Prescription for Malaise?

Providers are rushing to participate in Medicare's new drug-benefit program. Companies are proceeding with caution.

Blame Uncle Sam for the latest anxiety overwhelming the health-care sector. For the better part of a year, health insurers and pharmacy benefit managers have been preparing bids to provide prescription drugs to the nation’s 43 million seniors. If their bids hit the mark, these providers stand to reap a sizable chunk of the prescription-drug market for seniors. If their bids fall short, they risk becoming marginal players in a market that is set to explode as more baby boomers enter retirement age.

This nail-biting bidding process, part of the government’s plan to provide Medicare Part D drug benefits to eligible seniors when the program goes into effect on January 1, 2006, is secret and unparalleled — the first passing of the baton from the public sector to the private sector for the administration of a federal health-care program. Among the hundreds of health-insurance providers and pharmacy benefit managers gearing up to introduce the new prescription-drug plans (see “Let the Bidding Begin,” at the end of this article) is PacifiCare Health Systems, which is spending an estimated $50 million this year to prepare itself internally to develop and market products, establish lists of preferred drugs, enroll and educate beneficiaries, and deal with mountains of federal regulations.

The company, which had previously considered dropping its Medicare offerings, is now basing its future success partly on the bid it presents to the government to provide the drug coverage to seniors. “The government has set up this unique bidding process where we can all become government contractors and provide these services at competitive rates,” explains Gregory Scott, executive vice president and CFO of PacifiCare, a Cypress, California-based managed-care services provider with $12 billion in 2004 revenues.

Like other providers, PacifiCare is enticed by the potential financial gain — sharing in an estimated $59 billion in Medicare payments to private plans for the drug benefits next year, a figure expected to double within five years. Nothing is guaranteed, of course. While all bidders are eligible to become Medicare Part D providers, “the reality is that if your bid is not competitive, you’re not likely to attract any customers,” concedes Scott. “If you bid 50 cents to provide a particular drug and another provider bids 25 cents, people won’t buy your product. We don’t want to bid too conservatively and not get market share, or bid too aggressively and wind up with market share but a product that doesn’t perform from a P&L perspective. Hopefully, we’re smart enough to avoid getting egg splattered on our face.”

To assure the best bid possible, Scott has assembled a dedicated team of a dozen finance, marketing, and customer-service professionals. This group is working with several consultants to design a cost-effective system for providing benefits in the 34 regions where PacifiCare has applied to offer Part D services. Each region requires a separate bid, based on respective market dynamics, notes Scott. “Frankly, I’ve never seen anything like this in my business career,” says the CFO, adding that “a large, new market [has been] created with the swipe of a pen and put in the private sector — a $400 billion to $500 billion program over the next 8 to 10 years. And in my view, we are making a $50 million venture-capital investment in a brand new business that could pay off nicely down the road.”

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