Medicare's New Prescription Drug Benefit: The Good, the Bad, and the Incomprehensible

Andy Calman, MD, PhD

By now you've heard about the Medicare Modernization Act of 2003, the most important Medicare legislation since the program was created in 1965. Here's a quick quiz.

The Medicare Modernization Act is:
a. An imperfect but substantial prescription drug benefit that will help most seniors
b. An interim fix to the physician fee schedule
c. A shameless giveaway to the HMOs and pharmaceutical companies
d. Part of the House Republicans' agenda to privatize government, and the beginning of the end of fee-for-service Medicare
e. An important piece of legislation that physicians had better understand
f. All of the above

If you answered (f), you've been paying attention. If not, don't feel bad; both the popular and medical press have failed to explain the details and implications of this far-reaching legislation. Perhaps this is not surprising, since the bill includes 415 pages of densely packed legalese. Even CMS's internal executive summary (not available to the public) is 150 pages long!

In this, the first of three articles on the Medicare bill (to follow in future issues of San Francisco Medicine), I'll discuss the new Medicare prescription drug coverage (Title I of the bill). The second article will address the new Medicare Advantage HMO/PPO Plans. (Did you think Medicare HMOs were dead? Think again.) The third article will cover the dozens of other provisions in the new law, many of which may affect your practice.

The most widely publicized (and most politically popular) aspect of the Medicare Modernization Act is the new Medicare Part D, providing prescription drug benefits for the first time to most Medicare beneficiaries. The structure of the benefit is confusing and counterintuitive, and arose out of the desire of the House Republicans to limit the cost of the program to $400 billion over 10 years. I'll explain the basic benefit available to middle-class and affluent Medicare beneficiaries, then discuss the new subsidies for lower-income seniors and disabled, but first, for your information, it might be useful to know what the income thresholds are for the drug subsidies:

• 100 percent of federal poverty level: $8,980 per individual or $12,120 per couple.
• 135 percent of federal poverty level: $12,123 per individual or $16,362 per couple.
• 150 percent of federal poverty level: $13,470 per individual or $18,180 per couple.

Let's proceed. In order to access Medicare Part D, beneficiaries must enroll with a private or "fallback" drug plan (administered by insurance companies, pharmacy benefit management companies, pharmacy networks, Medicare HMOs or PPOs and approved by CMS), and pay a new Part D premium, estimated to be about $35 per month. The patient pays the first $250 of annual drug costs as a deductible. For the next $2,000 in costs, the plan pays 75 percent, with the patient contributing 25 percent coinsurance. The plan pays nothing for the next $1,350 (the hole in the Part D doughnut). However, after annual drug costs hit $3,600, the plan pays 95 percent of costs with no upper limit.

The value of the prescription drug benefit under this confusing scheme thus depends on one's annual drug expenses. A senior with $2,250 in annual costs will pay $420 in premiums, a $250 deductible and $500 coinsurance; the plan covers 48 percent of her cost. If her total costs are $3,600 for the year, Part D ends up covering only 30 percent, because of the doughnut hole. On the other hand, a senior with catastrophic drug costs of $6,000 per year would get 56 percent of his costs paid by Part D. Not perfect, but a lot better than the zero dollars he or she receives under the current Medicare system.

Low-income seniors receive a generous subsidy, which reduces or eliminates their premiums, coinsurance and deductibles. Beneficiaries with income less than 135 percent of the federal poverty line (FPL), and whose assets are less than 300 percent of the SSI maximum, pay no premiums, no deductibles and no "doughnut hole" (i.e., their drug expenses between $2,250 and $3,600 of annual costs are fully covered). They do pay a small co-pay: for those under 100 percent of FPL, co-pays are $1 for generics and $3 for brand-name drugs. This rises to $2 and $5 for those with income between 100 and 135 percent of FPL. For incomes between 135 percent and 150 percent of FPL, there is a sliding-scale monthly premium, a $50 deductible (instead of $250), and 85 percent coverage in the "doughnut hole," with $2 and $5 co-pays above $3,600 of annual costs. Clear enough?

