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The Henry J. Kaiser Family Foundation:

Washington, D.C. Office:Website:

THE MEDICARE PRESCRIPTION DRUG BENEFIT

June 2006

The Medicare Prescription Drug, Improvement, andModernization Act of 2003 (MMA) established avoluntary outpatient prescription drug benefit for peopleon Medicare, known as Part D. The drug benefit, whichtook effect in January 2006, is available to all 43 millionelderly and disabled beneficiaries who enroll in privateplans approved by Medicare to offer coverage. Medicarereplaces Medicaid as the primary source of drugcoverage for low-income and disabled people with bothMedicare and Medicaid (dual eligibles). Assistance withdrug benefit premiums and cost sharing is available tobeneficiaries with low incomes and modest assets.

MEDICARE PRESCRIPTION DRUG PLANSThe drug benefit is offered through two types of privateplans: stand-alone prescription drug plans (PDPs) forpeople getting other Medicare benefits through the fee-for-service program, and Medicare Advantageprescription drug (MA-PD) plans, such as HMOs orPPOs, that cover drugs and other Medicare benefits. In2006, a total of 1,429 PDPs and 1,314 MA-PD plans areoffered across the 34 PDP regions and 26 MA regionsnationwide (excluding the territories). Beneficiaries inmost states have a choice of at least 40 stand-alonePDPs and one or more MA-PD plans (Figure 1).

PART D ENROLLMENT

Enrollment in Medicare drug plans is voluntary for mostbeneficiaries, with the exception of dual eligibles andcertain low-income beneficiaries who are automaticallyenrolled in a drug plan if they do not choose one on theirown. However, unless beneficiaries have coverage thatis at least as good as the standard Medicare drug benefit(creditable coverage), they face a penalty equal to 1%

of the national average monthly premium for each monththey delay enrollment. To encourage employers to offercreditable drug coverage to retirees, Medicare providesemployers with tax-free subsidies equal to 28% of costsbetween $250 and $5,000 in drug expenses per retiree.

As of June 2006, HHS reported that 22.5 millionbeneficiaries enrolled in Medicare Part D plans prior tothe 2006 enrollment deadline, and 10.4 million havecreditable drug coverage through retiree plans, includingFEHB and TRICARE (Figure 2). HHS estimates thatanother 5.4 million have alternative sources of creditabledrug coverage, such as the Veterans Administration.

Most beneficiaries with creditable drug coverage in 2006had coverage previously, either through Medicaid,Medicare Advantage, or employer plans. Of the 11.6million individuals who are new enrollees in Part D plans(10.4 million in PDPs and 1.2 mill ion in MA-PD plans), itis unknown how many lacked drug coverage prior to2006. Based on HHS estimates, between 4 million and5 million beneficiaries, or more than 10% of theMedicare population, have no drug coverage in 2006.

ASSISTANCE FOR LOW-INCOME BENEFICIARIESThe Medicare drug benefit includes substantial premiumand cost-sharing assistance for beneficiaries with lowincomes (less than approximately $15,000 forindividuals) and modest assets (less than $11,500 forindividuals) (Figure 3). Dual eligibles, QMBs, andSLMBs automatically qualify for the additionalassistance, and Medicare automatically enrolls them intoPDPs with premiums at or below the regional average ifthey do not choose a plan on their own. Otherbeneficiaries are subject to both an income and asset

DC

43

20-29 drug plans (2 states)

30-39 drug plans (3 states)

40-49 drug plans (44 states)

45

45

4744

44

44

41

4141

41

4141

41

40

42

47

43 43

43 41

40

43

424145

42

4540

42

42

41

41

46

4144

47

41

52

38

2738

39

52

29

44

50-59 drug plans (2 states)

Not including numbers of Medicare Advantage Drug Plans(HMOs, PPOs, and Private Fee-For-Service plans)

Figure 1

Number of Medicare Prescription Drug PlansAvailable Nationwide in 2006

SOURCE: CMS, landscape file (November 15, 2005).

