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In this episode of Lehigh University’s College of Business ilLUminate podcast, we are speaking with Chad Meyerhoefer about what you should know about the upcoming Medicare Open Enrollment Period, which starts on October 15th and runs through December 7th.
Meyerhoefer holds the Arthur F. Searing Professorship in economics and is chair of the department of economics in Lehigh's College of Business. His research focuses broadly on the economics of health and nutrition and involves the use of micro-econometric methods to evaluate and inform public policy.
Meyerhoefer spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.
Below is an edited excerpt from that conversation. Read the complete podcast transcript [PDF].
Jack Croft: What is the government's role in overseeing Medicare Advantage plans, as well as the pharmaceutical drug plans that are offered by private insurance companies?
Chad Meyerhoefer: Medicare Advantage was developed in order to introduce some choice and competition into the Medicare program. The general idea is that those plans are essentially given a payment for Medicare to cover people under their mechanisms.
And they were intended to reduce costs by introducing managed care characteristics. Meaning that individuals were restricted to a network of providers, and in order to seek care from specialists, they have to go through what's called a gatekeeper. Meaning, they have to go to their primary care physician to receive a referral.
But in exchange for those restrictions, they receive additional benefits. Those include potentially a dental insurance component, a vision component. And after Part D was introduced, individuals had the option of either buying a stand-alone prescription drug plan under the Part D market or buying a Medicare Advantage plan, a Medicare HMO or managed care plan that had prescription drug coverage included in it. And that's actually how many people get their drug coverage now.
Those plans have to follow Medicare's rules with regard to the quality of coverage. And there's also limitations on the premiums that can be charged. So the premiums have to be charged within a certain band, coverage has to meet certain restrictions. But outside of those general rules, plans are allowed to develop their own health care networks in the way they see fit. And they're allowed to adjust the cost-sharing amounts, essentially the co-payments, that they charge people in order to compete with other privately administered plans in that market.
Croft: What are some of the things that people should look at each year when [the annual Medicare Open Enrollment Period] rolls around?
Meyerhoefer: The important thing to consider when you're navigating the Medicare open enrollment are just all the options and think about the things that you really want in a health insurance plan. Because there are actually quite a few options that most people have when they enter open enrollment.
There's a contrast between traditional Medicare, which is parts A and B that you can sign up for. And the advantage of that is that you can go to pretty much any provider you want because almost all providers accept Medicare insurance. So if you really place a large emphasis on flexibility and being able to seek care at any facility you would prefer, then that could be a good option for you. However, it has fairly high cost-sharing associated with it. So the co-insurance rate is 20%. And 20% can be a lot when you're undergoing medical procedures associated with more expensive treatments.
Now, of course, the hospitalization coverage is fairly comprehensive and similar to what you'd get in a managed care plan. But it's really those outpatient costs that can be significant under traditional Medicare. And that's why Medicare Advantage plans fill in some of those costs by offering you lower co-payments.
However, that's not the only way to go. Another possibility is that you can sign up for traditional Medicare and you can buy what's called a Medigap plan, which is a supplemental private insurance plan that will cover some of those additional costs for an additional premium. So that's a good plan for somebody who wants lots of choice.
But for many people, actually, Medicare Advantage plans have a lot of advantages because they're significantly less expensive, mainly in terms of the cost-sharing, but sometimes also in terms of the premium. And they tend to provide more supplemental benefits.
Dental care can be particularly important for older Americans, and that is usually covered. It's not necessarily covered as well as if you had a supplemental dental plan, but there's some basic dental coverage and vision coverage and most people do access those services. The one thing, though, you have to pay attention to is whether the providers you want to go to are in that managed care network because usually there's limited or even no coverage for going outside the network.
Croft: One of the most significant changes in recent years is allowing Medicare, through legislation, for the first time in history to directly negotiate drug prices. And the list of 10 drugs selected for the first round of negotiation has been announced, and it includes … Eliquis, … Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara, and Fiasp and [related] delivery systems ...
How successful do you think the federal government will be in negotiating lower prices? Is there [a] balance with the health systems where if they impose prices that are too low, there'll be a chain reaction in other ways in the system?
Meyerhoefer: It's a really interesting initiative and something that a lot of advocates have been pushing for for quite some time. And the reason for that is that we pay relatively high prices for prescription drugs in the United States. Particularly branded drugs. We don't actually pay more for generic drugs. We actually pay less than many other countries for generic drugs. But for branded drugs like the ones you mentioned, we do pay significantly more.
And that's because of what economists call price discrimination. Prescription drug companies take advantage of the fact that we don't bargain for these drugs as a country. Each individual insurance company, through a pharmacy benefit manager [PBM], will bargain for lower prices for these drugs. But of course, those individual companies have a lot less power than they would if they were negotiating for the entire country.
Also, Americans tend to have high willingness to pay for these treatments. So drug companies take advantage of those two characteristics by charging us higher prices than individuals in other countries. This is a way to leverage our collective market power through the Medicare program to bargain for lower prices. And for drugs that are used predominantly by older Americans, we're talking about almost the entire market.
It would be similar to the country of Canada negotiating on behalf of its citizens for lower prices, which it does. In the case of drugs that are used by the entire population, of course, Medicare will have a little less bargaining power because it's only representing a portion of that market, although usually a pretty large portion. So if we look at the experience of other countries, we can expect that these negotiations will be successful in lowering the prices that Americans pay for these drugs through the Medicare program.
It'll be interesting to see how these negotiations through Medicare affect how much private insurance companies pay. Because one possibility is that these drug companies negotiate a harder bargain with PBMs and private insurance companies for people under 65 in order to shift, essentially, revenue generation from the Medicare market to the private insurance market, like we've seen with health insurance.
Or it could go the opposite way because if Medicare is such a large portion of the market for these drugs, that could just become the new market price. At a minimum, though, I would expect this to significantly lower the cost of these drugs from Medicare recipients.
Croft: When would they expect to actually see lower costs, whatever they are?
Meyerhoefer: There's been a lot of talk about this initiative recently because it's being implemented, but unfortunately, people won't actually see those savings for several years. There's two rounds of negotiations that occur before the final negotiated prices are determined. And that's going to happen over the next two-year period. So these prices, these lower prices, won't actually take effect until January of 2026.