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Medicare for the 21st Century: Section II - Part 1

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1.  Prescription Drug Benefit

Overview. This proposal would create a new and voluntary outpatient Medicare prescription drug benefit that is accessible and affordable to all beneficiaries. Medicare beneficiaries would have the option to enroll in "Part D" of the program. All Part D beneficiaries would immediately be able to purchase their prescriptions at the lower drug prices which private-sector benefit mangers are able to negotiate. In addition, the new benefit would have no deductible and would pay half of participants’ drug costs up to a limit of $5,000 ($2,500 in Medicare payments) when fully implemented. Medicare would also provide a 50 percent premium subsidy for this coverage to assure that it is affordable for all beneficiaries. Its premiums are estimated to be $24 in 2002 and $44 in 2008 when fully implemented. Low-income beneficiaries (below 135 percent of poverty) would not pay for premiums or cost sharing (improving the protections that they have for the Medicare Part B premium), and those between 135 and 150 percent of poverty would pay a reduced premium. Enrollees in Medicare managed care plans would receive their benefit as they do today – although plans, for the first time, would be paid directly for providing this coverage. Beneficiaries in the traditional program would get their benefits through private pharmacy benefit managers (PBMs) or other qualified entities. Medicare would contract out for this management through competitive bidding similar to that used by most private insurers and large employers. This proposal also includes incentives to develop and retain employer-provided retiree drug coverage.

Despite the indisputable importance of prescription drugs to health care today, Medicare does not explicitly cover outpatient prescription drugs. As a consequence, nearly 15 million Medicare beneficiaries lack drug coverage altogether – many of whom are middle income. Millions more have retiree health coverage, which is declining; Medigap, which is unstable and increasingly expensive; Medicaid, which restricts eligibility to the lowest income seniors and people with disabilities; or Medicare managed care. Medicare manage care plans are restricting their extra benefits, including prescription drugs, reinforcing the need for a minimum, national drug benefit option for all Medicare beneficiaries.

a.  Benefit design

Policy: There are several major design features of the prescription drug benefit:

  • No deductible: Coverage would begin with the first prescription.
  • Discounts: From the first prescription on, beneficiaries would get the same discount that the private group purchaser who manages the benefit gets. This discount would continue even after the benefit limit is reached.
  • Coinsurance: Beneficiaries generally would be responsible for coinsurance amounting to 50 percent of the cost of any prescription. Benefit managers would be allowed to reduce the coinsurance charged to beneficiaries if they could demonstrate as part of their bid proposal that they could achieve savings without undermining quality health care and access to needed medications.
  • Benefit limit: There would be a limit on total amount of spending that the plan would pay each year on behalf of a particular beneficiary. The limit would be set at $2,000 ($1,000 in Medicare payments) for calendar years 2002 and 2003; $3,000 for 2004 and 2005; $4,000 for 2006 and 2007, and $5,000 for 2008. In 2009 and subsequent years, the limit would be increased each year by the increase in the consumer price index (CPI).

In general, all therapeutic classes of drugs would be covered under the Medicare Part D benefit. In addition, beneficiaries would be guaranteed access to off-formulary drugs when medically necessary, and have basic appeal rights where coverage is denied. The only exceptions would be the set of drug classes currently excluded under Medicaid (Title XIX) (including drugs for weight loss or gain, promoting fertility, cosmetic purposes or hair growth, symptomatic relief of cough or colds, prescription vitamins and minerals, and all nonprescription drugs), except that prescription smoking cessation drugs not covered under Title XIX would be covered under Medicare Part D. Prescription drugs currently covered under Medicare Part A or B would still be covered under current arrangements and would not be counted against the Part D benefit limit. If there are drugs for which there have been documented abuses, benefit managers would be permitted to take certain measures to assure appropriate utilization, as is the case in both private sector and Medicaid prescription drug programs. No formulary would be established by the Medicare program, but private benefit managers could establish formularies, subject to the coverage requirements (described below), as virtually every PBM and private insurer does today. This would help them negotiate better prices and evaluate optimal therapeutic interventions. Benefit managers would also be authorized to create appropriate incentives for generic substitution, a practice widely used in private plans today.

Background/rationale: This benefit would provide meaningful coverage to all beneficiaries regardless of their level of drug utilization. Because of the zero deductible, beneficiaries would be covered from their first prescription each year. The 50 percent coinsurance would help to make the coverage affordable to the government and beneficiaries through lower premiums, and would help guard against overutilization. The cap on total benefit payments helps keep the program affordable for taxpayers. Over 90 percent of beneficiaries would not reach the cap when fully implemented.

