Medicare Star ratings: the billion-dollar opportunity for providers

Source: Medicare.gov

In accordance with the recently upheld Accountable Care Act, the Centers for Medicare and Medicaid Services (CMS) has created a program to reward insurers for providing high-quality care with new bonus payments to high-performing Medicare Advantage health plans. Under the new program, health plans now have increased incentives to improve patient adherence, and therefore, pay more for medications that could improve patient adherence and real-world outcomes. This creates a new profit opportunity for pharmaceutical manufacturers, because their customers have entirely new incentives, with a lot of money—as much as $3 billion by one estimate—at stake. Understanding the scope of the changes and proactively positioning their products to capitalize on health plans’ willingness to pay are the two key steps for manufacturers to tap into this new and significant profit opportunity.

How pay for performance works

In 2007, CMS began the Five-Star Quality Rating System program, under which CMS rates the quality of insurers’ Medicare Advantage and Part D plans on a scale of 1—5 stars. A rating of one star represents “poor performance” and five represents “excellent performance.” Ratings are based on performance in 55 measures, ranging from outcomes and medication adherence to preventive screening rates and plan customer service. They encompass ratings for both medical care and prescription drug benefits, with prescription drug-related criteria accounting for about one-third of the combined Medicare Advantage plan rating.

The institution of program bonus payments marks an important change for health plans. In the spirit of improving the quality of healthcare for seniors participating in the Medicare Advantage program, the 2010 Accountable Care Act doubled down on the Star program by tying new bonus payments to a plan’s annual star rating. The bonus payments, which began in 2012, are designed to reward the top performing plans by providing a payment proportional to the total number of Medicare lives covered under a Medicare Advantage contract. Under the new law, CMS will pay up to 5% of a health plan’s total annual benchmark payments to those Medicare Advantage contracts receiving a rating of four stars or higher.

In addition to the changes mandated by the healthcare law, CMS has also recently extended the scope of the bonus payment program through a new demonstration project. Under that program, Medicare Advantage plans receiving a rating of three stars receive up to a 3% bonus, and 3.5 star plans are eligible for up to 3.5%. This new program will represent a significant increase in the scope of the payments. According to analysis done by the Kaiser Family Foundation, the majority of Medicare Advantage health plans received a three or 3.5 star rating in 2011.

According to CMS, 10 of the 55 criteria relate to outcomes-based measures, which are given the most weight when determining star ratings. Pharmaceutical products could potentially impact up to eight of the 10 outcomes measures, accounting for nearly 30% of the total weighted rating. Criteria are often specific to a disease area; among others, rheumatoid arthritis, hyperlipidemia, hypertension and diabetes are all reflected explicitly in individual star measures. The Star Ratings program places special emphasis on diabetes management to measure plan quality. The criteria “Diabetes Care — Blood Sugar Controlled” and “Part D Medication Adherence for Oral Diabetes Medications” both receive the highest criteria weight.

Medicare makes each health plan’s rating available to the public, so that prospective customers can compare plans’ quality ratings on Medicare.gov. Because Medicare plans must market themselves to consumers, a higher government quality rating can lead to a decisive advantage in attracting potential customers. Beyond marketing advantages, the new bonus payments significantly strengthen the incentive for health plans to improve the quality of their care. The Kaiser Family Foundation estimates that the new program will pay more than $3 billion in bonus payments in 2012, and for major national plans, an improvement in their average star rating could mean more than $100 million in additional bonus money.

Managed care has taken notice

The details and potential impact of the changes were discussed in several sessions of April’s Academy of Managed Care Pharmacy Annual Meeting. With such high stakes, managed care is investing heavily in new solutions both to improve their quality ratings and to take advantage of the tremendous financial opportunity that the Star program bonus payments present. However, payers have yet to fully explore the potential role of manufacturers and their products in helping plans achieve higher star ratings.

A focus on medication adherence is not a new concept for health plans, as many plans have already invested significantly in plan-administered adherence programs. However, this has yet to translate into changes at the P&T level. Managed-care P&T decisions instead still focus on two tenets: “Efficacy is king” and “We don’t pay for convenience.” The pharmaceutical industry has developed numerous innovations over the past several years that offer unique value propositions, yet time and time again, managed care has insisted that clinical efficacy remains the key driver of pricing and access. For example, Merck’s Januvia (sitagliptin) established the DPP-4 inhibitor category of oral anti-diabetics as a class with modest efficacy, but a fairly clean, well-tolerated side effect profile. Januvia has been successful and clearly delivers significant value, but as a result of the predominant payer focus on clinical efficacy, Januvia did not achieve the price levels of thiazolidinediones, such as Takeda’s Actos, or GLP-1 agonists, such as Amylin’s Byetta (exenatide).