HHS Estimates of Prescription Drug CoverageAmong Medicare Beneficiaries, 2006

4.4

million

10%

5.4

million

13%

10.4

million

24% 6.0

million

14%

6.1

million

14%

10.4

million

24%

Note: Numbers do not sum to 100% due to rounding. 1 Includes coverage from Veterans Administration, Indian Health Service,employer plans without retiree subsidies, and employer plans for active workers. 2 Includes employer/union, FEHB, and TRICAREcoverage. 3Approximately 0.5 million dual eligibles are enrolled in Medicare Advantage drug plans and are reported in this category.SOURCE: HHS, June 14, 2006. Data as of June 11, 2006.

Total Number of Beneficiaries = 43 Million

Total inPart D Plans:22.5 Million

(53%)

Stand-AlonePDP

Medicare AdvantageDrug Plan3

Dual Eligiblesin PDPs

CreditableEmployer/Union

Coverage2

No CreditableCoverage

OtherCreditableCoverage1

Figure 2

November 2006

The Medicare Prescription Drug, Improvement, andModernization Act of 2003 (MMA) established avoluntary outpatient prescription drug benefit for peopleon Medicare, known as Part D. All 43 million elderly anddisabled beneficiaries have access to the Medicare drugbenefit through private plans approved by the federalgovernment. Medicare replaces Medicaid as the primarysource of drug coverage for low-income and disabledpeople with both Medicare and Medicaid (dualeligibles). Assistance with drug benefit premiums andcost sharing is available for beneficiaries with lowincomes and modest assets.

MEDICARE PRESCRIPTION DRUG PLANS, 2007

The drug benefit is offered through two types of privateplans: stand-alone prescription drug plans (PDPs) thatsupplement fee-for-service Medicare, and Medicare

Advantage prescription drug (MA-PD) plans, such asHMOs or PPOs, that cover drugs and other Medicarebenefits. In 2007, a total of 1,875 PDPs are offeredacross the 34 PDP regions nationwide (excluding theterritories), up from 1,429 in 2006. Beneficiaries in moststates have a choice of at least 50 stand-alone PDPsand multiple MA-PD plans (Figure 1).

PART D PLAN BENEFITS AND PREMIUMS, 2007

Part D plans offer either a defined standard benefit or analternative equal in value (actuarially equivalent), andcan also offer enhanced benefits. The standard benefitin 2007 has a $265 deductible and 25% coinsurance upto an initial coverage limit of $2,400 in total drug costs,followed by a coverage gap (the so-called doughnuthole) where enrollees pay 100% of their drug costs untilthey have spent $3,850 out of pocket (Figure 2).

Thereafter, the plan pays 95% of total drug costs. Thestandard benefit amounts are set to increase annually bythe rate of per capita Part D spending growth.

In 2007, only a small share (12%) of PDPs nationwideoffer the standard drug benefit. The majority of PDPs(60%) have no deductible, and 86% charge tieredcopayments for covered drugs rather than 25%coinsurance. However, most PDPs have a coveragegap; less than 2% of PDPs nationwide cover both brand-name and generic drugs in the gap. In 11 states, there

are no PDPs available that offer gap coverage for brand-name drugs.

Approximately 4 million Medicare beneficiaries areprojected to have spending in the coverage gap in 2006,according to updated analysis by Actuarial ResearchCorporation for the Kaiser Family Foundation. Thisestimate is based on current Part D enrollment (CMS,6/11/06) and low-income subsidy participation (SSA,7/14/06), and updated National Health Expenditure datafor Medicare per capita drug spending (about 11% lowerthan projected prior to implementation of Part D).