This benefit is designed to assure beneficiaries have access to needed drugs while allowing private managers set procedures for accessing drugs. This flexibility allows the Medicare drug benefit to adapt to future pharmaceutical advances without major new legislation or regulation.

b.  Financing

Policy: In general, the new Medicare prescription drug benefit would be operated as a separate part of the Supplemental Medical Insurance (SMI) Trust Fund. Using this Trust Fund would eliminate the additional bureaucracy associated with a new trust fund. In no way would Part D costs or income affect Part B costs or premiums. The beneficiaries and government would equally split the cost of the Part D benefit. Thus, beneficiaries would pay a premium in the amount of 50 percent of the cost of the program. The estimated premium in 2002 is $24 per month, rising to $44 per month in 2008 when the benefit is fully phased in. Beneficiaries would also pay cost sharing, as described above.

Premiums for those beneficiaries opting for Part D coverage would be collected in the same way as Part B premiums, as a deduction from Social Security checks for most beneficiaries. Once enrolled, beneficiaries would be notified of the annual premium in the same notice in which they learn about the Part B premium for the next year.

Background/rationale: The Part D prescription drug benefit is financed on a shared voluntary basis, similar to the structure of Medicare Part B. Financing will be split between beneficiaries and government (each pays 50 percent of the full premium). This level of subsidy is designed to keep premiums low enough to be affordable to beneficiaries and to avoid risk selection (see section III-2 for a description of the offsets for this benefit).

c.  Enrollment

Policy: In general, beneficiaries would have a one-time opportunity to sign up for the voluntary benefit, in either the first year the benefit is offered (2002) or their first year of Medicare eligibility. There are two exceptions: (1) beneficiaries who are covered by their employer while still working (or by the employer of a working spouse) have a one-time opportunity to enroll after retirement (or retirement or death of the working spouse); and (2) beneficiaries who are covered by employer-based retiree coverage have a one-time opportunity to enroll if the former employer drops coverage of prescription drugs for all retirees.

In the first year of implementation, all Medicare beneficiaries would be able to sign up for the benefit during an open enrollment period, held at the same time as the Medicare+Choice enrollment period in November 2001. During 2001, the Medicare program would conduct a major education campaign about the new benefit option. After the first year of implementation, all newly eligible Medicare beneficiaries could enroll for the optional Part D coverage, under the same procedures as established for enrollment in optional Part B coverage.

Background/rationale: Similar to Medicare Part B, enrollment in Medicare Part D is done on a one-time only basis. This approach is critical to reducing or eliminating selection bias; if enrollment were allowed on an annual basis, beneficiaries could make the decision to select coverage only for years in which they anticipate high drug costs. Beneficiaries who have adequate employer-sponsored coverage could continue that coverage without paying twice for the same benefit. The exceptions are designed to ensure that beneficiaries with employer-sponsored coverage are protected if that coverage becomes unavailable.

d.  Management, payments, and beneficiary protections

Policy: Medicare would not administer this benefit directly, but instead contract out with private sector entities. This could include pharmacy benefit managers (PBMs), retail drug chains, health plans or insurers, states (through mechanisms established for Medicaid), or multiple entities in collaboration (e.g., alliances of pharmacies), provided that the collaboration increases their scope or efficiency and is not anti-competitive.

Private benefit managers would competitively bid to manage the benefit for a particular geographic area. The number and boundaries of the geographic areas designated should be set to ensure that multiple entities would have an opportunity to compete for the single contract awarded in each area and that enrollment in each area is large enough to encourage efficiency. At the same time, rules would be established to assure that a few private benefit managers do not dominate the Medicare market and that there are multiple areas.

Competition for contracts to administer the Part D benefit would be held periodically, probably every two or three years. The Secretary would develop specific criteria for selecting the winning entities, and would solicit bids in response to these criteria. In general, Medicare would follow the best practices of large private employers and plans, including consultation and recommendations from benefits experts. The selection process would consider the entity’s administrative fees, as well as its clinical quality programs, its formulary, information and management systems, the likely ability of the entity to control drug costs for beneficiaries and government, disease management programs, relationships with drug manufacturers, and other factors. Any entity that meets a set of criteria (described below) would be eligible to compete for the contracts.

