Medicare Part D - Prescription Drug Plans

Medicare Part D, also called the Medicare prescription drug benefit, is a United States federal-government program to subsidize the costs of prescription drugs and prescription drug insurance premiums for Medicare beneficiaries. It was enacted as part of the Medicare Modernization Act of 2003 (which also made changes to the public Part C Medicare health plan program) and went into effect on January 1, 2006.

Program specifics

Eligibility and enrollment

Individuals on Medicare are eligible for prescription drug coverage under a Part D plan if they are signed up for benefits under Medicare Part A and/or Part B. Beneficiaries obtain the Part D drug benefit through two types of plans administered by private insurance companies: the beneficiaries can join a standalone Prescription Drug Plan (PDP) for drug coverage only or they can join a public Part C health plan that jointly covers all hospital and medical services covered by Medicare Part A and Part B at a minimum, and typically covers additional healthcare costs not covered by Medicare Parts A and B including prescription drugs (MA-PD). (NOTE: Medicare beneficiaries need to be signed up for both Parts A and B to select Part C.) About two-thirds of all Medicare beneficiaries are enrolled directly in Part D or get Part-D-like benefits through a public Part C Medicare Advantage health plan. Another large group of Medicare beneficiaries get prescription drug coverage under plans offer ed by former employers.

Generally, not all drugs are covered at the same out of pocket cost to the beneficiary. This gives participants incentives to choose certain drugs over others. This is most often implementedâ€"as is the case for drug coverage for those not on Medicareâ€"through incentives to use generic drugs over brand-name drugs. The incentive is also often implemented via a system of tiered formularies in which some brand-name drugs are less expensive than others and not subject to step therapy.

Medicare beneficiaries must enroll in a Part C or Part D plan to participate in the federal-government-subsidized drug program. They can enroll directly through the plan's administrator, or indirectly via an insurance broker or the exchange run by the Centers for Medicare and Medicaid Services (CMS) for this purpose; the beneficiary's subsidy and other assistance payments and rights are the same no matter which enrollment channel they choose. Beneficiaries already on a plan can choose a different plan or choose to drop Part C or Part D during an annual enrollment period or during multiple other times during the year. Currently, the annual enrollment period lasts from October 15 to December 7 of each year. Low-income seniors on Social Security Extra Help/LIS and many middle-income seniors on state pharmaceutical assistance programs can choose a different plan or drop Part C or Part D (or join Part C or Part D plan for that matter) as often as once a month. Other special enrollment circumstances apply.

Medicare beneficiaries who were eligible for but did not enroll in a Part D when they were first eligible and later want to enroll, pay a late-enrollment penalty, basically a premium surtax, if they did not have creditable coverage through another source such as an employer or the U.S. Veterans Administration. This penalty is equal to 1% of the national premium index times the number of full calendar months that they were eligible for but not enrolled in Part D and did not have creditable coverage through another source. The penalty raises the premium of Part D for beneficiaries, when and if they elect coverage.

Enrollment in Part D as of April 2010 was 27.6 million beneficiaries. In 2012, enrollment exceeded 31 million including both those on standalone Part D and those counted as being on Part D because their Part C plan includes Part-D-like drug coverage or a former employer receives a Part D subsidy. The latter two groups lack the same freedom of choice that the standalone Part D group has because they must use the Part D plan chosen by the Part C plan's administrator or their former employer.

In 2010, there were 1,576 stand-alone Part D plans available, down from 1,689 plans in 2009. The number of available plans varied by region. The lowest was 41 (Alaska, Hawaii) and the highest was 55 (Pennsylvania, West Virginia). This allows participants to choose a plan that best meets their individual needs. The number of plans varies yearly and differs from county to county across the United States. Although the number of plans available has been trending down since 2009, almost all counties offer choices.

Plan administrators are required to offer at least the "standard" minimum benefit or one actuarially equivalent, or they may offer more generous benefits. This previous sentence relates to how the administrator of the drug insurance designs the deductible/co-pay/formulary/donut-hole/pharmacy-preference aspects of each plan and has no direct relevance to the beneficiary. Each plan is approved by the CMS before being marketed.

Medicare has made available an interactive online tool called the Medicare Plan Finder that allows for comparison of coverage and costs for all plans in a geographic area. The tool allows one to enter a list of medications along with pharmacy preferences and Social-Security-Extra-Help/LIS and related status. It can show the beneficiary's total annual costs for each plan along with a detailed breakdown of the plans' monthly premiums, deductibles, and prices for each drug during each phase of the benefit design. Plans are required to update this site with current prices and formulary information every other week throughout the year.

