MEDICARE PART D: A NEW PRESCRIPTION
FOR PRESCRIPTION DRUGS
THE LAW OFFICE OF WILLIAM J. BRISK
1340 Centre Street, Suite 205
Newton Center, MA 02459
November 7, 2005
Medicare was created in 1965 to cover hospitalization and some outpatient health services for Americans over 65 years of age. It has become the major insurer of medical care for elders in America yet it never provided prescription drug benefits for outpatients. That will change on January 1, 2006 when Medicare launches a controversial and complicated program designed to protect Medicare recipients from budget-breaking costs for medications.
The revolution in American medicine of the past five decades owes much to an often overlooked factor, growing dependence on pharmaceuticals to prevent, control, and even cure chronic ailments such as diabetes, hypertension, asthma, Parkinsons, and heart disease. Drug therapies are used with increasing effect to treat or contain cancer and AIDS. Other medications attack symptoms of many common maladies and allergies, etc. One cannot watch American television without becoming aware of many heretofore hidden ailments, from acid reflux to erectile dysfunction, for which medications have been developed. When one considers how much Americans depend on medications to maintain their health, it is no surprise that prescription drugs now rank as the second greatest out-of-pocket health expense borne by Americans over 65.
Passage in 2003, of the Medicare Prescription Drug, Improvement, and Modernization Act (designed specifically to defray costs of prescription medications for seniors) was prompted by seniors¡¦ dissatisfaction that Medicare, because it did not cover outpatients¡¦ prescription needs, no longer provided the basis for affordable good health. The new law created ¡§Medicare Part D¡¨ which is already inviting enrollment for the year 2006. This report may help you determine, in the face of your other healthcare options, whether paying for Medicare Part D makes sense for you.
II. Medicare D - Definition of the Plan
Medicare Part D is voluntary. Those who anticipate high medication costs may purchase medication benefits while other seniors, who feel they will not benefit from its prescription drug coverage, may choose not to enroll and not incur Part D¡¦s costs. While most commercial health insurance programs attempt to ¡§cherry pick¡¨ the healthiest members, all Medicare members, regardless of their health, may obtain Part D. Even persons with catastrophic medication expenses are eligible for this new benefit. Guaranteeing coverage without compelling participation are laudable but incompatible goals which jeopardize Part D¡¦s fiscal goal, to be self-funded, i.e. collect sufficient premiums to pay benefits and cover administrative expenses. In the long run, most commentators believe that without raiding the general treasury or increasing premiums beyond the means of most Medicare patients, Part D¡¦s success will depend on inducing reasonably healthy seniors to pay premiums greater than the benefits they receive.
Part D offers a regular pricing scheme as well as a subsidized benefit for low-income individuals. To counter the inherent adverse selection bias (that most people who enroll will derive more benefits from the program than they pay into it), Part D penalizes delayed enrollments in the plan. A late enrollee will be accepted regardless of his/her medical condition, but subject to an increased premium as long as the individual remains enrolled in Part D. This penalty is waived for individuals who had ¡§creditable¡¨ coverage prior to their enrollment in Part D, that is if they were previously covered for some medications under an employer-sponsored plan, medigap insurance, or HMO. All private or retiree plans with existing prescription drug coverage are required to notify their members as to the ¡§creditability¡¨ of the plan in comparison to Part D during Fall 2005. For those eligible seniors who enroll in Part D between November 15 ¡V December 31, 2005, coverage under the plan will be effective January 1, 2006. Enrollment in Part D is open until May 15th 2006, with coverage beginning on the first day of the subsequent month of enrollment. (Example: enrollment on the15th of January would result in coverage effective February 1st).
A. Standard Coverage under Part D
The standard (i.e., nonsubsidized) Medicare Part D provides the following coverage:
ƒæ Initial Benefit. The patient pays monthly premiums which will vary by plan but the average cost is expected to be $35 per month. As a deductible, the patient pays the first $250/year for medications. Medicare pays 75% of the next $2,000 in drug expenditures. The remaining 25% is billed directly to the patient. Example: If Mia¡¦s prescriptions cost exactly $2,250 in a year, she will pay $1170 (the first $250 plus one-fourth of $2,000 plus premiums of $420) and Medicare will pay $1,500. Participating in Medicare Part D saves Mia $1,080/year as opposed to paying $2,250 for her medications out-of-pocket.
