Prescription Drug Benefits Under Part D of the Medicare Modernization Act The Genie s Out of the Bottle

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1 ISSUE BRIEF VOL. 5, NO. 10, 2005 This ongoing series provides information on how to develop programs to educate Medicare beneficiaries and their families. Additional information about this and other projects is available on our Web site: This material may be reprinted only if it includes the following: Reprinted with the permission of the Center for Medicare Education. % Prescription Drug Benefits Under Part D of the Medicare Modernization Act The Genie s Out of the Bottle ABOUT THIS BRIEF Introduction With the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 came the creation of the Medicare Part D prescription drug benefit, which takes effect in January In this brief, we discuss the new Part D benefit, including who is eligible, the basic benefit, benefits for low-income individuals and coordination with other prescription drug coverage. Special thanks to our guest author this month, L. Sue Andersen of Health Benefits ABCs. Following years of legislative debate, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003, known as MMA. In many ways, this law made the most comprehensive changes to Medicare since One of these changes was the addition of a prescription drug benefit first, in the form of a two-year voluntary prescription drug discount program, and second, a standard drug benefit to begin in On January 28, 2005, CMS published final rules on the 2006 Medicare drug benefit program. Among Medicare beneficiaries, a tide of quiet anxiety is rising about what the new prescription drug benefit will offer, whether to participate and how this benefit might impact their access to prescription drug benefits offered through retirement health plans, pharmaceutical discount cards, state prescription drug programs and Medicaid. This issue brief will discuss some of the specific provisions of the MMA prescription drug program and identify what we know about the benefit to be offered in CENTER FOR MEDICARE EDUCATION 2519 Connecticut Avenue, NW Washington, DC Phone: Fax: info@medicareed.org Web site: A project of the American Association of Homes and Services for the Aging with funding from the Robert Wood Johnson Foundation. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 Title I of MMA establishes a new section of the Social Security Act, Part D, which authorizes a voluntary outpatient prescription drug benefit. Title II of MMA changes the name of the Medicare+Choice plans to Medicare Advantage (MA) plans and provides new incentives for heath plans to contract with CMS. ELIGIBILITY AND ENROLLMENT Eligibility To be eligible to participate in Medicare s prescription drug coverage, individuals must: S Be enrolled in and receive benefits from Medicare Part A or B, 1 S Reside in the Prescription Drug Plan (PDP) or MA service areas, and CENTER STAFF Robyn I. Stone Natasha Bryant

2 CENTER FOR MEDICARE EDUCATION / Issue Brief Vol.5 No.10: Prescription Drug Benefits Under Part D of the Medicare Modernization Act / page 2 S Not be enrolled in another PDP (including an MA plan that offers qualified prescription drug coverage). If an MA plan does not offer prescription drug coverage, an individual may enroll in a PDP. In addition, a person may enroll in a PDP if he/she is enrolled in one of two special MA plans a health savings account or a private fee-for-service plan that does not offer prescription drug benefits. An individual who is in a PACE program or cost-based HMO must enroll in the prescription drug program offered by that plan. Enrollment The initial enrollment period for the new Part D prescription drug benefit runs from November 15, 2005 through May 15, 2006 for people who already have Medicare and for those people who become eligible to enroll in Medicare in January People who become eligible for Medicare in February 2006 have an enrollment period that runs from November 25, 2005 through May 31, Individuals who become eligible for Medicare after February 2006 have the same seven-month initial enrollment period as the initial enrollment period for Part B of Medicare.3 Medicare beneficiaries will only be able to change plans once each year between November 15 and December 31. This is known as the annual election period and is similar to the annual election period for the Medicare Advantage plans. The change becomes effective in the following year on January 1. 4 Special Enrollment Under special circumstances, people with Medicare Part D can change to another PDP or MA plan outside the annual enrollment period. Reasons for a special enrollment period include: Change of beneficiary s residence; Termination of a plan contract; Termination of employer health coverage or other creditable coverage; 5 Disenrollment from an MA plan by individuals who are 65 and over who enroll in an MA plan during the first 12 months of Medicare enrollment; Substantial violation of a material provision of the contract with the individual; Eligibility for Medicaid (or other full benefit dual eligible ); and Other immediate exceptional circumstances on a case-by-case basis. Your client must enroll in a new drug plan within 63 days of the termination of other coverage. Medicare beneficiaries who fail to enroll during the initial or special enrollment period and who do not have other prescription drug coverage may have to pay a late enrollment penalty. 