The Impact of Medicare Advantage Growth on Part D Competition, Costs, and Coverage

As Medicare Advantage (MA) enrollment grows, the nature of prescription drug benefits will evolve with it, including in profound ways that are not fully recognized by policy makers. When Medicare’s prescription drug benefit, Part D, was first established in 2006, just 16.9 percent of Medicare beneficiaries were enrolled in a MA plan. That share has since grown to 50 percent with few signs of slowing.

This shift has brought a corresponding increase in the number of Medicare beneficiaries who get prescription drug coverage through an MA plan. Medicare fee-for-service enrollees have the option of obtaining drug coverage through a separate Prescription Drug Plan (PDP). While MA plans can, in principle, be offered without prescription drug coverage, roughly 90 percent of MA enrollees choose MA-PDPs that include it (based on our calculations from the December 2022 Centers for Medicare and Medicaid Services enrollment report). As a result, 53 percent of those in Part D currently get prescription drug coverage through a MA-PDP rather than through a standalone PDP. As Medicare Advantage continues to grow, MA-PDP enrollment is likely to grow in lockstep, potentially leading to changes in drug benefit generosity, risk selection, and the competitive landscape that are worthy of policy makers’ attention.

Medicare Advantage And Prescription Drug Coverage

In general, MA plans are paid more than what it costs them to provide standard Part A and B benefits. This is partly a function of MA payments being higher than for fee-for-service: Base MA payment rates are higher by statute, and risk adjustment further compounds overpayment through higher risk coding intensity and advantageous selection (even conditional on risk adjustment). It is also a function of MA plans’ ability to use utilization management tools to reduce costs.

MA plans use this surplus—which is specifically based on the difference between MA bids and benchmarks—partly to offer supplemental benefits, including expanded prescription drug coverage. Typical rebate amounts are substantial, averaging $164 per member per month (this represents about 15 percent of total plan payments). About one-third of this amount is allocated toward enhanced Part D benefits, with $25 going toward lowering monthly premiums and $30 toward cost-sharing reductions or other supplemental benefits. These are economically meaningful amounts compared to baseline government spending of roughly $195 per month on drug benefits (or $165 inclusive of offsetting beneficiary premium payments).

This translates into significant differences in prescription drug coverage under MA-PDPs versus PDPs. For example, average annual deductibles in PDPs are roughly four times higher than those in MA-PDs ($398 versus $90). Average monthly premiums for PDPs are also roughly 3.5 times higher than in MA-PDPs ($40 versus $11). Similarly, MA-PDP formularies cover a higher share of potentially coverable Part D drugs than PDPs (89 percent compared to 83 percent). At the same time, MA-PDPs impose utilization management requirements (such as prior authorization and quantity limits) on formulary covered drugs at a lower rate, relative to PDPs.

Consequences Of Rising MA Enrollment For Medicare’s Drug Benefit

Increasing Medicare Advantage enrollment raises a few considerations for the future of Medicare’s prescription drug coverage.

Reduction In Drug Plan Competition May Lead To Higher Profits And Lower Pass-Through To Consumers

The Medicare Advantage market is relatively consolidated, with more than 70 percent of enrollees located in highly consolidated markets and nearly all others in moderately consolidated markets. In contrast, the Part D market has had relatively robust levels of competition, with only two out of 34 Part D markets—Alaska and Hawaii—being highly concentrated. These markets account for fewer than 1 percent of PDP enrollees. This is reflected in the fact that there are at least 19 PDPs offered in each of the 34 PDP regions covering a US state or the District of Columbia. As more enrollees secure drug coverage through their choice of MA plans, though, the competitive landscape of Part D will more closely mirror that of the MA market.

Reduced competition is likely to result in more limited pass-through to consumers and higher plan profits, as has been found in the MA market more generally.

Using Part D For Risk Selection May Increase Drug Costs And Risk Segmentation

Because they cover medical and drug spending, MA-PDPs have a clear incentive to care about potential spillovers between the two. This can be beneficial. For example, insurers may encourage medication adherence that helps avoid hospitalizations or other costly medical care. This incentive can be quite strong given that medical spending makes up a much larger portion of total spending.

However, plans also may use the drug benefit to attract enrollees who are likely to be most profitable. Compared to aspects of medical coverage, features of drug benefits, such as the design of formularies, may provide a relatively effective, flexible, and targeted mechanism for encouraging self-selection into plans. In turn, this can distort drug benefit design, leading specifically to overly generous coverage of certain medications.

Research has provided evidence of this kind of behavior. For example, MA-PDPs have been shown to lower cost sharing on drugs treating medical conditions that are relatively more profitable (even conditional on risk adjustment). As a result, distortions in Part D plan design are estimated to increase MA enrollment likelihood by 7 percent on average, with a substantially higher increase among more profitable enrollees.

These incentives are heightened by the benefit design of Part D, which has historically shielded plans from full financial risk. Notably, plan liability has been just 15 percent for any beneficiary spending in excess of the catastrophic threshold. Beginning in 2025, plans’ exposure will rise to 60 percent of costs in the catastrophic phase. Even prior to the catastrophic phase, though, plans will still be responsible for only 65 percent of total costs. By contrast, plans are liable for 100 percent of spending in the medical benefit. This can lower the cost of using Part D to risk select, thereby intensifying the incentive for doing so. Altogether, this could further distort drug benefit design and inflate overall drug spending. At the same time, it can help contribute to the bifurcation in the risk profiles of those in Medicare Advantage versus traditional fee-for-service Medicare.

Policy Implications

Policy makers should recognize that Medicare Advantage growth raises some questions about future competition and costs within Medicare’s prescription drug benefit. We highlight a few to consider.

First, policy makers should recognize that the Part D competitive landscape is likely to mirror the less competitive MA market over time. This puts additional impetus on efforts to improve competitive dynamics in Medicare Advantage more broadly, such as proposals to use competitive bidding models or improve the choice environment.

Second, efforts to address coding intensity in Medicare Advantage are likely to moderate some of the incentives to use Part D as a selection mechanism, by reducing the profitability of the average MA enrollee. However, risk adjustment will remain imperfect even with improvements to coding (and even with more wholesale improvements to risk adjustment), meaning the incentive and opportunity to use Part D as a selection mechanism will persist. We think that this Part D-driven selection is worth focusing on as MA-PDP enrollment grows. Researchers and policy makers can gain insight into potential selection by continuing to compare features, such as plan formularies, across MA-PDPs and PDPs over time. Policy makers may also want to consider whether certain standardized designs or coverage restrictions aimed at mitigating these issues are merited.

Third, it may be worth reconsidering the current model of paying plans separately for medical and drug coverage, particularly where plans are liable for a modest fraction of drug spending but effectively 100 percent of medical spending. Instead, MA-PDPs could be given a single payment covering all services, putting them at full risk for medical and drug spending. Moving toward a more global capitation model can eliminate incentives to shift costs to services for which plans bear lower risk and, more broadly, create incentives for insurers to care about all costs—drug and medical.