Costs to beneficiaries

Beneficiary cost sharing (deductibles, coinsurance, etc.)

The Medicare Modernization Act (MMA) established a standard drug benefit that all Part D plans must offer. The standard benefit is defined in terms of the benefit structure and not in terms of the drugs that must be covered. For example, in 2013, the standard benefit required payment by the beneficiary of a $325 deductible, then required 25% coinsurance payment by the beneficiary of drug costs up to an initial coverage limit of $2,970 (the full retail cost of prescriptions). Once this initial coverage limit is reached, the beneficiary had to pay the full cost of his/her prescription drugs up until the total out-of-pocket expenses reached $4,750 (excluding premiums and any expense paid by the insurance company) minus a 52.5% discount in this gap, infamously referred to as the "Donut Hole". Once the beneficiary reaches the Out-of-Pocket Threshold, he or she becomes eligible for catastrophic coverage. During catastrophic coverage, he or she pays the greater of 5% coinsurance, or $2.6 5 for generic drugs and $6.60 for brand-name drugs. The catastrophic coverage amount is calculated on a yearly basis, and a beneficiary who reaches catastrophic coverage by the end of the benefit year will start his or her deductible anew at the beginning of the next benefit year. Although uncommon, not all benefit years coincide with the calendar year. The donut-hole and catastrophic-coverage thresholds dropped slightly in 2014.

The standard benefit is not the most common benefit mix offered by Part D plans. Only 11% of PDPs in 2010 offered the defined standard benefit described above. Plans vary widely in their formularies and cost-sharing requirements. Most eliminate the deductible and use tiered drug co-payments rather than coinsurance. The only out-of-pocket costs that count toward getting out of the coverage gap and into catastrophic coverage are True Out-Of-Pocket (TrOOP) expenditures. TrOOP expenditures accrue only when drugs on plan's formulary are purchased in accordance with the restrictions on those drugs. Monthly premium payments do not count towards TrOOP.

Under the Patient Protection and Affordable Care Act of 2010, the effect of the "Donut Hole" coverage gap will be gradually reduced through a combination of measures including brand-name prescription drug discounts, generic drug discounts, and a gradual increase in the percentage of out-of-Pocket costs covered while in the donut hole. The "Donut Hole" will continue to exist after 2020 but its effect will be changed in some way yet to be determined because plan administrators will have to treat out of pocket costs below the catastrophic level the same whether or not the insured is in the donut hole or not. That is, under the "standard benefit" design all prescriptions in all tiers could be subject to a 25% co-pay whereas as of 2014 hundreds of drugs in Tier 1 are available with no co-pay.

Most plans use specialty drug tiers, and some have a separate benefit tier for injectable drugs. Beneficiary cost sharing can be higher for drugs in these tiers.

Beneficiary premiums

The average (weighted) monthly premium paid by the beneficiary for PDPs was $35.09 in 2009, which is an increase from $29.89 in 2008. Premiums were projected to increase to $38.94 for 2010 as well. In 2014, the average is around $30 a month. The average premium is a misleading statistic because it averages the premiums offered, not the premiums paid. Most insurers offer a very low-cost plan (e.g., $15 a month) that few choose. This lowers the average but does not truly reflect what is happening in the market.

In 2007, 8% of beneficiaries enrolled in a PDP chose one with some gap coverage. Among beneficiaries in MA-PD plans, enrollment in plans offering gap coverage was 33% (up from 27% in 2006). Premiums are significantly higher for plans with gap coverage. These plans are becoming less common as the gap closes as described above. In addition the combination of the fact that beneficiaries on Social Security Extra Help/LIS were never affected by the gap and the fact that many state pharmaceutical assistance programs protected middle income seniors in the gap is the reason this gap benefit was never especially popular.

Major Part D plan sponsors are dropping their more expensive options, and developing lower-cost ones.

Low-income subsidies and Middle-income help

One option for those struggling with drug costs is the low-income subsidy. Beneficiaries with income below 150% poverty are eligible for the low-income subsidy, which helps pay for all or part of the monthly premium, annual deductible, and drug co-payments. The Centers for Medicare and Medicaid Services (CMS) estimated that 12.5 million Part D beneficiaries were eligible for low-income subsidies in 2009.