6 How Medicare Part D Works Your client can enroll in a PDP directly with the private company that offers the MA plan or PDP. All PDPs must offer basic coverage. PDPs and MA plans also may provide additional or supplemental prescription drug coverage. In order to provide a choice of PDP or MA plans in all areas of the United States, CMS divided the country into 34 PDP regions and 26 MA regions. In each region, beneficiaries must have at least two PDPs to choose from and at least one plan must be a stand alone (i.e., not an MA plan). If two plans are not available, CMS will provide a fallback plan that will offer basic prescription drug benefits. A fallback plan cannot offer supplemental coverage. All plans are expected to create a list (or formulary ) that specifies the drugs for which they have negotiated reduced prices or obtained rebates from pharmaceutical manufacturers. Beneficiaries who enroll in a PDP or MA plan and purchase drugs from the plan s formulary may lower the overall cost of their prescription drugs. The availability of Part D prescription drug benefits does not change the coverage of some classes of drugs through Part B primarily, those drugs that may be administered at physician s offices. Each plan can determine its own monthly premium amount. CMS estimates the average monthly premium will be about $37. Beneficiaries will pay premiums directly to the PDP or MA plan, or they may have premiums deducted from their Social Security checks or have their employer or other employeebased health plan pay the premiums. 7 Individuals who do not receive Social Security checks may pay premiums to CMS, which will pay the PDP or MA plan directly.

3 CENTER FOR MEDICARE EDUCATION / Issue Brief Vol.5 No.10: Prescription Drug Benefits Under Part D of the Medicare Modernization Act / page 3 Medicare s Basic Prescription Drug Benefit The MMA requires that all plans provide a basic benefit that limits beneficiaries out-of-pocket expenses to $3,600 in When beneficiaries reach this out-of-pocket maximum, the catastrophic benefit limits additional out-of-pocket expenses to $2 or $5 per prescription in 2006 and 5% of the costs of prescriptions in The following chart defines the 2006 basic benefit that must be offered by these plans: Drug Costs What Beneficiaries Pay What Medicare Pays Cost for Beneficiary First $250 (deductible) 100% Nothing $250 Up to$2,250 25% 75% $500 Up to $5, % Nothing $2,850 Above $5,100 $2 for generic drugs, $5 for brand name; after 2007, 5% 95% $3,600 NOTE that while the statute defines the basic benefit as indicated above, a plan may offer a different benefit that is equal to or actuarially equivalent to this basic coverage. This means that some PDPs may offer plans that look like the benefits outlined above, but others could offer plans with: Different premiums, Different deductibles, Different copayment amounts, Different out-of-pocket maximums, Different drug formularies and/or Supplemental benefits. As a result, beneficiaries may confront a bewildering array of plans to choose from and will need help sorting through them to determine which is best for them. In addition, the MMA allows a PDP or MA plan to reduce cost sharing for prescriptions purchased from an in-network pharmacy, for purchasing extended supplies of prescriptions (90 days or more) or for using a mail-order pharmacy instead of a community pharmacy. 9 Conversely, beneficiaries face higher cost sharing and out-of-pocket payments if they use out-of-network pharmacies. 10 Medicare beneficiaries will have to become well-informed purchasers of prescription drug benefits to navigate the options that may be presented to them. EXAMPLE 1: Mr. John Doe, age 72, takes five prescription drugs and has a monthly drug cost of $540 per month. He has heard about the Medicare prescription drug plan and wants to know whether he should enroll and which plan he should choose. He has a monthly income of $4,000 per month. His yearly prescription costs are $6,480 ($540 monthly costs x 12 months = $6,480 annually). Although it may vary, let s assume that if Mr. Doe does enroll, he will pay $37 monthly premiums for Part D. Mr. Doe would pay $444 in annual premiums. In addition, he would be responsible for the first $250 in prescription costs to satisfy his annual deductible. After the deductible, Mr. Doe pays 25% of his costs between $250 and $2,250, which would total $500. From $2,251 to $5,100 in annual drug costs, Mr. Doe pays 100%, or $2,850. After $5,100 in costs, Mr. Doe will pay $2 per generic or $5 per brand-name drug in 2006 and 5% of his costs in Five percent of his costs are $69. Adding all of Mr. Doe s costs together equals $4,113 ($444 + $250 + $500 + $2,850 + $69 = $4,113), or about 63% of his total drug costs. In addition, the current cost of each of his prescriptions may be reduced if his drugs are included on the plan formulary and the plan is effective in negotiating for lower drug costs on his behalf. Overall, Mr. Doe is likely to benefit significantly from the Part D drug plan.