The monthly Part D premium averages $27.35 in 2007,

but actual premiums vary across plans and regions,ranging from a low of $9.50 for a basic benefit PDP to ahigh of $135.70 for a PDP with enhanced benefits. PartD plans approved by CMS for 2007 vary in benefitdesign, covered drugs, and utilization managementtools, such as prior authorization, quantity limits, andstep therapy. CMS established minimum requirementsfor Part D plan formularies (the list of covered drugs) tohelp ensure that plans do not offer formularies thatdiscriminate against or discourage enrollment of certaintypes of beneficiaries.

DC

61

57

57

5554

56

56

53

5353

53

5353

53

53

57

60

53 57

55 53

58

58

565759

56

5454

54

54

57

53

61

5351

56

53

66

53

4551

53

66

46

51

45-50 drug plans (2 states)51-55 drug plans (26 states)56-60 drug plans (18 states)

61-66 drug plans (5 states)

57

Not including numbers of Medicare Advantage Drug Plans(HMOs, PPOs, and Private Fee-For-Service plans)

Figure 1

Number of Medicare Prescription Drug PlansAvailable Nationwide in 2007

SOURCE: CMS, landscape file (October 23, 2006).

Standard Medicare Prescription Drug Benefit, 2007

$328.20 Average Annual Premium

$265 Deductible

$2,400 inTotal Drug Costs

$5,451 in

Total Drug Costs($3,850 out of pocket)

$3,051 Coverage Gap(Doughnut Hole)

NOTE: Annual premium amount based on $27.35 national average monthly beneficiary premium (CMS, August 2006).Amounts for premium, coverage gap, and catastrophic coverage threshold rounded to nearest dollar.

SOURCE: Kaiser Family Foundation illustration of standard Medicare drug benefit, updated with Part D benefit parametersfor 2007 (from CMS, OACT, May 22, 2006).

Plan Pays 75%

Plan Pays 15%;Medicare Pays 80%

Enrollee Pays 100%

Enrollee Pays 5%

Enrollee Pays 25%

BeneficiaryOut-of-PocketSpending

Figure 2

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Low-Income Subsidies Under the Medicare Drug Benefit:

HHS Estimates of Eligibility and Participation, 2006

Beneficiaries Eligible for Low-Income Subsidies (LIS) = 13.2 million

2.0 million (15%)

Eligible bySSA and

receiving

subsidy

0.5 million (4%)

Eligible but estimatedto have creditable

coverage

SOURCE: Testimony of Mark McClellan, CMS Administrator, June 14, 2006. Data from CMS, as of June 11, 2006, andupdated LIS eligibility determinations from SSA, as of July 14, 2006.

3.1 million (24%)

NOT receiving

subsidy7.5 million (57%)

Full/partial

dual eligibles and

SSI recipientsreceiving subsidy

0.1 million (1%)Anticipated facilitated

enrollment

3.1

million

2.0

million

Total = 5.7 Million

Non-Duals Eligible for LIS

0.5 million0.1 million

54% NOT

receiving LIS

35%

receiving LIS

Figure 4

PART D ENROLLMENT, 2006

Enrollment in Medicare drug plans is voluntary for mostbeneficiaries, with the exception of dual eligibles andcertain low-income beneficiaries who are automaticallyenrolled if they do not choose one on their own.However, unless beneficiaries have coverage that is atleast as good as standard Part D coverage (creditablecoverage), they face a penalty equal to 1% of thenational average monthly premium ($27.35 in 2007) foreach month they delay enrollment.

As of June 2006, HHS reported that 22.5 millionbeneficiaries are enrolled in Medicare Part D plans, and10.4 million have creditable drug coverage throughretiree plans, including FEHB and TRICARE (Figure 3).(Employers offering creditable drug coverage to theirretirees can receive tax-free subsidies equal to 28% ofdrug expenses between $250 and $5,000 per retiree.)

Another 5.4 million have other sources of creditablecoverage, such as the Veterans Administration. Basedon HHS estimates, between 4 million and 5 millionbeneficiaries, or more than 10% of the Medicarepopulation, have no creditable drug coverage in 2006.