ƒæ ¡§Hole in the Donut.¡¨ Medicare Part D does not contribute anything towards annual prescription drug costs between $2,250 and $5,100/year, of which $2,850 becomes the sole responsibility of the patient. Thus, if Nomar¡¦s medications cost exactly $5,100 in a year, he will pay $4,020 (the $1,170 described above plus the additional, uninsured, cost of $2,850). Medicare still pays $1,500 towards his total bill and Nomar still reaps a net benefit of $1,080.
ƒæ Catastrophic Coverage. Part D pays all but 5% of the cost for prescription drug costs that exceed $5,100, leaving enrollees responsible for only 5% of the costs exceeding $5,100. If prescribed medications cost Shanda $20,000/year, her drug costs will be the $4,020 calculated above plus 5% of the next $14,900 or $745. Medicare will cover $15,655, the $1,500 calculated above plus $14,155 (95% of $14,900).
The following chart, derived from a forthcoming article to be published in the NAELA Journal by Professor Richard L. Kaplan of the University of Illinois School of Law, expresses that information graphically:
B. Subsidized Coverage Under Part D
To qualify for a subsidy for the Part D premium an individual must be classified as low-income. Individuals who are both enrolled in Medicare and receive Medicaid benefits while living in a nursing home automatically qualify for coverage under Part D and are not required to pay any of their prescription drug expenses. Of low-income persons not in nursing homes, there are three income categories. The first is comprised of individuals on Community Medicaid and whose incomes are under 100% of the poverty level ($9,810 for an individual, $13,070 for a couple). They receive free prescription drug coverage under Part D (no premiums and no deductible) but must pay a $1 co-pay for generic prescription drugs and a $3 co-pay for brand-name prescriptions until out-of-pocket costs reach $3,600. After reaching the out-of-pocket maximum, the member has no liability. Maximum cost to the member will be $3,600.
Individuals with incomes under 135% of the poverty level ($13,160 for an individual, $17,561 for a couple) and who have assets of less than $7,500 (individual) or $12,000 (couple) also qualify for free coverage under Part D (no premiums and no deductible) but are required to pay a $2 co-pay for generic prescriptions and a $5 co-pay for brand-name prescriptions until reaching an out-of-pocket maximum of $3,600. After reaching this point, there is no further cost to the senior. Maximum cost to the member will be $3,600.
Those seniors whose incomes fall below 150% of the poverty level ($14,595 for an individual, $19,485 for a couple) and have assets less than $11,500 (individual) or $23,000 (couple) are eligible to receive some low-income assistance with Part D premiums. Based on the amount of income received, these individuals pay a monthly premium between $0 and about $28, as well a deductible of $50. The individual is then responsible for 15% of drug expenditures until reaching the out-of-pocket maximum of $3,600; after that point, the member pays a $2 co-pay for generic prescriptions and a $5 co-pay for brand-name prescriptions. Maximum cost to the member will be about $4,000 plus additional $2/$5 co-pays.
Seniors interested in Part D who believe that their situation may qualify them for a subsidy should apply by contacting the Medicaid or Social Security office. Exceptions and exclusions are expected when determining eligibility for subsidies, so seniors who may be unsure as to whether they meet the qualifications for assistance are strongly urged to apply regardless. Seniors must apply for the subsidy first, and then for a particular plan.
III. Structure of Medicare Part D
The Part D plan will be sponsored nationally by various competing Prescription Drug Plans, or PDPs. The Centers for Medicare & Medicaid Services (CMS) mandate that each region within the U.S. offer at least 2 PDPs for Part D enrollees to choose from. Each PDP will offer a formulary of drugs, as well as a list of participating pharmacies associated with the plan. By law, a Part D drug is any drug available only by prescription, approved by the Food and Drug Administration (FDA), used and sold in the United States, used for a medically accepted condition for which a prescription is required, and for which payment is required under Medicaid. Excluded from coverage are categories of drugs for which Medicaid payment is optional or those drugs for which payment could be made under Medicare Part A or Part B. Among the drugs excluded from coverage under Part D, those of potential significance to elders include drugs for weight gain, (used in connection to treating weight loss due to cancer etc.), barbiturates, (used to treat seizures in older people), and benzodiazepines (used to treat acute anxiety, panic attacks, seizure disorders, and muscle spasms). Many of these excluded medications are used by nursing home residents.