4 CENTER FOR MEDICARE EDUCATION / Issue Brief Vol.5 No.10: Prescription Drug Benefits Under Part D of the Medicare Modernization Act / page 4 Drug Costs What Mr. Doe Pays What Medicare Pays Cost for Mr. Doe Plan premium $37 per month Nothing $444 $250 deductible 100% Nothing $250 Up to $2,250 25% 75% $500 Up to $5, % Nothing $2,850 Above $5,100 $2 for generic drugs, $5 for brand name; after 2007, 5% 95% $69 ($6,480 - $5,100 = $1,380 x 5% = $69) Total Drug Costs for Mr. Doe $4,113 EXAMPLE 2: An individual with low monthly drug costs may not come out quite so well. Mrs. Smith, for example, only has $80 in prescription drug costs each month or $960 annually. Let s assume that Mrs. Smith also must pay $37 in Part D premiums, or $444 per year. Drug Costs What Mrs. Smith Pays What Medicare Pays Cost for Mrs. Smith Plan premium $37 per month Nothing $444 $250 deductible 100% Nothing $250 Up to $2,250 25% 75% Total Drug Costs for Mrs. Smith $ ($960 - $250 = $710 x 25% = $177.50) $ Mrs. Smith would save $88.50, but pay 91% of her drug costs under Part D. It is clear that Mr. Doe should participate in a Part D plan, which may reduce his drug costs by 37%. Mrs. Smith, on the other hand, would still pay over 90% of the cost herself. The Kaiser Family Foundation has created a helpful Web site to help calculate the benefit for an individual who enrolls in Part D. You can find it at:

5 CENTER FOR MEDICARE EDUCATION / Issue Brief Vol.5 No.10: Prescription Drug Benefits Under Part D of the Medicare Modernization Act / page 5 Part D for Low-Income Beneficiaries To help low-income individuals afford the prescription drug benefit, the MMA provides a premium subsidy, eliminates the deductible and/or reduces copayments depending on the income and assets of the individuals and whether they receive Medicaid benefits. CMS will facilitate enrollment of these individuals through a shortened application and income verification process. State Medicaid and Social Security offices are required to take applications and are authorized to make eligibility determinations for low-income subsidies under Part D. 11 State Medicaid offices must begin accepting Part D subsidy applications on July 1, In addition, Medicaid programs (but not SSA offices) are required to identify and screen individuals for eligibility for the Medicare Savings Programs QMB, SLMB and QI-1 and enroll them if eligible. 12 The Social Security Administration recently began sending out a screening application to help identify individuals who may qualify for the Part D lowincome assistance. Individuals with Incomes Below 150% of the Federal Poverty Line Individuals whose incomes are below 150% of the federal poverty line (in 2005, $14,355 per year for one person; $19,245 for a couple in the contiguous 48 states) and with assets less than $10,000 for one person and $20,000 for a couple will: Receive a premium subsidy on a sliding scale. Pay a $50 deductible. Receive 15% coinsurance up to the $3,600 out-ofpocket maximum. Pay $2 and $5 copays above the out-of-pocket maximum. Individuals with Incomes Below 135% of the Federal Poverty Line Individuals whose incomes are below 135% of the federal poverty line (in 2005, $12,920 per year for one person; $17,320 for a couple in the contiguous 48 states) and with assets less than $6,000 for one person and $9,000 for a couple will: Receive a premium subsidy equal to the average premium for basic coverage in the region. Pay no deductible. Pay copays of $1 and $3 respectively for generic and brand-name drugs if their incomes are below 100% of the federal poverty line. Pay copays of $2 and $5 if their incomes are between 100% and 135% of the federal poverty line for prescriptions below the out-of-pocket maximum of $3,600. Above the out-of-pocket maximum, these individuals will receive free prescriptions. Part D and Medicare/Medicaid Dual Eligibles The MMA provides relief for the states Medicaid programs by paying for the prescription costs of individuals who are eligible for Medicare and Medicaid ( full benefit dual eligibles ). 13 This change may have important implications for dual-eligible individuals. For example, the Medicaid formulary may differ from the PDP or MA formulary, and dual-eligible beneficiaries may have trouble getting necessary medications. Dual-eligible individuals who have severe disabilities, chronic illness or live in a nursing home may have trouble determining which drug plan to choose or be discouraged from enrolling by a drug plan that fears the high drug costs for these beneficiaries. 14 To address these issues, CMS will allow state Medicaid programs to pay for drugs that are not covered under the Medicare PDP or MA formulary. In addition, CMS will examine PDP and MA plan formularies to evaluate whether the formulary design deters enrollment by high-risk/high-cost beneficiaries and may require the PDP or MA plan to include certain drugs utilized by special needs individuals or pay for them during a transitional period. CMS will provide additional financial assistance to PDPs and MA plans that enroll high-cost individuals and will autoenroll low-income dual-eligible individuals who fail to enroll voluntarily. Individuals who live in federal territories are not eligible to participate in Medicare s prescription drug program. CMS will pay additional funds to the territories to pay for drug costs of these low-income individuals. Auto-Enrollment CMS will randomly auto-enroll dual-eligible beneficiaries in a PDP basic benefit plan in the region where they reside. The plan chosen will have a

