Medicare Part D: The New US Voluntary Prescription Drug Benefit
This article was originally published in SRA
Executive Summary
Karen Finn describes the largest reform to the Medicare programme since its inception and discusses how it may affect the various stakeholders.
Karen Finn describes the largest reform to the Medicare programme since its inception and discusses how it may affect the various stakeholders.
Karen Finn is chief of correspondents for The Regulatory Affairs Journals.
With the January 2006 introduction of a voluntary prescription drug benefit for approximately 42 million Americans, the US is about to embark on the most significant overhaul of the Medicare system since its birth in 1965. This new benefit, to be provided by the nation's largest health insurance programme, has been hailed as ‘a landmark change...that will significantly improve the health care coverage available to millions of Medicare beneficiaries’1. And it comes with a large price tag: the Congressional Budget Office estimates that the programme will cost the government $593 billion in total net outlays over the fiscal year 2004-2013 period2. Hence, its supporters are still defending it nearly two years after the president signed it into law.
After years of debate and a number of attempts at passing legislation to decrease the soaring cost of prescription drugs for America's seniors, the US Congress finally agreed to pass the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)3. The law introduced Medicare ‘Part D', which for the first time provides an outpatient prescription drug benefit for people eligible to receive Medicare benefits, ie people aged 65 or older, some people with disabilities under age 65 and people with permanent kidney failure.
On its face, the benefit appears to be just the solution needed to rein in the high cost of prescription drugs - and perhaps stop seniors from feeling the need to buy their prescriptions over the border - but there are a number of critics who say that it still does not resolve the fundamental problem of high drug prices. Furthermore, they argue that it goes too far in fragmenting and privatising a system that should be uniformly administered by the federal government nationwide. Thus, the debate continues. Indeed, one patient advocacy group says that the introduction of this new market-driven system is ‘the beginning of a battle over the soul of the Medicare program’4.
This paper provides an overview of the drug benefit and discusses how various stakeholders - the US Centers for Medicare and Medicaid Services (CMS), the pharmaceutical industry, the insurers and the beneficiaries - could be affected by the reform.
How the benefit works
The new voluntary prescription drug benefit will be managed by the CMS. It will be available to all people eligible to receive Medicare benefits under Part A (covering hospital and other inpatient services) and Part B (covering doctor visits and other outpatient services, including durable medical equipment). It is an outpatient benefit that will be provided through stand-alone private prescription drug plans (PDPs) that offer drug-only coverage, or through Medicare Advantage (formerly known as Medicare + Choice) plans that offer private integrated prescription drug and healthcare coverage (MA-PD plans).
Overview of benefits
Medicare plans will vary, but under the standard plan, beneficiaries will pay a monthly premium (about $32.20 on average in 2006) in addition to any premiums for Medicare Part A and/or Part B. The beneficiary will incur a $250 annual deductible, after which he/she will pay5:
- 25% of annual drug costs from $250 to $2,250;
- 100% of drug costs from $2,251 until out-of-pocket costs reach $3,600; and
- 5% of drug costs (or a small co-payment) for the rest of the calendar year after spending $3,600 out-of-pocket (having reached the ‘catastrophic coverage’ limit).
Low-income beneficiaries will be eligible to receive additional subsidies (see Table 1).
Beneficiary income | Monthly premium | Deductible | Copayments | Coverage gap |
Dual eligibles, up to 100% of FPL | None | None | $1-3 | None |
Other dual eligibles and others, 100%-135% of FPL | None | None | $2-5 | None |
135%-150% of FPL | Sliding scale | $50 | 15% of drug cost | None |
Notes: a. FPL = federal poverty level. b. Dual eligibles = those eligible for both Medicare and Medicaid benefits. c. Low-income beneficiaries must meet an asset test to qualify for low-income subsidies. In 2006, assets must be no greater than $10,000 (singles) or $20,000 (couples). | ||||
Beneficiaries will have at least two qualifying Medicare drug plans to choose from in their region, one of which must be a stand-alone PDP. However, the CMS expects that there will be several plans to choose from in most areas. Furthermore, fallback PDPs (ie those which are not required to be risk-bearing entities) will be made available if there is not at least one plan available that provides the same level of coverage as the Medicare's basic prescription drug coverage. Formal appeal and grievance procedures have been put in place for beneficiaries who are not satisfied with the management of a plan or who disagree with a coverage decision.
There are a number of scenarios for people who receive a prescription drug benefit under other schemes such as employee retiree plans, but in general they may keep their existing benefit as well as enrol in the Medicare Part D programme. Their existing benefit, however, may change as a result. On the other hand, beneficiaries that receive a Medicare supplemental insurance policy (MediGap Plans H, I and J) offering drug coverage are not entitled to also receive benefits under Medicare Part D.