All PBMs or other entities would be required to meet access and quality standards established by the Secretary. These standards would include (but are not limited to): inclusion of strategies to encourage appropriate use of medications; use of a medical panel with outside experts free of conflicts of interest in creating the formulary; use of objective criteria in selecting drugs for the formulary; open and fair dealing with all drug and biologic companies; publication of criteria for any cost containment measure that could affect patient care; submission of data about costs and utilization on a regular basis to help improve quality of care; compliance with standards for capacity and pharmacy availability to serve all beneficiaries in the geographic area; and compliance with contract requirements and consumer protections, including grievance and appeals procedures, that apply to Medicare+Choice plans to the extent that these requirements are relevant. No balance billing could be collected by the pharmacy. We would also require that, once beneficiaries have exceeded their benefit caps, that they would continue to have access to prices established by the benefit manager.

Private benefit managers could use various cost containment tools in administering the program, subject to limitations and guidelines in the contract. Benefit managers would be required to negotiate with pharmacies that meet a set of qualifications, including having the necessary information systems to process electronic point-of-sale transactions and create utilization records. Dispensing fees would have to be high enough to ensure participation by most pharmacies. They would also be required to use drug utilization review programs and meaningful clinical criteria to assure quality.

The government would bear most of the risk for the cost and utilization of services under the prescription drug benefit. The PBM serving each geographic area would be paid a fee for managing the benefit, and would have some contractual incentives to control cost and utilization. The Medicare program would test the use of various arrangements such as bonuses (retaining portion of discounts they arranged), withholds, or risk corridors to provide incentives to the private benefit managers to manage the benefit effectively.

Under this proposal, Medicare would not set prices for drugs. Prices would be determined through negotiations between the private benefit administrators and drug manufacturers. Thus, the proposal differs from the Medicaid program in that a "rebate" would not be required and from the Veterans’ Administration program in that no fee schedule for drugs will be developed. Instead, the competitive bidding process would be used to yield the best possible drug prices and coverage, just as it is used by large private employers and the Federal Employees Health Benefit Plan today.

Medicare+Choice plans would be required to provide a prescription drug benefit for all enrollees who have elected to participate in Part D. Those beneficiaries enrolled in Medicare managed care plans would receive their drug benefit through their plan and the government would explicitly subsidize this coverage. Like the Part B premium, which would be based on the plan’s price, this Part D premium would be competitively set. If beneficiaries leave a Medicare+Choice plan and return to fee-for-service Medicare, they would receive their Medicare Part D benefit through the contracting PBM for their geographic area.

Background/rationale: The Part D benefit would rely on administration by private entities, such as PBMs. Beneficiaries enrolled in managed care plans would receive a drug benefit from that plan which would receive a government payment for that coverage. Beneficiaries in traditional Medicare would get their benefits through private benefit managers. This approach mirrors the administration of most private insurance programs, which increasingly use PBMs or similar organizations to administer their drug benefits. These organizations have experience managing drug utilization and have developed numerous tools for cost containment and utilization management. Contracting with multiple private entities, each with claims processing and program management experience, will increase Medicare’s ability to run this benefit smoothly. The number of contracts and the number of years in the contracting cycle will be set by the Secretary at levels that will help attract existing PBMs to this program and that will encourage new entrants into this market.

Private benefit managers would have the authority to use the tools that are commonly used for managing drug costs and utilization in the private sector, subject to basic standards set by Medicare. In particular, Medicare would require drug utilization review to help ensure that adverse drug interactions are prevented, that proper drug protocols are followed, and that compliance by patients is monitored. A key goal would be to reduce unnecessary hospitalizations and adverse drug events where possible.

In today’s private-sector marketplace, PBMs do not typically accept full risk for the management of drug benefits. To be consistent with market practices and to assure that PBMs participate, Medicare would share only limited risk in its contracts. To provide some incentive for managing utilization and costs, Medicare would establish performance bonuses or other means of rewarding benefit managers that manage the benefit effectively.