The PDPs that offer Part D plans are not required to pay for all covered Part D drugs. Instead, they will devise a list of covered drugs for which they will make payment, called formularies. Each PDP¡¦s formulary must follow the formulary classes and categories established by the United States Pharmacopoeia and be approved by the CMS. In addition, each formulary must contain a minimum of 2 drugs for each category/class identified by the United States Pharmacopoeia. The two drugs per category/class is meant to be a floor rather than a norm or a ceiling. The CMS expects that most formularies will contain more than two drugs per category to maintain good clinical standing. Notably, plans can change the drugs on their formulary during the course of the year as long as they provide all affected parties with 60 days notice. The CMS requires each PDP to make their formularies available to the public beginning in October 2005. Specific PDP formularies can be accessed at this time by logging on to Medicare¡¦s website at www.medicare.gov.
An enrollee of Part D who requires a prescription drug not included on their PDP¡¦s formulary, or who would like to have a drug moved to a different tier in the cost structure, may enter the ¡§exceptions process¡¨ with her PDP, and if that is unsuccessful, may further appeal the request for change. The first recourse should be to contact the plan and initiate an ¡§exception,¡¨ under which a non-formulary or non-preferred drug might be covered under certain conditions depending on the flexibility of a given plan¡¦s exceptions criteria. If the plan denies the exception, the second recourse is a formal appeal to the CMS, which acts independently to review the decisions of a PDP. Unfortunately, the CMS places the burden of the appeal process on both the beneficiary and her acting physician, who must corroborate that a denial of the drug in dispute would result in severe risk to the health of the patient. Such a statement must be substantiated by documentation and medical records provided by the physician to the CMS, a requirement that will likely tax both the time and patience of the physicians dedicated to serving elders.
IV. Who Should Apply For Standard Part D Benefits?
Another way to explain the impact of Part D is to say that enrollees will pay on average monthly premiums of $35 and an annual deductible of $250, totaling $670/year before they receive any benefits. It should follow, then, that seniors anticipating prescription drug costs of less than $670 per year won¡¦t benefit from Medicare Part D. Seniors not dependent on significant medications may, nevertheless, enroll for three reasons: 1) to protect against potential, particularly catastrophic, expenses in the next year, 2) to avoid the penalties assessed on future premiums against those who fail to enroll now, or 3) because they don¡¦t understand the program.
Professor Kaplan elaborated the following chart to calculate net savings for those covered by Part D as opposed to paying for drugs out-of-pocket:
NET SAVINGS BASED ON ANNUAL PRESCRIPTION COSTS
Annual Drug Costs Enrollee Pays* Net Savings
$500 $732.50 0
1,000 857.50 $143.00
1,500 982.50 517.50
2,000 1,107.50 892.50
2,500 1,420.00 1,080.00
3,000 1,920.00 1,080.00
5,000 3,920.00 1,080.00
10,000 4,265.00 5,735.00
* Includes $250 annual deductible and estimated $420 in premiums.
Because Part D participants must pay at least $670 (premiums plus deductible) before receiving benefits, at first glance it seems that anyone with expected drug costs below that figure would be better off not buying into Part D. There are two drawbacks to this approach. First, the program penalizes late-joiners by increasing premiums by 1% for every month of eligibility in which the participant did not join. For example, if a person decides to purchase a Part D Plan 60 months after eligibility, then for as long as she remains a member her premiums will be 60% higher than they otherwise would have been.
The second reason to consider buying into Part D even if costs are below $670 per year is that the ¡§open enrollment¡¨ period every year for all plans will only be from November 15 ¡V December 31. If the individual has increased costs in any year, she will have to pay out of pocket until she can enroll in November.
For these reasons, a person with low prescription costs may want to purchase the lowest-cost plan possible, and if his prescription costs increase, he can switch to a more appropriate plan during the next open enrollment period.
V. Medicare D vs. Existing Prescription Drug Policies
For the 59% of senior Medicare beneficiaries who already have some type of existing prescription drug coverage, deciding whether to stay with their current coverage or replace it with Medicare Part D poses some difficult challenges. Medigap policies that currently offer a prescription drug benefit will no longer be available for enrollment of new members after the advent of Part D in January 2006 (but people buying into the plans through December 31 can keep them indefinitely). It is not a viable option for seniors to maintain ¡§double¡¨ prescription coverage by maintaining a private insurance policy that covers pharmaceuticals while opting for coverage under Part D. Therefore, any senior interested in a private insurance supplement with a prescription drug benefit must enroll by December 31, 2005, and those already enrolled must decide between Part D and their existing coverage. People enrolled in a private prescription plan before January 2006 can later decide to drop the private coverage and instead buy into Part D. They will not incur the penalties described above for joining late, so long as their private prescription coverage is deemed ¡§creditable.¡¨ Insurance companies are sending letters to customers during Fall 2005 to indicate whether the plans are creditable. To date, we know that the following plans are creditable: Blue Cross / Blue Shield¡¦s Medex Gold, GIC, AARP, VA, TriCare, and Federal Employee Health Benefits plans.
