Part D Profits––Not Yet the Great Results the Industry Hoped For

Part D—Some Results Starting to Come In
To say the Part D business has been controversial this year would certainly be an understatement. It’s not news that many in the industry have questioned its sustainability as a business—including me.

During 2006, the profitability data hasn’t been credible. In fact, it will likely be another year before we get a good sense for what’s really going on. While the players had to bid their 2007 rates earlier this year, most of what they based them on was pretty soft.

However, the third quarter was supposed to be the quarter that Part D profitability would spike as the sickest seniors would be in the gap and Part D claim levels would therefore decrease for the rest of the year. There is evidence that is happening. But, is it happening enough?

The biggest Part D player is UnitedHealth. In the second quarter, they said, “The Part D business is well on track to provide positive contributions to earnings on a GAAP basis in the third and fourth quarter and meet its full-year operating margin target of 3% to 4%.”

But their outlook was less specific in the third quarter, “On a full year basis, management estimates that Medicare Part D will generate a positive operating margin, however as a result of the benefit design, generated a slightly negative margin during the first three quarters of 2006.” No more specific earnings estimates and no report of big Part D profits in the third quarter.

The second largest Part D insurer, Humana, was less oblique about its Part D results. Given that the third quarter was supposed to be the quarter that the “gap” turned Part D profits around and produced a profit, their results are somewhat startling. Humana reported that, The MER [medical expense ratio] for the company’s PDP [Part D] business was 93.0% for 3Q06, primarily driven by an MER of 133.0% in the company’s Complete [“gap” plan] PDP offering.” The expense factor for Part D plans is likely about 15%. That means that Humana’s Part D combined ratio in the third quarter, the quarter the profits were supposed to show up, was likely 108%!

It is clear that Humana blew it on its “Complete” plan that provides brand name drug coverage in the “gap.” It gets back to the anti-selection argument. Seniors had the ability to pick the plan they could make the most money on, and hundreds of thousands zeroed in on Humana’s rich offering.

Humana’s response has been to double the 2007 senior premium for this plan and stop covering name brand name drugs in the “gap.” They will continue to cover generic drugs in the “gap.” However, with a monthly price of about $80, seniors can find competing generic “gap” plans for about half of that price. Humana clearly intends to blow these much higher utilizing seniors not only out of this losing plan but also out of the company all together. Remember, I told you that the Democrats now have “oversight” powers? This one is going to be the subject of oversight hearing number one.

The great majority of the Part D renewal process appears to be running well. Most plans are increasing their premiums by less than $5 per month and most seniors are happy with their plan and will stay put.

But the Humana “Complete Plan” is going to get the attention. Any Democrat that wants point to some market warts on the way to justifying more regulation and lower payments to private Part D plans is going to point to Humana—a company that tripled its profits by getting into MedicareAdvantage and then used its price strategy to churn the sickest people out of its Part D program.

The longer term Part D concern for the health plan industry has to be that, in the first year, it is turning out to be marginally profitable at best (United) and a real profit loser at worst (Humana). Looking ahead to at least two years of Democratic budgets and oversight, it can only go downhill from here.

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