The subsidy award is given a level with the following effects for the 2013 benefit year:

Probably the most important benefits of Social Security Extra Help/LIS other than "free" is the fact that the beneficiary has no exposure to "donut hole" costs and can change plans monthly if desired. In addition, in many states, state pharmaceutical assistance programs provide similar protection in the gap to middle-income seniors and allow beneficiaries to change plans one other time during the year in addition to the annual enrollment/re-enrollment period.

Excluded drugs

While CMS does not have an established formulary, Part D drug coverage excludes drugs not approved by the Food and Drug Administration, those prescribed for off-label use, drugs not available by prescription for purchase in the United States, and drugs for which payments would be available under Parts A or B of Medicare.

Part D coverage excludes drugs or classes of drugs which may be excluded from Medicaid coverage. These may include:

• Drugs used for anorexia, weight loss, or weight gain
• Drugs used to promote fertility
• Drugs used for erectile dysfunction
• Drugs used for cosmetic purposes (hair growth, etc.)
• Drugs used for the symptomatic relief of cough and colds
• Prescription vitamins and mineral products, except prenatal vitamins and fluoride preparations
• Drugs where the manufacturer requires as a condition of sale any associated tests or monitoring services to be purchased exclusively from that manufacturer or its designee

While these drugs are excluded from basic Part D coverage, drug plans can include them as a supplemental benefit, provided they otherwise meet the definition of a Part D drug. However plans that cover excluded drugs are not allowed to pass on those costs to Medicare, and plans are required to repay CMS if they are found to have billed Medicare in these cases. As of January 1, 2013, Medicare Part D plans may now cover all benzodiazepines and those barbiturates used in the treatment of epilepsy, cancer, or a chronic health disorder. These two drug classes were originally excluded under the MMA of 2003, until their reassignment in 2008 by the Medicare Improvements for Patients and Providers Act.

Plan formularies

Part D plans are not required to pay for all covered Part D drugs. They establish their own formularies, or list of covered drugs for which they will make payment, as long as the formulary and benefit structure are not found by CMS to discourage enrollment by certain Medicare beneficiaries. Part D plans that follow the formulary classes and categories established by the United States Pharmacopoeia will pass the first discrimination test. Plans can change the drugs on their formulary during the course of the year with 60 days' notice to affected parties.

The Plan's tiered co-pay amounts for each drug only generally apply during the initial period before the coverage gap.

The primary differences between the formularies of different Part D plans relate to the coverage of brand-name drugs. Nine out of the ten plans with the highest enrollment increased the number of drugs on their formularies in 2007. Plans have generally made fewer changes for 2008. One exception is SilverScript (Caremark Rx), which significantly increased the number of drugs on its 2008 formulary.

Typically, each Plan's formulary is organized into tiers, and each tier is associated with a set co-pay amount. Most formularies have between 3 and 5 tiers. The lower the tier, the lower the co-pay. For example, Tier 1 might include all of the Plan's preferred generic drugs, and each drug within this tier might have a co-pay of $5 to $10 per prescription. Tier 2 might include the Plan's preferred brand drugs with a co-pay of $40 to $50, while Tier 3 may be reserved for non-preferred brand drugs which are covered by the plan at a higher co-pay, perhaps $70 to $100. Tiers 4 and higher typically contain specialty drugs, which have the highest co-pays because they are generally expensive.

Tier 4 and higher: specialty drugs

By 2011 in the United States a growing number of Medicare Part D health insurance plans â€" which normally includes generic, preferred, and non-preferred tiers with an accompanying rate of cost-sharing or co-payment â€" had added an "additional tier for high-cost drugs," the specialty tier. Most Part D plans have four tiers: tier 1 includes preferred generics, tier 2 includes preferred brands, tier 3 includes non-preferred brands and generics and tier 4 includes specialty drugs.

Number of participants

At the start of the program in January 2006, it was expected that eleven million people would be covered by Medicare Part D; of those, six million would be dual eligible. About two million people who were covered by employers would likely lose their employee benefits.

As of January 30, 2007, nearly 24 million individuals were receiving prescription drug coverage through Medicare Part D (PDPs and MA-PDs combined), according to CMS. There are other methods of receiving drug coverage when enrolled in Medicare, including the Retiree Drug Subsidy. Federal retiree programs such as TRICARE and Federal Employees Health Benefits Program (FEHBP) or alternative sources, such as the Department of Veterans Affairs. Including people in these categories, more than 39 million Americans are covered for prescriptions by the federal government.

