Medicare Monday: What goes into Part D premiums?

You’ve heard us talk before about Part D premiums. Check out our 4 things to know about the 2016 Part D premium announcement here. And with the annual open enrollment period now underway, it is important to remember that plans change every year and this is the time for beneficiaries to shop around for a plan that works for them.

But you may wonder what goes into Part D premiums and how are they determined each year?

Part D premiums are determined through a competitive bidding process. Each year, plans submit bids to the Centers for Medicare & Medicaid Services (CMS) based on their expected costs for providing prescription drug coverage to Medicare beneficiaries. CMS calculates an average for all the Part D bids submitted, and beneficiaries pay a portion of this cost in the form of a monthly premium. We asked actuarial firm Milliman, Inc. to take a look at the 2016 bids and analyze the factors impacting bid and premium costs heading into next year.

Here are some of the key findings:

• Even while new generic launches have slowed in recent years, there are still several market-leading brand medications anticipated to lose patent protections prior to 2016. This puts downward pressure on costs and beneficiary premiums next year.
• The use of new hepatitis C treatments in Part D has increased in recent years and is expected to continue in 2016. However, in aggregate, manufacturer rebates and contracting improvements will more than offset the increased hepatitis C trend next year.
• New treatments for high cholesterol (PCSK9 inhibitors) are expected to have a limited impact on 2016 premiums, on average, due to their newness and the limited potential population for these medicines. 
• The most significant factor impacting costs and premiums heading into 2016 is contracting improvements and increases in manufacturer rebates. Overall, competition in a few key therapeutic classes, such as hepatitis C, is mitigating other factors putting upward pressure on costs and premiums next year.

You can view the full Milliman memo here. Looking at the factors impacting premiums in 2016, it is evident that manufacturer rebates for prescription drugs continue to be substantial, demonstrating the success of
competition in the program to keep costs low for beneficiaries while providing access to important new treatment options.

For more on Medicare Part D, check out PhRMA.org/PartD.