Most beneficiaries with creditable drug coverage in 2006were covered in 2005 through Medicaid, Medicare

Advantage, or employer plans. It is unknown how manyof the 11.6 million new Part D plan enrollees (10.4million in PDPs and 1.2 million in MA-PD plans) lackeddrug coverage before enrolling in a Part D plan.

ASSISTANCE FOR LOW-INCOME BENEFICIARIES

Part D includes substantial premium and cost-sharing

assistance for beneficiaries with low incomes (less thanapproximately $15,000 for individuals) and modestassets (less than $11,500 for individuals). Dual eligibles,QMBs, and SLMBs automatically qualify for theadditional assistance, and Medicare automaticallyenrolls them into PDPs with premiums at or below theregional average if they do not choose a plan on theirown. Other beneficiaries are subject to both an incomeand asset test and need to apply for the low-incomesubsidy (LIS) through either the Social Security

Administration (SSA) or Medicaid, along with enrolling ina Part D plan. Individuals determined eligible for LIS areassigned to a PDP if they do not enroll on their own.

HHS recently estimated that 13.2 million beneficiariesare eligible for low-income assistance in 2006, of which9.5 million (including dual eligibles) are currentlyreceiving the subsidy (Figure 4). An estimated 3.1million LIS-eligible beneficiaries are not currentlyreceiving this assistance.

EXPENDITURES AND FINANCING

The Administration estimates the net federal cost of theMedicare drug benefit to be $31 billion in 2006 and $768billion between 2007 and 2016. Actual costs will dependon several factors, including the number of beneficiarieswho enroll, their health status, the number of low-incomesubsidy recipients, and the ability of plans to negotiatedrug price discounts and manage utilization. Plans areexpected to produce savings by negotiating pricediscounts and rebates with drug companies; the MMAprohibits Medicare from negotiating drug prices directly.

Financing for Part D comes from beneficiary premiumpayments, state contributions (the so-called clawback),and general revenues. The monthly premium paid byenrollees is set to cover 25.5% of the cost for standarddrug coverage. CMS subsidizes the remaining 74.5%,based on bids submitted to CMS by plans for theirexpected benefit payments. Plans can also receiveadditional risk-adjusted payments for high-cost enrolleesand reinsurance payments for 80% of costs above thecatastrophic threshold. A Part D plans total potentiallosses or profits are limited by risk-sharing arrangementswith the federal government.

FUTURE CHALLENGES

The Medicare drug benefit offers beneficiaries help without-of-pocket drug spending, which is especiallyimportant to those with low incomes, those who lackeddrug coverage prior to 2006, and people withcatastrophic drug expenses. As Part D matures, severalareas will be important to monitor, including: enrollment;plan stability; benefit design and formulary changes; costsharing and access to medications; and low-incomesubsidy participation. Careful monitoring and oversightby the federal government is important to ensure thatMedicare drug plans provide beneficiaries with neededprotection against high and rising drug costs.

Additional copies of this publication (#7044-05) are available on theKaiser Family Foundations website at www.kff.org.

HHS Estimates of Prescription Drug CoverageAmong Medicare Beneficiaries, 2006

4.4

million

10%

5.4

million

13%

10.4

million

24% 6.0

million

14%

6.1

million

14%

10.4

million

24%

NOTES: Numbers do not sum to 100% due to rounding. 1 Includes coverage from Veterans Administration, Indian Health Service,employer plans without retiree subsidies, and employer plans for active workers. 2 Includes employer/union, FEHB, and TRICAREcoverage. 3Approximately 0.5 million dual eligibles are enrolled in Medicare Advantage drug plans and are reported in this category.SOURCE: HHS, June 14, 2006. Data as of June 11, 2006.

Total Number of Beneficiaries = 43 Million

Total inPart D Plans:22.5 Million

(53%)

Stand-AlonePDP

Medicare Advantage

Drug Plan3

Dual Eligiblesin PDPs

CreditableEmployer/Union

Coverage2

No CreditableCoverage

OtherCreditableCoverage1

Figure 3