Adverse selection cripples donut-hole coverage plans

April 1, 2007

Washington, D.C.-Sierra Health Services recently disclosed a $2 million monthly loss from its Medicare full donut-hole-coverage prescription drug plan (PDP), blamed the financial problem on a competitor, and decided to sell out to the leader in the field. Sierra executives say they will drop the Sierra Rx Plus plan, which pays for brand-name drugs through the Medicare coverage gap for its 42,000 members, and the new owner, UnitedHealth Group is unlikely to question that decision.

WASHINGTON, D.C.-Sierra Health Services recently disclosed a $2 million monthly loss from its Medicare full donut-hole-coverage prescription drug plan (PDP), blamed the financial problem on a competitor, and decided to sell out to the leader in the field. Sierra executives say they will drop the Sierra Rx Plus plan, which pays for brand-name drugs through the Medicare coverage gap for its 42,000 members, and the new owner, UnitedHealth Group is unlikely to question that decision.

Sierra complained to officials at the Centers for Medicare and Medicaid Services (CMS) that its generous PDP is the victim of high adverse selection, partly due to alleged efforts by Humana to steer high-cost seniors to the Sierra program after Humana dropped donut-hole coverage of brand drugs by its PDP Complete plan. In informing plan members of the change and higher premiums, Humana customer-service representatives evidently informed some members they might obtain similar coverage from the Sierra plan. CMS is examining whether providing such information violates Part D marketing rules.

Two weeks after the adverse selection troubles, United announced it would acquire Sierra for about $2.6 billion, primarily to expand into Nevada and the Southwest, a fast-growing region where Sierra is a dominant healthcare provider. The regional firm serves about 850,000 members, including more than 250,000 seniors in PDP plans and Medicare Advantage plans. The acquisition will further secure United as the top player in the Part D market, with 4.5 million seniors in PDPs and 1.2 million MA-PD enrollees.