The program would also establish certain basic beneficiary protections, an essential feature of any health program. Adequate access to a pharmacy network should be ensured since benefit managers are required to contract with all qualifying pharmacies. In addition, beneficiaries would be guaranteed access to off-formulary drugs when medically necessary, and have basic appeal rights where coverage is denied.

e.  Expanded assistance for low-income beneficiaries

Policy: This plan would build on current Medicaid protections for low-income beneficiaries to assure that they have access to the new prescription drug benefit. The new Part D program would be treated like Part B for beneficiaries in the qualified Medicare beneficiary (QMB) program. This means that Medicaid would pay for drug premiums and cost sharing for beneficiaries up to 100 percent of poverty, using the current Medicaid matching rate. Additionally, the proposal would create two new eligibility categories. First, beneficiaries with incomes between 100 and 135 percent of poverty would, like QMBs, receive full assistance for their drug premiums and cost sharing. However, the Federal matching rate would be 100 percent. Second, beneficiaries with incomes between 135 and 150 percent of poverty would pay a partial, sliding-scale premium based on their income. The Medicaid costs for this group would also be matched at 100 percent. States would be obliged to offer this expanded protection.

All states would have some fiscal relief as a result of this benefit since they all provide prescription drug coverage to dual eligible Medicaid-Medicare beneficiaries. The current qualified Medicare beneficiary (QMB), specified low-income Medicare beneficiary (SLMB), and qualified individual (QI) programs would continue as under current law to provide assistance for Part B premiums and cost sharing.

Background/rationale: Low-income beneficiaries tend to have disproportionately high drug costs. An AARP study found that beneficiaries with incomes below $10,000 spent an average of 8 percent of their income for drugs. For those with a severe illness or a need for a new, high-cost drug, the costs can be devastating. Only those beneficiaries who are very poor or who, because of severe health problems, qualify for Medicaid which covers prescription drugs.

Medicaid does, however, pay for Medicare Part B premiums and cost sharing for certain low-income beneficiaries. This coverage, which was expanded by the Balanced Budget Act, would be further enhanced under this proposal. Federal funding would be available to states to ensure that all poor and near-poor beneficiaries pay no premiums or cost sharing for this coverage.

f.  Incentives to develop and retain employer-provided retiree drug coverage

Policy: The policy is designed to encourage and support the development and retention of employer-sponsored retiree health benefits. It is the intention of this policy to make certain that current coverage for prescription drugs in retiree health plans is not lost or diminished. The Administration will work closely with employers, unions, and other interested parties to make certain that this goal is met.

Under this policy, Medicare would provide a partial drug premium subsidy to employers whose retiree coverage is at least as good as the Medicare benefit. The Medicare contribution would be 67 percent per beneficiary of the subsidy that it would otherwise provide for Medicare Part D enrollees. As such, Medicare would save 33 percent of its costs for each beneficiary in private employer-based retiree coverage.

This incentive payment would operate through the health plan or PBM that administers an employer’s drug benefit, as follows. First, on an ongoing basis, the health plan or PBM would document for HCFA all retirees for whom they are providing employer-sponsored drug benefits. HCFA would use these lists to designate beneficiaries who should not be charged the Part D premium and which employers are eligible for the employer subsidy.

Second, the employer health plan or PBM would attest, at the outset and on an annual basis, that their drug benefit meets minimum standards (e.g., is as generous as the Medicare benefit and is offered to all retirees in a manner that does not discriminate based on factors such as age or health status). The standards would be analogous to those required of Medicare+Choice plans.

Third, HCFA would make the premium subsidy payments to the health plan or PBM that administers the drug benefit on behalf of the employer, so that the employer’s payment is reduced. Because the PBMs and private plans used by employers to administer their drug benefits will generally be participating in Medicare, the subsidies would generally go to entities that are already receiving payments from HCFA.

If the employer drops retiree coverage, beneficiaries who were covered would have a one-time opportunity to enroll in Medicare Part D.

Background/rationale: Less than 30 percent of Medicare beneficiaries today get coverage through their former employers. This type of coverage has been eroding in recent years. Between 1993 and 1997, the percent of large firms offering retiree health benefits for Medicare eligibles dropped 20 percent. This provision is designed to create an incentive to keep employers in this market by making a payment to the employers (or the plans or PBMs that manage their drug benefits) and possibly encourage others to offer. The incentive payment is lower than what the government’s costs would be if the employer coverage was dropped. Because the employer contribution to the drug benefit is tax-deductible, this policy provides an additional incentive for employers to provide coverage, allowing employers to offer the same or more generous drug benefits at a significantly lower net cost.

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Table of Contents

Section I - Part 1

Section I - Part 2

Section I - Part 3

Section I - Part 4

Section I - Part 5

Section II - Part 1

Section II - Part 2

Section II - Part 3

Section II - Part 4

Section III


June 29, 1999

June 30, 1999