6 CENTER FOR MEDICARE EDUCATION / Issue Brief Vol.5 No.10: Prescription Drug Benefits Under Part D of the Medicare Modernization Act / page 6 monthly premium that does not exceed the lowincome premium subsidy amount. For dual-eligible individuals in an MA plan, CMS will enroll them in the MA s basic benefit plan if available. 15 Individuals may change enrollment to a different PDP or enroll in an MA plan at any time through special enrollment. Medicare Savings Program participants will not be auto-enrolled because these individuals do not necessarily receive full Medicaid. 16 Part D and PACE Program Participants Individuals who are enrolled in a PACE program receive prescription drug benefits as part of their benefit and pay no cost sharing. MMA allows a PACE to offer a Part D plan but does not require it to do so. Beneficiaries who are enrolled in a PACE program that offers Part D benefits as of December 31, 2005 will be automatically enrolled in its Part D benefits. 17 Medicare-only PACE participants will be required to enroll in Part D benefits offered by the PACE plan. Dual-eligible and low-income PACE participants will be eligible for subsidies and will not be required to pay cost-sharing amounts. PACE plans that choose not to offer Part D benefits may receive a waiver from CMS to continue to offer prescription benefits to its enrollees as it did before. 18 Part D and Institutionalized Beneficiaries Individuals who reside in nursing homes, intermediate care facilities for the mentally retarded (ICF/MR) and inpatient psychiatric hospitals are eligible to enroll in Part D plans. PDP or MA plans are required to provide in-network access to institutional and long-term care pharmacies. 19 Dual-eligible residents of these facilities will be auto-enrolled if no choice is made. Residents have a special enrollment period when they enter or are discharged from a long-term care facility. Nursing home residents will have to choose a PDP or MA plan carefully. If they use an out-of-network pharmacy, they will be liable for cost sharing and an out-of-network cost differential, whether or not they receive low-income subsidies under Part D. 20 Part D and Retiree Health Insurance The MMA affects prescription drug coverage that many people receive through their employer, union or other employment-related health plan. First, the MMA provides subsidies to the sponsors of the employment health plan employers, labor organizations and others who provide retiree health benefits to encourage them to continue existing prescription drug coverage. To qualify for this subsidy, sponsors of retiree prescription health plans must choose one of the following: Continue their existing prescription drug benefit that is actuarially equivalent to a Part D plan and collect special federal subsidies; Contract with, or actually become, a PDP or MA plan to offer Part D benefits to Medicare-eligible retirees; or Provide separate drug coverage that wraps around, or supplements, Part D coverage in which Medicare-eligible retirees have enrolled. 21 A retiree health plan sponsor may change health benefits at any time. Second, the MMA requires employers of Medicare-eligible individuals to calculate whether their prescription drug coverage is actuarially equivalent to Part D plans and provide a notice of creditable coverage. If a beneficiary loses prescription drug coverage through an employer plan that is creditable coverage, the beneficiary is entitled to a special enrollment period. 22 Coordination with Other Prescription Drug Coverage The MMA requires CMS to establish a procedure to allow the coordination of benefits between the Part D program and the state prescription drug programs (SPAP) to enable beneficiaries to continue to benefit from these state programs. 23 Although federal regulations are not clear on how this will be accomplished, the regulations state that SPAP funds may be used to pay beneficiaries out-of-pocket costs and Part D premiums and to supplement drug coverage. CMS will publish additional guidance by July 1, 2005 to coordinate Part D benefits with other prescription drug assistance programs, including Medicare 1115 waiver programs (Pharmacy Plus programs), the Federal Employees Health Benefit Program (FEHBP), TRI- CARE and other group health plans. 24