With respect to enrolment, beneficiaries who are eligible for Part D as of 15 November 2005 will be able to enrol in a Medicare PDP or MA-PD plan between 15 November 2005 and 15 May 2006, and will have the option of changing plans once a year. For those eligible after 15 November 2005, the CMS will inform beneficiaries of their six-month enrolment period. However, beneficiaries who miss their enrolment deadline will be required to pay a premium penalty each month for the whole time that they are enrolled in Medicare Part D. Dual eligible beneficiaries (ie those receiving both Medicaid and Medicare benefits) will be automatically enrolled in a Medicare Part D plan if they do not choose one themselves. The drug coverage that they receive under Medicaid will be shifted to the Medicare programme. In order to receive drugs under the benefit, all beneficiaries will have to use a pharmacy in its plan's network.
Requirements of the plans
According to the CMS’ implementing regulations, organisations offering drug plans will have flexibility in terms of benefit design. Variances in plans may include, for example, the use of formularies with tiered copayments or the payment of a lower deductible, but the overall dollar value of the benefit must remain the same. This may occur because drug manufacturers will make pricing agreements directly with the plans - the CMS is explicitly prohibited from negotiating drug prices under Part D. In each of 34 geographic regions (or 26 regions for MA-PD plans), the plans will compete for enrolees on the basis of annual premiums, benefit structures, degree of access to specific therapies and quality of services7.
If a plan chooses to use a formulary, the formulary will be subject to prior CMS review and approval. Among other things, the CMS will require plans’ pharmacy and therapeutics (P&T) committees to rely on widely-used ‘best practices’ in existing drug benefits, including formulary reviews based on scientific evidence as well as pharmacoeconomic considerations that achieve appropriate, safe and cost effective drug therapy8. The CMS will review classification systems for proposed formularies, but plans that use a system consistent with that of the United States Pharmacopeia (USP) will satisfy a safe harbour, and thus will automatically be deemed not to ‘substantially discourage enrollment by beneficiaries’9.
Although the USP has not developed a model formulary, it has published a list of therapeutic categories and associated pharmacologic classes that may be used as a framework for the design of plans’ formularies, commonly referred to as the Medicare Model Guidelines. At the request of the CMS, the guidelines also list all FDA-approved drugs in the appropriate category and class. They include 41 therapeutic categories - 32 of which have associated drug classes and nine of which have no associated drug classes - and 137 pharmacologic classes.
At least two drugs will be required in each therapeutic category or drug class (unless only one exists), and plans will only be allowed to change therapeutic categories and classes at the beginning of each plan year unless new drugs or new therapeutic uses appear. However, any changes to formularies (eg additions, deletions, tier changes) must be submitted within 30 days after the plan's P&T committee makes a decision. The CMS will also require that P&T committees make a ‘reasonable effort’ to review a new chemical entity (NCE) within 90 days, and take a decision for each NCE within 180 days of its release onto the market. A clinical justification will be necessary if this timeframe is not met.
All marketing materials to be distributed by PDPs and MA-PD plans will also have to meet CMS approval10. However, plans that use the CMS’ Part D marketing guidelines and models without modification will be eligible for a ‘file and use’ certification, which allows them to publish and distribute certain materials without prior approval.
Impact on stakeholders
The main stakeholders in the Part D programme are the CMS, the pharmaceutical industry, the drug plans and of course the beneficiaries. Analysts still cannot say for sure whether these players will definitely be ‘winners’ or ‘losers’ as a result of the benefit, but some groups have quite strong opinions about who will come out on top.
The CMS
With the introduction of the Part D benefit, the role of the CMS will change dramatically. Suddenly its decisions are expected to have at least as much impact on the pharmaceutical industry as the Food and Drug Administration, as it polices the health plans that will provide drugs for about 42 million people. In addition to the first three hurdles that drug companies need in order to attain market access for their products - quality, safety and efficacy - the CMS will effectively create a ‘fourth hurdle’ that companies will have to clear, as it will have the final word as to whether the drug coverage that plans offer is suitable or significantly discourages enrolment11.
Although the CMS will not have direct authority to negotiate prices, it will be responsible for approving each plan that seeks to participate in the Part D programme, as well as their formularies if they choose to use one. Furthermore, as the majority of the plans are expected to establish contractual relationships with pharmaceutical manufacturers to receive rebates based on target volumes of drug sales, the CMS will have to monitor aggregate rebates in order to estimate transaction prices12. According to the Medicare Payment Advisory Commission (MedPAC), the independent federal body responsible for advising the US Congress on issues affecting the Medicare programme, previous lapses in government oversight of Medicaid drug pricing and manufacturer rebates highlight the challenge that the CMS will face. The agency will have to assert its right to audit participating plans and serve as the watchdog that ensures against fraudulent and abusive practices.