Prescription drug coverage obtained through employer-sponsored plans, private medigap insurance, or senior HMOs vary widely ¡V especially in terms of premiums and the extent of medication coverage. For individuals with existing prescription drug benefits, choosing Medicare Part D will depend upon comparing its plans with that of their existing coverage as well as guessing whether their current coverage will continue in its present form. Since MediGap plans that offer prescription drug coverage will not be available for enrollment after January 2006, it is reasonable to assume that the elimination of potential consumers will result in a potentially substantial increase of the existing premiums.
A. Employer-Sponsored Retiree Plans
Prescription coverage in employer-sponsored retiree health insurance policies varies greatly from employer to employer and even from year to year in some cases. Most however cover at least some medications, but the list of approved pharmaceuticals may differ between providers, as well as the co-payment levels for individual prescriptions and monthly policy premiums. Depending on the extent of their present coverage for prescription drugs, some seniors will decide to maintain existing employer-sponsored coverage rather than opt for Medicare Part D. The particular advantage of Medicare Part D over almost any type of employer-sponsored plan is that Medicare¡¦s prescription drug benefits are federally regulated. Also, most employer-sponsored plans cap catastrophic costs, including medications.
Employer-based plans are under no legal obligation (barring union contracts or other binding arrangements) to provide drug coverage. For many companies, when budgetary cutbacks occur, health benefits, as a singularly expensive fringe benefit, are often among the first costs scrutinized. Companies, moreover, are more likely to curtail benefits of retirees than reduce benefits for present staff. The Equal Employment Opportunity Commission (EEOC) now allows employers to reduce or eliminate company-provided health benefits to Medicare-eligible retirees, reversing prior EEOC policy, which had labeled such changes violations of the Age Discrimination in Employment Act. As a result, retirees¡¦ health benefits are increasingly targeted by companies for premium increases, bigger co-payments, and reduced benefits.
Those presently depending on employer-sponsored programs may want to investigate their current medication benefits and compare that with Part D coverage. For retirees leaning towards keeping their current plans, it is vital to know whether Medicare deems the coverage creditable.
B. Medigap Insurance
To insure against gaps in Medicare coverage, many seniors purchase private insurance policies referred to as ¡§medigap¡¨ insurance. Since medigap policies are not subsidized by the federal government, the policy holder bears the full cost of such policies. These policies come in standardized versions, the most comprehensive of which offer prescription drug benefits. The extent of coverage for prescription drugs varies from policy to policy, some capping benefits at $1,250 per annual expenditure, after an annual deductible of $250 has been met and a 50% co-insurance amount has been applied.
The educated consumer now has to compare medigap policies with the prescription drug benefits available to Medicare Part D enrollees. The most comprehensive medigap plan available for Massachusetts seniors is Blue Cross/Blue Shield¡¦s Medex Gold (other companies offer similar policies) which offers a full, uncapped prescription drug plan. On March 15, 2005, Medex Gold charged a monthly premium of $523.13 per month and imposed a deductible of up to $280 per year. After the deductible, Medex Gold pays 80% of the cost of brand name drugs, but 100% of the cost of generic drugs.
Should Medex customers maintain their expensive Gold policies or reduce their coverage to similar policies which do not cover outpatient medications (such as Medex Bronze) now that Medicare Part D promises to cover most of their pharmaceuticals? Annual premiums for Medex Gold amount to $6,277.56. Deductibles of up to $280 yearly raise the total cost to $6,557 per year. The cost of Medex Bronze is considerably less, only $138.41 per month or $1,661 annually (plus some out-of-pocket costs), a savings of $4,896/year if one is willing to forego prescription coverage. For consumers who want a Blue Cross Blue Shield Medigap policy, the choice is between purchasing the Bronze plan together with a Part D plan OR buying a Medex Gold policy. The following chart shows the costs of these plans for different levels of medication usage. The Part D figures use national average figures.
