Background

The Medicare Modernization Act of 2003^[1] established a voluntary outpatient prescription drug program for Medicare beneficiaries. Coverage is obtained by enrolling in a federally qualified “prescription drug plan” offered by either “stand alone” sponsors (known as PDPs) or by Medicare Advantage plans (MA-PDs, which offer comprehensive coverage encompassing all Medicare benefits, including outpatient prescription drugs).

As of February 2010, the federal Centers for Medicare and Medicaid Services (CMS) reported that 27.7 million Medicare beneficiaries were enrolled in a Medicare prescription drug plan. As of 2010, more than 1,500 plans were offered nationally; on average, beneficiaries in most states had a choice of more than 45 stand-alone plans.^[2] Part D plan sponsors offer plans that provide either the standard benefit required under federal law or an alternative coverage arrangement of equal value (known as “actuarially equivalent” coverage). Plan sponsors can offer plans with more generous coverage.^[3] Approximately 10% of Medicare beneficiaries continue to lack prescription drug coverage under Part D or through a separate a retiree health benefit plan offered by a former employer, union or the VA.

Over the years a number of issues have arisen under Part D related to coverage gaps for beneficiaries and low-income beneficiaries:

Coverage gaps for beneficiaries with high prescription drug costs

The first concerns the coverage “gap” (sometimes referred to as a “donut hole”) for Medicare beneficiaries whose prescription drug costs exceed the program’s “initial coverage limit;”^[4] as of 2010 the standard Medicare Part D prescription drug benefit plan applied a $310 deductible as well as a 25% coinsurance requirement, up to an “initial coverage limit”^[5] of $2,830 in total drug costs. When this “initial coverage limit” is reached, beneficiaries must spend another $3,610 in payments entirely out-of-pocket (not including the premiums they pay) before coverage resumes.^[6] This brings total out-of-pocket spending for covered services (not including the premium payments) to $4,550 in 2010 (the initial coinsurance, the deductible, and the $3,610 in out-of-pocket payments). This catastrophic coverage limit grows annually with medical price inflation. At the point at which out-of-pocket costs reach the catastrophic coverage limit, coverage increases to 95% of total covered drug costs.^[7]

Some PDPs and MA-PDs have elected to partially fill this coverage gap by using an “actuarial equivalency” plan design that adjusts other aspects of Part D coverage in order to fill a portion of the gap. The actuarial value of the plan remains the same, but under an equivalent plan, the beneficiary may not experience a period totally without coverage. But most PDPs do not offer gap coverage; those that do may limit coverage to generic drugs, or offer a subset of brand-name drugs in the gap, raising additional considerations for beneficiaries who need drugs for which there is no generic equivalent.

The U.S. Department of Health and Human Services (HHS) estimates that in 2007 over 8 million elderly beneficiaries reach the coverage gap, experiencing an average cost exposure of $340 per month or $4,080 annually.^[8] Research cited by HHS suggests that the coverage gap has a significant impact on prescription drug use.

Low-income beneficiaries

The second problem is the relatively low enrollment among lower income Medicare beneficiaries who qualify for “low income subsidies” (LIS). Part D covers Medicare beneficiaries who also receive Medicaid, in the form of either full Medicaid coverage or Medicaid assistance with Medicare’s cost-sharing requirements. For these populations, enrollment in Part D occurs automatically. In addition, Part D provides subsidies to Medicare beneficiaries who do not receive Medicaid but who have low incomes and limited assets (family incomes under $16,245 for individuals in 2009 and assets less than $12,510).^[9] The LIS program was estimated to reach millions of persons, but as of 2009, the program served about 20% of beneficiaries eligible for assistance.^[10]

Once enrolled in Part D, beneficiaries who receive premium and cost-sharing assistance through Medicaid or an LIS are eligible to enroll only in a qualified Part D prescription drug plan whose premium falls below a specified annual “benchmark” price, or pay the difference n the premium amount.^[11] There may be little choice among benchmark plans because in some states there are few offerings. In addition, if a beneficiary is enrolled in a benchmark plan and the plan’s premium rises above the benchmark, the beneficiary will be involuntarily disenrolled and re-enrolled automatically in another plan, whose rules and provider network may differ from the previous plan, thereby potentially disrupting care. Alternatively they may be required to choose a new plan or pay a premium.