MedPAC also notes that the CMS will confront obstacles in educating beneficiaries about prescription drug plan choices. Looking back at the implementation of the prescription drug card, which is a temporary measure to provide discounted drugs for Medicare beneficiaries until the prescription drug benefit comes into effect, the commission found that outreach efforts proved relatively ineffective in getting beneficiaries to enrol.
The pharmaceutical industry
The pharmaceutical industry is supportive of the new drug benefit, although it has reported that pharmaceuticals actually make up only a small share of total costs for Medicare beneficiaries13. Despite this finding in a 2004 report by the Pharmaceutical Research and Manufacturers of America (PhRMA), Part D is expected to ‘help a broad range of Medicare beneficiaries’.
The fact that the benefit is supported by industry would come as no surprise to its critics, who say that it will bestow enormous windfall profits on prescription drug makers while offering a scanty benefit to Medicare beneficiaries14. In a report written by two professors at Boston University's School of Public Health, the authors place this windfall at an estimated $139 billion in increased profits over the eight-year period of 2006-2013. According to their calculations, this accounts for 61.1% of the Medicare dollars that will be spent to buy more prescriptions under the programme.
The Medicare Rights Center (MRC), a consumer advocacy group, and some members of congress also firmly believe that the Part D offers more benefits to the drug industry and health plans than it does to Medicare beneficiaries15-17. Most of the criticism stems from the fact that the government cannot negotiate lower drug prices for Medicare beneficiaries, and that the MMA does not contain provisions that will actually cut drug prices.
Although many see the pharmaceutical industry as a clear winner due to the increased level of drug utilisation alone, the industry may also have greater difficulties in getting its products covered by potentially less comprehensive health plans that are increasingly conscious of keeping costs down. As the plans will be held to new government standards for the review of coverage and formularies, drug companies might face a greater challenge in gaining market access.
According to Kathleen Jaeger, the president and chief executive officer of the Generic Pharmaceutical Association (GPhA), the generics industry expects to profit from the new drug benefit programme overall, as plans’ formularies will continue to choose generics over brand name products when possible18.
The health plans
Health plans will have to share some of the risk with the government in providing Medicare drug coverage to beneficiaries, but nonetheless, the MMA provisions that establish a $12 billion stabilisation fund to provide incentives for participation in the programme are seen by critics as a handout to private insurers19.
Although refraining from comment on the above, Mohit Ghose, a spokesman for America's Health Insurance Plans (AHIP), says that the trade association's members that will offer Part D coverage have made a significant investment in preparing for its rollout20. Despite the additional regulatory burden, AHIP's members believe that they are in the best position to provide the maximum possible benefits under Medicare, in large part because of bulk purchasing agreements with drug companies. When asked if its members would be making their formulary review policies more stringent, Mr Ghose said that greater scrutiny of drugs is a trend that has been taking place over the past eight to ten years and not something that would result from Part D. Comments by Matthew Schiffgens, a spokesman at Kaiser Permanente, one of the nation's largest private healthcare providers, were in agreement, saying that although the provider will make the necessary adjustments to comply with CMS rules, the P&T committees’ review processes will remain much the same21,22.
One such rule that could be troublesome for plans, according to the Academy of Managed Care Pharmacy (AMCP), is the CMS’ requirement that P&T committees review NCEs within 90 days of their release onto the market23. The AMCP argues that a comprehensive review of any NCE is an exhaustive process, requiring considerable research, time and effort, and is not in the best interest of quality patient care. Current best practices are more typically 180 days, which allows time to evaluate scientific evidence and establish standards of practice.
The beneficiaries
Much of the potential impact of the Medicare prescription drug benefit is a function of an individual beneficiary's income, the nature of his or her current drug coverage (if any), drug spending level and future behaviour, according to a PricewaterhouseCoopers report commissioned by the AARP Public Policy Institute24.
Based on these and other factors, the report estimates that the Medicare population's aggregate drug spending will decrease by 3% as a result of the new benefit, although total drug utilisation is expected to increase by almost 6%. Despite the finding that on average, beneficiaries will be net winners as a result of the benefit, the report concludes that some are expected to be worse off than they would be in the absence of the new benefit, especially in the long term. The people with the greatest potential to lose out are retirees who are covered by employer-sponsored plans, as their plans decide to drop coverage in favour of the less comprehensive Medicare coverage. Deane Beebe, spokesperson for the MRC, says that another group of people who may be losers are those who do not qualify for the low-income subsidy but who lose their coverage when the so-called ‘doughnut hole’ kicks in, ie when they must pay for their own prescriptions from $2,251 until out-of-pocket costs reach $3,60025.
