Our purpose is to help community pharmacies. Help you win, every day, with every piece of data in our software. After speaking with 5,000+ of you who are customers, we decided to investigate how pharmacies could create a profitable Medicare Part D plan.
Step 1: Start an insurance company.
All Medicare plans must have a license from the Department of Insurance (DOI) of the state they want to do business in. Each state has different requirements, the most important one being the capital and surplus requirement. Capital and surplus refers to cash in the bank (assets minus liabilities) and some states require as much as $10 million, as in the case of Iowa. Here’s each state’s capital requirements form the NAIC (National Association of Insurance Commissioners).
So what do you do? You start the new insurance company in North Carolina, which has a $1.1 million capital requirement, then fill out all the forms and get a Certificate of Authority for Insurance. Next, you apply to NAIC to get a risk-bearing entity code. Now, you can apply in other states as an out-of-state insurance company to get the Certificate of Authority for each state. Note: you will still need to fulfill the capital requirements for each state. So, you will need around $10 million to ensure all state requirements are satisfied.
Why would you want to apply in every state? Because more states, more Medicare patients, and more premiums. Having a large number of patients on your plan is key to Medicare plan financials.
But here’s the real reason: Around 400,000 LIS (low income subsidy) patients lose their coverage due to plan and premium changes every year. These low income patients are auto-assigned into one of the LIS-eligible Medicare Part D plans offering a $0 premium for LIS patients. There are 6 LIS-eligible plans in each state, on average. So, if you have a LIS-eligible Part D plan, you will capture 400,000 / 6 = 66,000 new patients in your plans without doing anything – simply due to the way the system works. Let me say this again: If you have a plan with a premium below the benchmark in all 50 states, you will automatically get 66,000 Medicare patients on your plan each year.
But before you get too excited, start a Part D plan, and go through the Center of Medicare and Medicaid (CMS) application process, there’s an important CMS rule to be aware of: In the 2014 Final CMS Rule, CMS introduced the requirement that all new Medicare plans must have 2 years of experience in health insurance OR 5 years of experience as a PBM for health insurance.
This CMS rule makes it much harder for new plans to enter the market. You have 2 choices:
1. Run your new health insurance company for 2 years before applying to CMS (you can offer Medicare Supplement plans, for instance)
2. Buy a failing insurance company with 2 years of experience
The buying route seems the preferred method for many companies. Examples:
Ascension Health (a hospital system) bought a small Health Insurer in February of 2015 for $50 million. Click here for press release.
Symphonix, now a national Medicare Part D plan, acquired Vista Health for around the same amount. Click here for details of the deal.
The absolute cheapest option is to buy an insurance shell company. These companies go for about $80,000 per state license (that’s about $4 million for 50 states). This does not include the capital and surplus, so you are looking at a minimum investment of $14 million. The risk with these transactions is the unknown liabilities they bring from previous insurance policies they may have used in the past. While there are some preventive measures to minimize this, trust is a big factor in these transactions.
Step 2: Hire a Pharmacy Benefit Manager (PBM)
While the health insurance company has the licenses, the name, marketing, and contract with CMS, the day-to-day operations of a Part D plan are done by a pharmacy benefit manager.
PBMs do the work behind the scenes. PBMs create and administer the plan formularies, pharmacy networks, rebates, reimbursements, enrollments, phone calls, prescription claims processing, reporting to CMS, and compliance.
You may be tempted to start your own PBM, but it is unlikely that you can comply with all the CMS requirements your first few years. Others have tried, and failed:
By freezing all new enrollments, CMS can put any plan out of business with a stroke of a pen.
To hire a large PBM for all the functions above, you will likely have to pay a signup credit of a few hundred thousand, and then $10-$15 per member per month (PMPM). Or you can get a smaller PBM for $4-$5 PMPM.
Besides the PBM cost, you will need to spend an additional $550k per year: Actuary ($100k), a lawyer ($100k), CMS consultants ($100k), and a Statuary Accountant required on staff full-time ($250k)
Step 3: Create a business plan for your Part D plan
Every year, Medicare plans place a bid on the premium for their plan. For 2017, the average premium was $35.63/month. Click here for the CMS announcement.
CMS subsidizes the premium with an additional $25.45/month per patient, depending on the health risk score of each patient. Moreover, CMS covers 80% of the costs in the Catastrophic phase through what is called “Federal Reinsurance,” which will be around $70 in 2017, judging from the Milliman and Kaiser Family Foundation reports. So, added up, Part D plans will receive over $1,500 per member in 2017.
Then there’s DIR. Direct and Indirect Remuneration (DIR), refers to rebates and fees from manufacturers and pharmacies that the PBM negotiates on the plan’s behalf. From 2012 to 2015, DIR has increased from $10 billion to 23 billion according to a recent CMS factsheet. The same study shows that DIRs lower the plan’s liability from $1,077 to $666 per member per year (PMPY).
So a Part D Plan’s gross profit is $1,500 - $666 = $834 PMPY. PBMs take at most $180 PMPY. Other G&A expenses such as compliance, IT, rent, employees take another $216 PMPY. So the EBITDA of a Medicare Part D plan comes to around $438 per member per year.
So just how many $438 enrollments do you need to make a Part D plan profitable?