Cost of Prescriptions Under Part D, Member Pays With Part D + MedEx Bronze, Member Pays With MedEx Gold (no Part D), Member Pays
$50,000 $6319 $7980+ $6557+
$40,000 $5765 $7426+ $6557+
$30,000 $5265 $6926+ $6557+
$20,000 $4765 $6426+ $6557+
$15,000 $4515 $6176+ $6557+
$10,000 $4265 $5926+ $6557+
$5100 $4020 $5681+ $6557+
$2250 $1170 $2831+ $6557+
$670 $670 $2331+ $6557+
The Bronze and Gold figures account for premiums and deductibles, and the ¡§+¡¨ signs indicate co-pays, which cannot be calculated in advance. As the chart shows, where raw pharmaceutical costs are below $20,000 annually, it is more economical to purchase Bronze and a Part D Plan. At about $20,000, it becomes beneficial to switch to Gold. As described above, enrollment in Gold for new members is through December 31, 2005 only. People already enrolled in Gold do not have to make a change.
An exception to this general guide would be that persons who expect to rely heavily on name-brand medications, because they will have a 20% co-pay under the Gold plan on those, might be better off with Bronze and a Part D Plan. That decision would need to be made on a case-by-case basis.
C.Health Maintenance Organizations (HMOs)
About a sixth of Medicare beneficiaries nationwide supplement coverage through HMOs, to which Medicare pays a per capita fee in lieu of paying directly for medical procedures, etc. The superior reputations of HMOs in the basically urban Commonwealth accounts for the fact that roughly one half of supplemental policies written in Massachusetts are tied to HMOs. Initially, HMOs were the way to cover medications. HMOs generally provided 90 day supplies of brand-name pharmaceuticals for as little as $5 each. In the past two years, HMOs have raised the prescription co-pays to as much as $25 and have required patients to accept many generics. HMOs have not (yet) capped prescription coverage for catastrophic cases, but some worry that the physicians whose livelihood may depend upon an HMO¡¦s solvency might be less inclined to write expensive prescriptions. For seniors whose HMOs offer prescription coverage, they should strongly consider remaining with the HMO rather than switching to a different supplemental plan and a Part D plan.
D. Prescription Advantage
The Commonwealth¡¦s bulk purchasing plan will no longer serve as a primary source for prescription coverage. Instead, it will provide ¡§wrap-around coverage,¡¨ meaning that Prescription Advantage will provide financial assistance to its members to ensure that the individual is not paying any more for her medication under her Part D plan than she was paying through Prescription Advantage.
E. Medicaid and the ¡§Dual Eligibles¡¨
Traditionally, persons who qualify for medical assistance (¡§Medicaid,¡¨ known in Massachusetts as MassHealth) received almost all their medication benefits through that program, or, if their supplemental coverage continued, Medicaid covered all uninsured costs. On January 1, 2006, however, persons dually eligible for both programs will be switched to Medicare for their primary prescription benefits. Even more dramatically, nursing home patients over 65 will automatically be switched from MassHealth prescription benefits to a Medicare D Prescription Drug Plan (PDP) of their ¡§choice¡¨ for their prescription drug needs. Either the Centers for Medicare and Medicaid Services or a local agency will assign PDPs randomly within each nursing home, adding to their administrative burdens. Some commentators worry that Medicare¡¦s benefits will be watered down not only for nursing home residents but for others in the program when the coverage shifts and that Medicare is likely to impose new restrictions almost immediately.
VI. Assistance with Choosing a Plan
In the Newton zip code alone, there are 61 plans available. Seniors can obtain free, one-on-one counseling with counselors from the state¡¦s program Serving the Health Information Needs of the Elderly (SHINE). Shine volunteers will be available at local senior centers and councils on aging. Seniors should call for an appointment. Elders can also call 1-800-Age-Info (the Executive Office of Elder Affairs) requesting a schedule of availability.
Elders and their advisors need to understand Medicare D which is destined to become the primary insurer for elders¡¦ medication costs. The program is unduly complicated, the result of a number of legislative compromises. But even more complicated is how it will work with existing programs. This primer may help you decide whether to rely on your existing coverage (if it includes medications) or on Medicare¡¦s new plan. Since most observers recognize that Part D may not be fiscally sound, no matter how closely you study it now, you must be prepared for changes in the future.