7 CENTER FOR MEDICARE EDUCATION / Issue Brief Vol.5 No.10: Prescription Drug Benefits Under Part D of the Medicare Modernization Act / page 7 Resources STATE HEALTH INSURANCE ASSISTANCE PROGRAM (SHIP) Each state has a SHIP that provides free health insurance counseling to people with Medicare. The volunteer counselors may be able to help you understand the Medicare Prescription Drug Benefit. You can access your local SHIP through the Medicare Web site ( under Helpful Contacts or by calling MEDICARE ( ). KAISER FAMILY FOUNDATION The Kaiser Family Foundation s Web site has a resource section with information on the Medicare Prescription Drug Benefit. The resources include background information on various parts of the law and the latest information. MEDICARE MEDICARE ( ); (TTY) You can find important consumer information about the Medicare Modernization Act at This site currently has information regarding the Medicare drug discount card but will be updated in coming months with information about the Part D benefit CFR CFR CFR establishes the enrollment period for a new Medicare beneficiary to enroll in Medicare Part B that begins three months before his/her 65th birthday and ends three months after the month of his/her 65th birthday for a total of seven months. A beneficiary who fails to enroll during this time and who does not have health insurance through his/her own employment or that of a spouse may be subject to a penalty based on the number of months of delay CFR (b) 5 An individual who loses creditable coverage due to nonpayment of premiums is not eligible for special enrollment 42 CFR (c)(1). An individual who is not notified that his/her creditable coverage has ended is eligible for special enrollment, as is an individual who was not enrolled in a Part D plan or who enrolled in the wrong plan due to the unintentional, inadvertent or erroneous action of a federal employee or other individual acting on behalf of the federal government. 42 CFR (c)(2) 6 42 CFR CMS will calculate the amount of this penalty to be up to 1% of the base beneficiary premium for each month in which the beneficiary failed to be enrolled in a PDP or have other creditable coverage 42 CFR (d)(3) CFR (a) 8 Each year, the deductible, copayments and out-ofpocket maximums will be adjusted based on annual percentage increases in the price of prescription drugs. 9 Social Security Act, Section 1860D-4(b)(1)(D); 42 CFR (a)(10) CFR 124(b) and Comment in Final Rule, 70 FR CFR USC 1935(a)(3) 13 Dual-eligible individuals are defined in 42 CFR The MMA requirement that states pay part of the Part D drug costs for dual-eligible beneficiaries will be phased out over a period of years. 14 Comment in Final Rule 70 FR 4200 includes all individuals who qualify for Medicaid, including

8 CENTER FOR MEDICARE EDUCATION / Issue Brief Vol.5 No.10: Prescription Drug Benefits Under Part D of the Medicare Modernization Act / page 8 expansion populations and persons eligible for Medicaid in long-term care facilities under a state s special income standard which does not exceed 300% of the SSI payment standard as full benefit dual eligibles CFR (d) 16 Comment in Final Rule 70 FR 4209, January 28, In addition, CMS declined to auto-enroll lowincome subsidy individuals in the Medicare Savings Programs because state Medicaid programs may impose estate recovery on these individuals. 17 Id. 18 Id., at CFR (a) 20 Id., Supplemental coverage may be used to pay beneficiaries out-of-pocket costs but does not count toward the true out-of-pocket cost ( TrOOP ) that the beneficiary must meet before the Part D catastrophic coverage becomes effective. Comment in Final Rule 70 FR 4401, January 28, Id., at SSA, Section 1860D-23(a) 24 Comment in Final Rule 70 FR 4324, January 28, 2005 About the Author L. Sue Andersen is a former health law clinical professor at George Washington University Law School and has significant litigation experience in Medicare eligibility and coverage, Medicaid benefits, and other public and private health insurance issues. Sue is now a principal of Health Benefits ABCs, a private firm offering health benefits educational and consulting services to a wide variety of public and private organizations. She is recognized as a leading authority in developing benefits education training programs and providing technical assistance to public and private organizations on Medicare, Medicaid, HIPAA and COBRA laws. Sue has a J.D. from Antioch Law School and a master of laws from Georgetown University Law School. For more information, contact: Center for Medicare Education 2519 Connecticut Avenue, NW Washington, DC Phone: Fax: info@medicareed.org Web site: