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Analysis of the Medicare Prescription Drug Benefit

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Issue 28, Summer 2005

Analysis of the Medicare Prescription Drug Benefit
by Chris Trapp, MPLP Summer Law Clerk

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) will usher in a new era of socialized medicine in America. Beginning on January 1, 2006, Medicare will provide over 30 million people with prescription drug plans (PDP) through a new "Part D" benefit to Medicare. Medicare will contract with private insurance companies to provide this benefit.

Besides having an impact on millions of senior citizens and other Medicare recipients, the MMA will permanently change state-federal fiscal relations. For the first time in its forty-year history, states will be required to contribute to Medicare funding. These payments will reflect the amount of prescription drug benefits currently paid out by Medicaid to individuals who are eligible for both Medicaid and Medicare. Starting in 2006, prescription drug benefits for these "dual eligibles" will be disbursed through Medicare Part D.

Although the MMA will create important changes in the lives of millions of Americans, many are confused and concerned about the specific changes the legislation will make. In order to bring clarity to these changes, this article will discuss the standard coverage that Part D offers, the additional assistance made available to individuals with low-incomes and few assets, the effect on state-federal fiscal relations, and the effect on dual-eligibles.

Standard Coverage
The MMA allows current Medicaid beneficiaries to receive Part D benefits through a "Medicare Advantage" plan that includes an array of Medicare benefits, or through stand-alone prescription drug plans. Additionally, Medicare beneficiaries are under no obligation to receive the Part D benefits, and many may find it beneficial not to enroll in a plan.

Since Part D eligible persons will not be automatically enrolled in the program, a potential beneficiary is required to enroll in a plan during an initial six-month enrollment period, from November 15, 2005, until May 15, 2006. In subsequent years, potential beneficiaries need to enroll in a plan between November 15 and December 31 to be eligible to receive coverage in the following calendar year.

If an eligible person decides to enroll in a PDP, Medicare has guaranteed that the recipient will be able to choose between at least two different insurance companies in her area. Plans will potentially differ by, for example, offering different lists of covered drugs (formularies) or requiring different co-payments on drugs. In the fall, Medicare will mail potential recipients information regarding the different plans available.

Each plan will require a monthly premium, a deductible, and co-payments on prescriptions. According to the Congressional Budget Office (CBO), monthly premiums for Part D will average $37 per month, but will slightly vary amongst different plans. This premium will annually rise and is anticipated by the CBO to reach about $58 per month by the year 2013.

The annual deductible will be $250 in 2006 and will be annually indexed to the growth in average per capita spending by Medicare beneficiaries for Part D drugs. After this deductible is met, Medicare will cover 75% of drug costs (leaving the beneficiary to pay 25%) until the beneficiary has reached the "initial coverage limit." This limit is set at $2,250 for 2006, and will increase to $3,934 in 2014.

Once the initial coverage limit is met, there is a "coverage gap," where a beneficiary is responsible for 100% of the cost of drugs until the total annual cost to a beneficiary reaches the "catastrophic level." This level is currently set at $5,100 in annual Part D drug costs. After this catastrophic level is reached, the beneficiary would only pay the greater of a $2 co-payment for a generic drug, a $5 co-payment for a brand name drug, or 5% of the total cost of each prescription, with Medicare paying the residuum.

Assistance to the Poor
Since the average individual will still need to pay hundreds of dollars per year for prescription drugs under standard coverage, the MMA will provide additional assistance to individuals with low-incomes and few assets. This assistance includes subsidized premiums, deductibles, and co-payments. Additionally, eligible individuals will be excused from the "coverage gap", so a recipient may continue to receive the same level of benefits, irrespective of total annual drug costs.

Beneficiaries with annual incomes below 135% of the Federal Poverty Level (currently $12,123 for an individual and $16,363 for a couple), and assets totaling less than $6,000 if the person is single, or $9,000 for a couple, will pay no premiums and no deductibles. Furthermore, the only required co-payments will be nominal; a $2 co-payment for generic drugs and a $5 co-payment for brand-name drugs will be required. These persons will be exempt from the coverage gap, so Medicare will subsidize their benefits regardless of annual prescription drug spending.

Beneficiaries with annual incomes below 150% of the Federal Poverty Level (currently $13,470 for an individual and $18,180 for a couple) and assets valued at less than $10,000 for a single person, or $20,000 for a couple, will have deductibles reduced to $50, and a 15% co-payment on all drug costs prior to the catastrophic level. Hence, for beneficiaries at this eligibility level, the coverage gap and the initial coverage limit are merged together, and total co-payment amounts are reduced (from 25% to 15% in the initial coverage area and from 100% to 15% in the coverage gap).

Monthly premiums will be subsidized based solely on income, without regard to assets, for individuals with incomes between 135% and 150% of the Federal Poverty Level. The subsidies for premiums will be allocated according to a sliding scale; those at the 135% of the Federal Poverty Level paying $0 per year and those with incomes at 150% being required to pay $420 per year.

"Dual Eligibles:" Effects on States and Medicaid Beneficiaries
Currently, there are over seven million citizens that qualify in some way for both Medicare and Medicaid coverage. These people are referred to as "dual eligibles." Through the Medicaid program, which is funded through state and federal contributions, many of these people currently receive prescription drug benefits. Beginning in 2006, Medicare will begin financing the entire amount of these benefits through the new Part D plan.

In order to compensate the federal government for the additional expenses, states will financially contribute to Medicare for the first time in the program's forty-year history. These monthly payments will be deposited into the Medicare Prescription Drug Account in the Medicare Part B Trust fund. According to Congressional Budget Office estimates, states will pay approximately $48 billion dollars toward part D coverage through 2010.

An individual state's contribution will roughly reflect the expenditures of its own funds that a state would be required to make for Part D covered prescription drugs, if the benefits were still being disbursed through Medicaid. The following formula will be used to calculate the total state payment:

State Payment = 1/12 * Per Capita Expend. * Dual Eligibles * Phase-down %
  (Monthly) (PCE) (DE) (PD%)

The PCE, per capita expenditure, will reflect the state share of per capita Medicaid expenditures on prescription drugs covered under Part D for dual eligibles during 2003, trended forward. The state share is based on the state's federal matching rate for the month in which the payment is due. The total monthly payment will be "phased-down" annually, starting with a 90% phase down in 2006, gradually being reduced to a 75% level in 2013.

Many are concerned that a Medicaid beneficiary may be temporarily without drug benefits if he or she has difficulty enrolling in the Part D plan. Medicaid will automatically terminate prescription drug coverage when the MMA takes effect on January 1, 2006. However, unlike those solely eligible for Medicare, the secretary of health and human services is required to enroll dual eligibles that have not signed up for a plan by then end of 2005 into one of the available plans.

While the automatic enrollment policy is designed to protect dual eligibles from losing coverage, there are disadvantages. Unlike other Medicare recipients, dual eligibles will only have six weeks to enroll in a program. This may prove to be problematic, since health issues and other problems may make it difficult for dual eligibles to make these decisions during this time frame. Furthermore, because of the high number of beneficiaries that will be affected, many are almost guaranteed to temporarily lose prescription drug coverage due to human error. For these reasons, among others, advocacy groups are working diligently to inform and comfort dual eligibles about the upcoming changes.

Conclusion:
The new Part D prescription drug plan is sure to cause as much confusion as it will create controversy. In the fall of 2005, Medicare will be mailing Medicare beneficiaries more information about available plans, and will mail additional information to low-income persons who may qualify for additional assistance. Concerned citizens are encouraged to visit Medicare's website at www.medicare.gov, or contact a local representative organization.