Dual-eligible beneficiaries (Medicare and Medi-Cal) will receive the new Part D benefit with the subsidies discussed above, and will no longer receive their prescription drug coverage through Medi-Cal.

Unfortunately, there are two major trade-offs in the new plan. First, the private insurance plans that will administer the prescription drug benefit are free to have restrictive formularies and coverage policies, as long as they offer at least one drug in each category and class as defined by USP and approved by CMS (there is an appeal mechanism for beneficiaries who need nonformulary drugs).

Second, although the insurance companies are free to negotiate lower prices with the pharmaceutical companies, CMS is barred from negotiating directly with the drug companies on behalf of its beneficiaries. Thus, the profound drug savings achieved by countries like Canada, which negotiates directly with drug companies, will not likely occur. Furthermore, drug re-importation from Canada, widely popular with consumers, was banned under a "poison pill" provision: Reimportation from Canada can proceed only if the FDA Administrator certifies that the reimportation process is safe (which almost certainly will not occur during the Bush administration), and reimportation from other countries is prohibited.

Medicare Part D will go into effect in January 2006. In the meantime, CMS will offer a prescription drug discount card no later than June 2004. The annual enrollment fee for the card will be less than $30, and will provide access to lower drug prices by virtue of negotiation between the card sponsors (insurance companies, pharmacy networks, etc.) and the drug companies. Beneficiaries with income less than 135 percent of FPL will receive an additional subsidy of 90 to 95 percent of their first $600 in drug costs.

The private prescription drug insurance plans will be paid by CMS according to the geographically and actuarially adjusted estimated drug costs of the beneficiaries enrolled in their program. "Risk corridors" will incentivize companies to control costs via formularies, disease management and other mechanisms. All insurance companies offering a Medicare Advantage HMO or PPO plan (to be discussed in next month's article) must provide a plan that includes a prescription drug benefit substantially equivalent to Medicare Part D. Employers who currently provide drug coverage for their retired employees will receive subsidies from CMS to encourage them to maintain that coverage. Medigap coverage of prescription drugs (under plans H, I, and J), will be phased out in 2006. CMS will offer grants to physicians to cover up to 50 percent of the cost of equipment and software for electronic prescribing and will develop standards for electronic prescribing by 2008.

Who wins and who loses under the new plan? Most Medicare beneficiaries will benefit, though not as much as they might have wished. Low-income beneficiaries who are not poor enough to qualify for Medi-Cal are the big winners: They will receive a generous drug benefit almost cost-free. For dual-eligibles, it remains to be seen whether the new Medicare benefit will be better or worse than the current drug benefit under Medi-Cal. It is likely that the new formularies will have more restrictive coverage and higher co-pays, but perhaps the current six-drug maximum will be lifted. In other states, the story may be different, depending on the way their current Medicaid drug benefit is structured.

The conference committee that produced the Medicare bill was dominated by Republicans, with only two Senate Democrats and no House Democrats allowed to participate in the negotiations. Thus, it is no surprise that the big winners are the drug companies, HMOs and other insurance companies. The Republican leadership balked at Canadian drug reimportation and direct price negotiation with the drug companies, both of which could have dramatically reduced drug costs. The Democratic leadership hopes to introduce legislation to correct these serious flaws and may even attract support from conservative Republicans who are aghast at the cost of the prescription drug plan-now estimated at over $500 billion. And, of course, the Bush administration has not proposed any new revenues to cover these costs, opting instead for more tax cuts.

The House Republicans have an almost religious zeal to privatize as much of the Medicare program as possible, in the belief (unsupported by facts) that such private plans are always more efficient. As we'll see next month, the prescription drug plan is the sugar coating on a bitter pill to privatize Medicare Part B, giving patients the "choice" of HMOs or PPOs instead of the choice they really want and need, the right to choose their own doctors.

Andy Calman practices ophthalmology in the Mission District of San Francisco and is a member of SFMS. He has served for many years on California's Medicare Carrier Advisory Committee and helps to coordinate Medicare policy for the American Academy of Ophthalmology. Having read all 415 pages of the Medicare bill and watched the entire three-hour House vote on C-SPAN, he is in serious danger of becoming a policy wonk.