Background Brief
After years of discussion and debate, President Bush signed a new outpatient prescription drug benefit into law on December 8, 2003. Since the enactment of Medicare in 1965, the program had not generally paid for outpatient prescription drugs, despite numerous attempts by Congress and prior Administrations to add a drug benefit. In 1988, a prescription drug benefit was enacted as part of the Medicare Catastrophic Coverage Act (MCCA) but the benefit was repealed along with other provisions of the Act in 1989. The Clinton Administration proposed adding a drug benefit to Medicare as part of the ill-fated Health Security Act of 1993, and later that decade, proposed to provide drug coverage under a new Medicare Part D. In both 2000 and 2002, the House of Representatives passed Medicare prescription drug legislation, but the Senate did not to pass legislation in either year.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), enacted December 8, 2003, established a voluntary outpatient prescription drug benefit for people on Medicare, known as Part D, to be provided exclusively by private plans approved by the federal government. The drug benefit went into effect on January 1, 2006. At that time, Medicare replaced Medicaid as the primary source of drug coverage for beneficiaries who are covered under both programs (sometimes referred to as “dual eligibles”).
Through Part D, Medicare beneficiaries have access to outpatient prescription drug coverage offered by private plans, either stand-alone prescription drug plans (PDPs) or Medicare Advantage prescription drug plans (MA-PDs), such as health maintenance organization (HMOs) that provide all Medicare-covered benefits including drugs. The Centers for Medicare and Medicaid Services (CMS) oversee the private plans that administer the drug benefit.
Beneficiaries can enroll or switch plans during an enrollment period which for stand-alone prescription drug plans runs from November 15 to December 31 of each year for coverage beginning in January of the following year, and for Medicare Advantage plans, from November 15 through March 31 of the following year. Although enrollment in Part D plans is voluntary, there is a permanent premium penalty for those who delay enrollment and do not have drug coverage that is at least comparable to the Part D standard benefit (known as “creditable coverage”). Once beneficiaries enroll in a plan, they are generally locked into that plan until the following open enrollment period.
The program was structured to rely on competition among private plans to limit drug prices and drug spending. The MMA explicitly prohibits the federal government from negotiating with drug manufacturers to reduce drug prices despite the view held by some that the government should use its purchasing power to leverage lower prices.
As of January 2008, approximately 90 percent of all Medicare beneficiaries have “creditable” prescription drug coverage, and more than 25 million Medicare beneficiaries are enrolled in a Part D plan. Of this total, about two-thirds (68 percent) are enrolled in stand-alone prescription drug plans, while one-third are in Medicare Advantage prescription drug plans (MA-PDs). Nearly a quarter of all Medicare beneficiaries (10.2 million) receive prescription drug coverage from a creditable employer or union plan. However, approximately one in ten beneficiaries (4.6 million) lacks drug coverage.
In 2008, a total of 1,824 PDPs were offered across the 34 PDP regions nationwide (excluding the territories), about the same number that was available in 2007.[1] Beneficiaries in most states have a choice of at least 50 stand-alone PDPs and multiple MA-PD plans, all provided exclusively through private plans. According to multiple 2006 Kaiser Family Foundation and Harvard School of Public Health polls, the large number of Part D plans offered has led to some confusion among seniors, doctors, and pharmacists.[2] Since 2006, the number of private stand-alone plans offered has increased each year of the program.
Monthly Part D plan premiums vary widely across plans. In 2008, the national average monthly Part D premium was $25.30 (unweighted by enrollment); actual premiums ranged from a low of $9.80/month to a high of $107.50/month for a PDP with enhanced benefits. The Centers for Medicare and Medicaid Services (CMS) estimates the average premium for the standard Part D benefit will be $28 (unweighted by enrollment) in 2009.
Part D plans are required to offer either a standard benefit that is defined in law, or an alternative that is equal in value (“actuarially equivalent”). Companies may also offer plans with enhanced benefits beyond the standard benefit. In 2008, the standard benefit included a $275 deductible and 25 percent coinsurance up to an initial coverage limit of $2,510 in total drug costs, followed by a coverage gap (the so-called “doughnut hole”). Enrollees who reach the coverage gap pay 100 percent of their drug costs until they have spent $4,050 out-of-pocket (excluding premiums). At that point, individuals pay five percent of total drug costs or a copayment ($2.15/generic or $5.35/brand for each prescription) for the rest of the year. The standard benefit amounts are set to increase annually by the rate of the per capita Part D spending growth.
In 2007, an estimated 3.4 million beneficiaries (14 percent of all Part D enrollees) reached the coverage gap and faced the full cost of their prescriptions. Among Part D enrollees taking drugs for one of eight common chronic conditions, such as diabetes and osteoporosis who reached the coverage gap, 20 percent either stopped taking a medication for their condition, reduced their medication use (e.g., skipped doses), or switched to a different medication in that class when they reached the gap.[3] Sudden changes to an enrollee’s drug use regimen could negatively affect patient outcomes.
In 2008, more than a quarter of stand-alone Part D plans and half of Medicare Advantage plans offered some type of coverage in the doughnut hole. Based on our analysis conducted by researchers at Georgetown University, NORC and the Kaiser Family Foundation, among those that offered some coverage in the gap, the gap coverage was mainly for generic drugs. Nationwide, only one stand-alone drug plan and 16 percent of all Medicare Advantage drug plans offered coverage for at least some brand-name drugs in the gap.
Under Part D, Medicare beneficiaries with modest incomes and assets may qualify for additional assistance with Part D premiums and cost-sharing requirements. Individuals with incomes below 150 percent of poverty ($15,600/individual and $21,000/couple in 2008) and limited assets ($11,990/individual and $23,970/couple in 2008) are eligible for the low-income subsidy (LIS), or “extra help”, which can reduce beneficiaries’ out-of-pocket spending by paying for all or some of the Part D monthly premium and annual deductible, and limit drug copayments to a nominal price. As of January 2008, CMS estimated that of the 13 million beneficiaries potentially eligible for low-income subsidies, 3 million beneficiaries were not yet receiving them.[4] Because the low-income subsidy provides valuable assistance to those who qualify, policymakers are exploring various outreach strategies to find and enroll those who are potentially eligible for the additional assistance.
The Medicare prescription drug benefit offers people on Medicare help with their prescription drug costs, which is especially important to those with low incomes, without other sources of drug coverage, and those with very high drug expenses. Looking to the future, it will be important to monitor the evolution of the Part D benefit to assess the extent to which it provides beneficiaries access to needed and affordable medications over time.
[1] Kaiser Family Foundation, “The Medicare Prescription Drug Benefit – an Updated Fact Sheet,” February 2008.
[2] KFF/HSPH, The Public’s Health Care Agenda for the New Congress and Presidential Campaign (conducted November 9-19, 2006).
[3] Georgetown University, NORC, and KFF, The Medicare Part D Coverage Gap: Costs and Consequences in 2007, August 2008.
[4] Centers for Medicare and Medicaid Services (CMS), “Medicare Drug Plans Strong and Growing,” Press Release, January 30, 2007.
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• What are the implications of administering Part D through private plans instead of offering the benefit through the traditional fee-for-service Medicare program?
• What are ways in which Medicare can be reformed to boost Part D and Low-Income Subsidy (LIS) participation?
• Why did Congress prohibit government from negotiating with pharmaceutical companies to lower prescription drug prices?
• Why does the standard benefit include a coverage gap?
• What measures could Congress take to simplify the way in which drug coverage is offered under Medicare?
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