As of April 2006, the primary private insurance plans providing Medicare Part D coverage were UnitedHealth with 3.8 million subscribers, or 27% of the total, Humana with 2.4 million, or 18%, and WellPoint with 1 million, or 7%. Companies with the next largest shares were MemberHealth, with 924,100 subscribers (7%); WellCare Health Plans, with 849,700 (6%); and Coventry Health Care, with 596,100 (4%). CMS offers updated enrollment numbers on their website.

Program costs

As of the end of year 2008, the average annual per beneficiary cost spending for Part D, reported by the Department of Health and Human Services, was $1,517, making the total expenditures of the program for 2008 $49.3 (billions). Projected net expenditures from 2009 through 2018 are estimated to be $727.3 billion.

From a budget perspective, Part D is effectively three different programs. Based on 2012 budget numbers:

• About $26 billion is spent for the about 10 million low-income Medicare beneficiaries (20% of those on Medicare) mentioned above and the drug costs of some of the people on Part C. This expense was previously (before Part D was implemented in 2006) mostly covered by Medicaid, the VA, and state pharmaceutical assistance programs. This is not a new expense to the government as of the implementation of Part D.
• About $20 billion is premium support that allows about 10 million middle-income Medicare beneficiaries and the rest of the people on Part C (about half of those on Medicare altogether) get drug coverage. After the first five years of Part D, government-accountability-office research shows that this expense in the Part D budget actually appears to be holding down other Medicare Part costs related to provider services. Although it is much too early to tell, because people are better at taking their medications the middle-income portion of the Part D program may actually pay for itself in the long term.
• About $13 billion of the Part D budget covers re-insurance for catastrophic drug costs as described above. Part D pays 95% of costs over about $6,000 out of pocket a year at retail. This part of the budget helps about 1% of the people on Medicare who are very ill

Cost utilization

Medicare Part D Cost Utilization Measures refer to limitations placed on medications covered in a specific insurer's formulary for a prescription drug plan or Medicare Advantage with prescription drug coverage. Cost utilization consists of techniques that are implemented to reduce the cost to insurers. The three main cost utilization measures are quantity limits, prior authorization, and step therapy.

Quantity limits refer to the maximum amount of a medication that may be dispensed during a given calendar period. For example, a Medicare Part D plan may dictate that it will only cover 90 pills of a given drug within a 30-day period.

A prior authorization requirement is a measure that requires a health care worker to receive formal approval from a plan before it will cover a specific drug. This may be used by insurers for drugs that are often misused or used inappropriately. Prior authorization also helps ensure that patients receive correct medications.

Step therapy is a process whereby a plan requires an individual to try, and prove ineffective, one or more specified lower-cost drugs before a higher-cost drug in the same therapeutic class is approved.

Implementation issues

• Plan and Health Care Provider goals are not aligned: PDP's and MA's are rewarded for focusing on low-cost drugs to all beneficiaries, while providers are rewarded for quality of care â€" sometimes involving expensive technologies.
• Conflicting goals: Plans are required to have a tiered exemptions process for beneficiaries to get a higher-tier drug at a lower cost, but plans must grant exception when medically necessary. However, the rule denies beneficiaries the right to request a tiering exception for certain high-cost drugs.
• Lack of standardization: Because each plan can choose their formulary and tier levels, drugs appearing on Tier 2 in one plan may be on Tier 3 in another plan. Tier 2 drugs may have a different co-pay with different plans. There are plans with no deductibles and the coinsurance for the most expensive drugs varies widely. Some plans may insist on step therapy, which means that the patient must use generics first before the company will pay for higher-priced drugs. There is an appeal process, and the insurance company is required to respond within a short timeframe, so as to not further the burden on the patient.
• Standards for electronic prescribing for Medicare Part D conflict with regulations in many U.S. states.

Impact on beneficiaries

One study published in April 2008 found that the percentage of Medicare beneficiaries who reported forgoing medications due to cost dropped after the implementation of Medicare Part D, from 15.2% in 2004 and 14.1% in 2005 to 11.5% in 2006. The percentage who reported skipping other basic necessities to pay for drugs also dropped, from 10.6% in 2004 and 11.1% in 2005 to 7.6% in 2006. Among the very sickest beneficiaries there was no reduction in the percentage who reported skipping medications, but fewer reported forgoing other necessities to pay for their medicines.

A second study appearing in the same issue of JAMA found that not only did Medicare beneficiaries enrolled in Part D still skip doses or switch to cheaper drugs, many do not understand the program. Another study found that the Medicare Part D prescription benefit resulted in modest increases in average drug utilization and decreases in average out-of-pocket expenditures among Part D beneficiaries Further studies by the same group of researchers indicate that the net impact of Medicare Part D among beneficiaries is a decrease in the use of generic drugs, which is consistent with economic theory, and shows how assessing Medicare Part D is complex.