Changes Made by the Health Reform Law
Pub. L. 111-148, §3301 and Pub. L. 111-152 §1101

Closing the Coverage Gap

• The law phases out the coverage gap^[12] by reducing over time the amount of cost sharing incurred by beneficiaries for both generic and brand name drugs in the coverage gap. Therefore, as of 2020, the cost sharing for drugs under the coverage gap would equal the cost sharing obligation during the initial coverage limit (i.e., 25%).^[13] The law would also slow the rate of growth in the catastrophic coverage limit and would count both beneficiary cost-sharing and the value of manufacturer drug discounts in calculating when the coverage limit is met. In addition, the discounts will count toward beneficiary out-of-pocket costs.

Prescription Drug Discount Program

• The legislation establishes a “coverage gap discount program”^[14] as a condition of Part D program participation for pharmaceutical manufacturers.
•  The law would apply the discount program beginning January 1, 2011, and would continue even after the coverage gap is closed (that is, when cost-sharing is reduced to the same 25 percent requirement applicable to initial coverage).^[15] For 2010, the program would pay a $250 rebate to beneficiaries who had incurred sufficient expenses to enter the coverage gap.^[16]
• The legislation requires pharmaceutical manufacturers to enter into written agreements that provide “applicable beneficiaries” with access to “discounted prices” for “applicable drugs” offered by the manufacturer.^[17] The discounted prices must be available to the beneficiary at the point of sale, that is, at the pharmacy or when a mail order is placed.^[18]
• The law assigns program administration to contractors deemed qualified by the Secretary. Contractors are responsible for determining the amount of the discounted price and establishing procedures for point-of-sale discounts and program administration.^[19]
• The legislation defines an “applicable beneficiary” as an individual who is enrolled in a PDP or MA-PD plan when the drug is dispensed, who is not receiving subsidized coverage, and who is in the coverage gap in that the individual has reached the initial coverage limit but who has not exceeded the annual out-of-pocket threshold before catastrophic coverage begins.^[20] The discount does not apply to individuals not enrolled in a Part D discount plan.
• The legislation defines the term “applicable drug” as a covered part D drug that is on the beneficiary’s plan formulary or is covered under the plan,^[21] limiting the drug to drugs under the plan that are covered under a formulary or through an exceptions process.
• The law defines the discount as 50% off the negotiated price of the applicable drug under Medicare’s negotiated pricing system.^[22]

Treatment of Low-Income Beneficiaries

The legislation expands assistance and information for low-income beneficiaries:

• The law exempts premium rebates from income when calculating beneficiary subsidy eligibility.^[23]
• The law waives de minimus premiums and incentivizes plans to waive de minimus payments by increasing their share of the auto-enrolled population (i.e., beneficiaries who are automatically assigned to plans that meet benchmark price requirements).^[24]
• The law provides safeguards in the case of low income beneficiaries whose enrollment must change because their prior plan no longer offers coverage at a “benchmark” price, including the provision of information about formulary differences and how those differences might affect the individual’s “drug regimen.”^[25]
• The law provides an extension of subsidies for low income persons who are widowed during a period of eligibility^[26] and authorizes funds to help conduct low-income subsidy outreach programs to identify eligible but unenrolled persons.^[27]

Implementation

Agency

The Centers for Medicare and Medicaid Services (CMS) oversees the Medicare program, including the prescription drug program.

Key Dates

Key timetable issues will be the 2010 rebate due in July 2010 and having the permanent discount program up and running in time for January 2011. In addition, the changes aimed at assisting low-income beneficiaries take effect rapidly.

Process

The health reform law does not provide specific direction to CMS regarding the administrative process used to implement the law. However, the Secretary is directed to enter into manufacturer agreements to implement the discount programs and must develop a model agreement in consultation with manufacturers and must allow comment on the model. Beyond these directives, CMS has the discretion to use a range of tools to implement the reforms, such as publishing regulations in the Federal Register with a public notice and comment period or using other types of approaches such as posted policy instructions, policies published and disseminated through the agency’s website, and other approaches. The CMS website can be regularly checked for updates.