Managed care has also demonstrated an unwillingness to pay a premium for innovations that make the lives of patients easier. New formulations of existing agents and fixed-dose combinations often fail to achieve premium prices despite obvious patient-related advantages. For example, pill burden can often contribute to poor adherence and sub-optimal patient outcomes in diabetes patients. Fixed-dose combinations, which combine a drug like Januvia with a commonly used generic medication into one convenient pill, help patients manage their pill burden, but insurers frequently refuse to pay a premium price for the convenience provided to their members.

The advent of Star Ratings program bonus payments could change that. Never before has managed care had such a clear monetary incentive to advantage products that promote patient adherence and better real-world outcomes. These new incentives could lead insurers to emphasize patient-related product features, like oral administration, less frequent dosing, and better tolerability.

This in turn would increase insurers’ willingness to pay for these features, offering manufacturers new avenues to achieve additional price premiums for their products. Under pressure to improve star ratings, Medicare Advantage plans could view a drug like Januvia through a new lens: a convenient and easy-to-tolerate product that could help them improve medication adherence and thus, member HbA1c control. The lure of better quality ratings and higher bonus payments could also compel insurers to reconsider their positions on convenience-focused products, like fixed-dose combinations, and increase insurer willingness to pay for these products.

Capitalize on the opportunity

While the changes described above present opportunities to extract additional value out of innovations, it would be naïve to think that insurers will make such a leap on their own. Manufacturers need to pursue the potential opportunity proactively, by tailoring and communicating the value propositions of their products to show how new, innovative products can help improve star ratings and unlock new sources of revenue for their customers.

Consider future diabetes launches, such as a potential anti-diabetic medication with once-monthly dosing. Such a product would have the potential to make meaningful adherence-related blood glucose outcomes improvements for an insurer’s diabetes member population. This product’s opportunity for a significant premium will partially depend on the manufacturer’s ability to convince insurers that granting better access to the product will allow the insurers to earn additional, greater bonus payments. Understanding how star ratings are calculated, coupled with telling a well-crafted product value story that incorporates the potential for star rating improvement, will allow manufacturers to capture some of the additional revenue insurers stand to gain. Additionally, manufacturers can target their value communication strategies to focus Star-related value messages on those health plans that stand to gain the most from improvement in their star rating, since Medicare makes star ratings publicly available.

To capitalize fully on the opportunity to extract additional willingness to pay for their products, manufacturers will also need to demonstrate their products’ real-world impact to health plans. In recent Simon-Kucher & Partners projects related to patient adherence, payers have claimed that one of the largest barriers to implementation is the difficulty of monitoring the impact of new manufacturer adherence programs. Theoretically linking convenience and tolerability to adherence and outcomes alone is insufficient to payers, leaving manufacturers with one of two options: supporting health plans in tracking adherence and outcomes of patients taking the new product or developing innovative contracting schemes that link access rebates to improvement in one or more of the individual 55 measures used to calculate a plan’s star rating.

In the case of diabetes, this could mean tying access rebate levels to improvements in the reported percentage of patients whose blood sugar is controlled. Both options will help manufacturers attribute improvements in medication adherence and real-world clinical outcomes to their products and strengthen the argument to command a premium price.

With millions of dollars and decisive marketing advantages at stake, insurers will clearly value improvement in star quality ratings. Products that can help them achieve this improvement, therefore, take on new, added value. But insurers may not immediately associate new product reviews with the bonus payments that favorable access decisions could unlock.

With so much at stake for their customers, manufacturers must devote sufficient time to learning the details of the Star program and how the new policies will impact the drugs in their pipelines or portfolios. Capitalizing on this opportunity and successfully convincing insurers of the potential gains they stand to achieve in their highly coveted star ratings will lead to better access, higher achievable prices, and increased profitability for pharmaceutical manufacturers.

ABOUT THE AUTHOR

Matt Adkins is a senior consultant at Simon-Kucher & Partners, a strategy and marketing consulting firm specializing in the life sciences industry. Matt has worked on engagements for six of the top 10 global pharmaceutical companies primarily related to pricing and value communication strategies. Matt graduated from Brown University with a Bachelor of Arts degree in Economics and Engineering. He can be reached at: [email protected].