plans Necessitate Key Patient Protections

Medicare Part D plans don't pay for hospital or physician services. And as research demonstrates, this makes them less invested in keeping people healthy enough to avoid some hospital visits. 

​The most popular type of Medicare drug coverage is through a stand-alone prescription drug plan (PDP). A stand-alone plan never has to pay for hospital or physician visits — those are covered by traditional Medicare. Another way to get drug benefits from Medicare is through Medicare Advantage (MA) plans, which are private insurance plans subsidized by the government to manage prescription drug benefits alongside other medical benefits. ​Because of this difference, stand-alone drug plans have less incentive than MA plans to keep people healthy enough to avoid some hospital visits.

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This phenomenon is brought to light in multiple economic analyses, which repeatedly highlight how “profit-maximizing” PDPs are incentivized to limit benefits or increase out-of-pocket costs because they are not responsible for costs incurred by other parts of the Medicare, such as hospitalizations.
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• ​A study issued in 2015 and updated in April 2018 by researchers at Northwestern University’s Kellogg School of Management and the University of Texas at Austin highlights how PDPs are encouraged to reduce drug spending without bearing financial responsibility for the holistic health of the patient. The authors conclude that in covering drugs less generously, Part D plans end up costing traditional Medicare $475 million per year.
• Another study found that formulary restrictions within the Medicaid program appear to lead to worse outcomes for patients with major depressive disorder and increased the probability of an MDD-related hospitalization by nearly 17 percent with no significant reductions to pharmacy or total spending.  Importantly, there was no evidence that these restrictions resulted in any net savings for Medicaid.
• A June 2016 study published by the National Bureau of Economic Research (NBER) determined that stand-alone drug plans charge enrollees about 13 percent more than MA plans in cost sharing for drugs that are highly likely to help patients avoid an adverse health event within two months. They charge up to 6 percent more for drugs that help avoid an adverse health event within a year.​ 

As detailed in a New York Times article by health economist Austin Frakt, "Part of the purpose of Medicare’s drug benefit is to encourage enrollees to take prescription drugs that can keep them out of the hospital." In July 2003, promoting the legislation that created Medicare’s drug benefit, President George W. Bush articulated this point. “Drug coverage under Medicare will allow seniors to replace more expensive surgeries and hospitalizations with less expensive prescription medicine,” he said. This effect is illustrated by a recent study led by a Harvard economist that shows that seniors’ increased use of medications to manage health conditions contributed to much slower growth in Medicare spending than had been expected.

In practice, the design of Medicare’s drug benefit includes stand-alone plans that aren’t liable for hospital costs and don’t work as hard as commercial plans to avoid them. That's why Congress explicitly created a handful of patient protections — including the Six Protected Classes policy — which are unique to Medicare, and encourage plans to provide benefits that help keep people healthy. By ensuring that Medicare beneficiaries with the most complicated conditions have access to the right combination of prescription drugs, the Six Protected Classes policy helps hundreds of thousands of patients effectively manage their illness — keeping them out of the hospital and ​ultimately producing considerable savings in Medicare Parts A and B.