Key Issues

• Program standards: What standards will be established for the operation of the drug discount program, including interpretation of provisions aimed at clarifying the beneficiaries and drugs to which the program applies and how the discount will be calculated?
• Model agreements: What will the HHS model agreements with prescription drug manufacturers look like and what public comment opportunity will be given?
• Contractors: What standards will be developed for drug discount contractors and how will contracts be negotiated?
• Data collection: What data will HHS require from manufacturers and what will be the procedures for collection and transmission?
• The rebate: How will the 2010 rebate be implemented and what coordination will be undertaken with the Social Security Administration to assure that the rebate is transmitted?
• Information for low income beneficiaries: What information will be developed and how will this information be transmitted to beneficiaries assigned to other plans?
• De minimus standards and auto-enrollment: How will HHS define de minimus premium payment levels for purposes of assisting low-income subsidy beneficiaries, and how will the auto-enrollment incentive be implemented to reward plans that waive de minimus premiums? How will beneficiaries be apprised of these changes?
• Outreach: How will the low-income beneficiary outreach program be implemented?

Recent Agency Action

The Centers for Medicare and Medicaid Services issued guidance to Part D plan sponsors for implementation of discount drug program for beneficiaries in the “donut hole” due to go into effect in 2011. In a notice in the Federal Register, CMS also issued the draft model agreement that drug manufacturers of applicable Part D drugs will sign in order to participate in the discount program and will host a public meeting about it on June 1.

Federal Register notice: Medicare Coverage Gap Discount Program Model Manufacturer Agreement ^[1]

Authorized Funding Levels

Because Medicare is a legal entitlement, the reforms in the Part D program are not subject to upper aggregate spending limits. The law authorizes mandatory spending of approximately $75 million on beneficiary outreach and provides that funds are available until spent.

[1] P.L. 108-173.
[2] Kaiser Family Foundation, The Medicare Prescription Drug Benefit (Updated February 2010) http://www.kff.org/medicare/advantagetrackingreport_current.cfm ^[2] (Accessed April 20, 2010).
[3] Kaiser Family Foundation, The Medicare Prescription Drug Benefit (Updated November 2009) http://www.kff.org/medicare/upload/7044-10.pdf ^[3] (Accessed April 4, 2010).
[4] SSA §1860D-2(b)(3).
[5] SSA §1860S-2(a)(3).
[6] Patricia Davis et. al. Medicare: Changes Made by the Reconciliation Act of 2010 to H.R. 3950 (CRS, Washington DC, March 23, 2010).
[7] Kaiser Family Foundation, The Medicare Prescription Drug Benefit (Updated November 2009) http://www.kff.org/medicare/upload/7044-10.pdf ^[4](Accessed April 4, 2010).
[8] Health Reform.gov. Health Reform and Medicare http://www.healthreform.gov/reports/medicare/index.html ^[5](Accessed April 4, 2010).
[9] Kaiser Family Foundation, The Medicare Prescription Drug Benefit (Updated November 2009) http://www.kff.org/medicare/upload/7044-10.pdf ^[4](Accessed April 4, 2010).
[10] Kaiser Family Foundation, The Medicare Prescription Drug Benefit (Updated November 2009) http://www.kff.org/medicare/upload/7044-10.pdf ^[4](Accessed April 4, 2010).
[11] Patricia Davis et. al. Medicare: Changes Made by the Reconciliation Act of 2010 to H.R. 3950 (CRS, Washington DC, March 23, 2010).
[12] Pub. L. 111-152 §1101 ^[6], amending SSA §1860D-43 as added by §3301 Pub. L. 111-148 ^[7].
[13] §1101, Pub. L. 111-152 ^[6].
[14] SSA §1860D-43 as amended by §1101 ^[6].
[15] SSA §1860D-43 (1).
[16] §1101, Pub. L. 111-152 ^[6].
[17] SSA §1860D-14A(b).
[18] SSA §1860D-14A(b)(1)(B).
[19] SSA §1860D-14A(b).
[20] Pub. L. 111-148 §3301 ^[7], adding SSA §1860D-43(g).
[21] Pub. L 111-148 §3301 ^[7], adding §1860D-43(g).
[22] Pub. L. 111-148 §3301 ^[7], adding §1860D-43(g).
[23] P.L. 111-148 §3302 ^[8], amending SSA §1860D-14(b).
[24] P.L. 111-148 §3303 ^[9], adding SSA §1860D-14(a)(5).
[25] Pub. L. 111-148 §3305 ^[10], amending SSA §1860D-14.
[26] Pub. L. 111-148 §3304 ^[9], amending SSA §1860D-14.
[27] Pub. L. 111-148 §3306 ^[10].