On a more positive note, the people who are eligible to receive the low-income subsidy are expected to benefit from the programme, as they will not be subject to the coverage gap of the standard programme. However, the downside is that these people will have to apply separately to receive the extra subsidy, which is expected to discourage enrolment due to the complex application procedure. The MRC is also concerned about the people who will be automatically switched from Medicaid to Medicare coverage and the confusion that will follow when they try to fill a prescription at their local pharmacy only to find out that it is not in their plan's network.
Conclusion
The Medicare Part D benefit is a highly sensitive issue for the stakeholders involved, and thus few have expressed indifference to its introduction. In general, passionate supporters of the benefit appear to have the most to gain from the privatised, market-driven system, while passionate opponents (or their constituents) seem to have the most to lose and support a nationwide, publicly administered system. It is an issue that will be debated for years to come, as the programme evolves and millions of dollars are passed between the parties involved.
References
1. Federal Register, 70(18), 28 January 2005, 4194-4585
2. Congressional Budget Office, Updated Estimates of Spending for the Medicare Prescription Drug Program, 4 March 2005, www.cbo.gov/showdoc.cfm?index=6139&sequence=0
3. P.L. 108-173, The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 8 December 2003, http://thomas.loc.gov
4. Medicare Rights Center, The History of Medicare and the Current debate, www.medicarerights.org/maincontentpremiumsupport.html
5. HHS Weekly Report, 12-18 August, 2005, www.hhs.gov/news/newsletter/weekly
6. Medicare Payment Advisory Commission, Report to Congress: Issues in a Modernized Medicare Program, June 2005, www.medpac.gov/publications/congressional_reports/June05_Entire_report.pdf
7. Ibid.
8. CMS, Medicare Modernization Act Final Guidelines - Formularies, CMS Strategy for Affordable Access to Comprehensive Drug Coverage, Guidelines for Reviewing Prescription Drug Plan Formularies and Procedures, www.cms.hhs.gov/pdps/FormularyGuidance.pdf
9. USP, Medicare Prescription Drug Benefit Model Guidelines, 31 December 2004, www.usp.org/healthcareInfo/mmg/index.html?USP_Print
10. CMS, Part D Plan Marketing Guidelines, 1 September 2005, www.cms.hhs.gov/pdps/PrtDPlnMrktngGdlns.asp
11. Cohen J, The Emergence of a De Facto Fourth Hurdle for Pharmaceuticals in the US, The Regulatory Affairs Journal - Pharma, 15(12), 867-870
12. Medicare Payment Advisory Commission, Report to Congress: Issues in a Modernized Medicare Program, June 2005, www.medpac.gov/publications/congressional_reports/June05_Entire_report.pdf
13. PhRMA, Focus on Health Policy, Winter 2004, www.phrma.org/publications/policy//2004-03-23.921.pdf
14. Sager A and Socolar D, 61 Percent of Medicare's New Prescription Drug Subsidy is Windfall Profit to Drug Makers, 31 October 2003, www.bu.edu/dbin/sph/departments/health_services/documents/health_reform/Medicare_Rx_bill_windfallprofit.pdf
15. Representative Bernard Sanders, Prescription Drugs: Medicare Drug Benefit, http://bernie.house.gov/documents/prescriptions/medicare_drug_benefit.asp
16. Senator Debbie Stabenaw, September 2004, http://stabenow.senate.gov/infocus/medicare.htm
17. Personal communication, Deane Beebe, Medicare Rights Center, 12 September 2005
18. Kathleen Jaeger, GPhA,Q&A session, International Generic Pharmaceutical Alliance, 8th Annual Conference, 19-20 June 2005
19. America's Health Insurance Plans, Healthplan, January/February 2004, www.ahip.org/content/default.aspx?bc=31|130|136|259|260
20. Personal communication, Mohit M Ghose, America's Health Insurance Plans, 12 September 2005
21. Personal communication, Matthew Schiffgens, Kaiser Permanente, 12 September 2005
22. Kaiser Permanente, www.kpventures.net/home.html
23. Academy of Managed Care Pharmacy, 3 January 2005, www.amcp.org
24. Rodgers J and Stell J, Health Policy Economics, PricewaterhouseCoopers, The Medicare Prescription Drug Benefit: Potential Impact on Beneficiaries (commissioned by AARP), #2004-13, November 2004, http://assets.aarp.org/rgcenter/health/2004_13_rx.pdf
25. Personal communication, Deane Beebe, Medicare Rights Center, 12 September 2005