Medicare observers expect heavy competition for drug plan contracts with the Centers for Medicare & Medicaid Services (CMS). It now appears CMS will receive several hundred applications, including applications from major insurers offering drug benefit packages in every state.

Since adoption of the Medicare Modernization Act (MMA), most observers – most notably CMS itself – feared inadequate competition for 2006 contracts. Only a few wonks, including your humble editor, believed the Medicare business, while complex and unprecedented, is too strategic and lucrative for insurers to ignore.

Prospective drug plan sponsors skillfully played up CMS? fear and perceived inexperience, consistently warning against policies that might restrict the discretion of drug plans. In addition, CMS has a long tradition of taking a ?light touch? to health plan contracting under Medicare+Choice (now called Medicare Advantage).

The result is Medicare?s drug plan rules, guidelines, and application procedures are highly deferential to drug plan bidders. Add to this (a) the captive market of nearly seven million dual eligibles, (b) the financial safety valves of risk corridors and risk adjustment, and (c) strategic imperatives of a quickly changing pharmaceutical supply chain ? and you have market opportunities that are hard, if not foolish, to refuse.

This, of course, merely indicates there will be heavy competition. However, do not confuse this with smooth implementation, profitable operation, or a successful drug benefit. Stay tuned for ongoing commentary on the predictable surprises of the Medicare prescription drug benefit.