A further study concludes that although there was a substantial reduction in out-of-pocket costs and a moderate increase in medication utilization among Medicare beneficiaries during the first year after Part D, there was no evidence of improvement in emergency department use, hospitalizations, or preference-based health utility for those eligible for Part D during its first year of implementation. It was also found that there were no significant changes in trends in the dual eligibles' out-of-pocket expenditures, total monthly expenditures, pill-days, or total number of prescriptions due to Part D.

Criticisms

By the design of the program, the federal government is not permitted to negotiate prices of drugs with the drug companies, as federal agencies do in other programs. The Department of Veterans Affairs, which is allowed to negotiate drug prices and establish a formulary, has been estimated to pay between 40% and 58% less for drugs, on average, than Medicare Part D.

Although generic versions of [frequently prescribed to the elderly] drugs are now available, plans offered by three of the five [exemplar Medicare Part D] insurers currently exclude some or all of these drugs from their formularies.…Further, prices for the generic versions are not substantially lower than their brand-name equivalents. The lowest price for simvastatin (generic Zocor) 20 mg is 706 percent more expensive than the VA price for brand-name Zocor. The lowest price for sertraline HCl (generic Zoloft) is 47 percent more expensive than the VA price for brand-name Zoloft."

Estimating how much money could be saved if Medicare had been allowed to negotiate drug prices, economist Dean Baker gives a "most conservative high-cost scenario" of $332 billion between 2006 and 2013 (approximately $50 billion a year). Economist Joseph Stiglitz in his book entitled The Price of Inequality estimated a "middle-cost scenario" of $563 billion in savings "for the same budget window".

Former Congressman Billy Tauzin, Râ€"La., who steered the bill through the House, retired soon after and took a $2 million a year job as president of Pharmaceutical Research and Manufacturers of America (PhRMA), the main industry lobbying group. Medicare boss Thomas Scully, who threatened to fire Medicare Chief Actuary Richard Foster if he reported how much the bill would actually cost, was negotiating for a new job as a pharmaceutical lobbyist as the bill was working through Congress. A total of 14 congressional aides quit their jobs to work for the drug and medical lobbies immediately after the bill's passage.

In response, the Manhattan Institute, a free-market think tank, issued a report by Frank Lichtenberg, a business professor at Columbia University, that said the VA National Formulary excludes many new drugs. Only 38% of drugs approved in the 1990s and 19% of the drugs approved since 2000 are on the formulary.

In 2012, the plan requires Medicare beneficiaries whose total drug costs reach $2,930 to pay 100% of prescription costs until $4,700 is spent out of pocket. (The actual threshold amounts will change year-to-year and plan-by-plan, and many plans offer limited coverage during this phase.) This coverage gap is known as the "Donut Hole". While this coverage gap will not affect the majority of program participants, about 25% of beneficiaries enrolled in standard plans find themselves in this gap. However, the Washington Post reports that upwards of 80% of enrollees are satisfied with their coverage, despite the fact that nearly half had chosen plans that do not cover the "donut hole".

Critics such as Ron Pollack, executive director of Families USA, said in late 2006 that even the satisfied enrollees would not be so satisfied the next year when prices increase. However, a survey released by the AARP in November 2007 found that 85% of enrollees reported being satisfied with their drug plan, and 78% said that they had made a good choice in selecting their plan.

According to a January 2006 article by Trudy Lieberman of Consumers Union, consumers can have up to 50 choices, in hundreds of combinations of deductibles, co-insurance (the percentage consumers pay for each drug); drug utilization techniques (trying cheaper drugs first); and drug tiers, each with their own co-payments (the flat amount consumers pay for each drug). Co-payments differ on whether people buy generic drugs, preferred brands, non-preferred brands or specialty drugs, and whether they buy from an in-network or out-of-network pharmacy. There is no standard nomenclature, so sellers can call the plan anything they want. They can also cover whatever drugs they want.

As a candidate, Barack Obama proposed "closing the 'doughnut hole'" in his campaign agenda, and subsequently proposed a plan to reduce costs for recipients from 100% to 50% of these expenses. The cost of the plan would be borne by the drug manufacturers for name-brand drugs and by the government for generics.

CMS funds a national program of counselors to assist all Medicare beneficiaries, including duals, with their plan choices. The program is called State Health Insurance Assistance Program (SHIP).