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Regulation and Compliance > State Regulation

Insurers Eye Medicare Drug Profits

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The new Medicare drug benefit will generate lower profits than previously predicted in several key states, an analyst says.[@@]

Credit Suisse First Boston analyst Patrick Hojlo said that Ohio, California, Arizona and Nevada are among the states where increased competition could cut so-called Medicare Part D contributions to the bottom line of the nation’s health insurers.

The average California premium will be about 28% below the national average, Hojlo says. With 10% of the nation’s seniors in California, a total of 3.5 million, economies of scale could justify lower premiums in the state. But he doubts that could justify pricing that is so much lower than the nation as a whole, he says.

“Any way you look at it, even after careful analysis of state-by-state prescription drug utilization patterns, it appears to us that certain regions at the low end of the reimbursement spectrum are unlikely to be as profitable as some health plans had hoped,” Hojlo says.

Health plans will not ignore states with intense competition, he adds.

“Furthermore, the competitiveness of these markets may well drive smaller, less experienced players out of the Part D business, resulting in less competition and higher margins in future years,” he says.

But the large players such as Aetna and WellPoint will have the advantage, at least initially, of being able to pick and choose the most profitable states to reap Part D profits.

“We remain very positive on the Medicare market opportunity for all of our outperform-rated companies,” Hojlo says. “We simply think our analysis supports maintaining relatively conservative Medicare contribution assumptions, at least in the short term, than some have contended.”


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