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Prescription drug coverage for seniors: the Medicare plan.

Seeking to make good on its promise to provide a prescription drug plan for seniors, Congress passed sweeping new legislation to overhaul the Medicare program.


Controversial in its design, as well as the methods used to pass it, the Medicare Prescription Drug Modernization and Improvement Act of 2003 has ignited a firestorm among traditional supporters of the Medicare program.

Signed into law by President George W. Bush, the new law creates the largest increase in this entitlement program in history. Many continue to question whether the new legislation really fixes the problem of access to affordable prescription drugs for beneficiaries.

What it does

The new program adds an outpatient prescription drug benefit to the Medicare program. The program is voluntary and provides tiered fiscal subsidies for program participants.

The program is also means tested for the first time, requiring most beneficiaries to incur some out-of-pocket costs for the benefit. Because the major pharmaceutical benefit does not start until 2006, the program has some interim benefits to lower drug costs until the program kicks in.

For calendar years 2004 and 2005, Medicare recipients will be eligible to purchase a prescription drug discount card. The card is expected to save from 10 percent to 25 percent off of drug costs and cost about $30.

The federal government will also provide up to $600 per year for individuals with incomes below $12,123 for single individuals ($16,362 for couples) for years 2004 and 2005.

Starting in 2006, 40 million elderly and disabled Medicare beneficiaries become eligible for the new outpatient pharmacy benefit. It will be administered by a new federal agency in the Department of Health and Human Services. The agency will oversee the benefits delivered through private health plans and pharmacy plans.

The private health plans are authorized to deliver the pharmacy benefit as a component of preferred provider organizations (PPOs). It provides $12 billion in fiscal incentives for health plans to participate in the program. The government will ensure drug coverage in any area that does not have at least one private health plan and one pharmacy benefit plan.

The program creates a six-year pilot program in 2010 that allows private plans to compete in pricing with traditional Medicare in up to six metropolitan areas. Participating areas must have at least two private plans with at least 25 percent of Medicare beneficiaries in the area.

Concern has been raised about this provision because it is feared that private plans will "cherry pick" healthy beneficiaries leaving costly high-risk patients in traditional Medicare.

Participation in the program is voluntary and requires a monthly premium of $35 and an annual deductible of $275. After fulfilling the deductible, the program will pick up 75 percent of prescription drug costs up to $2,200. There is no coverage for out-of-pocket costs from $2,200 to $3,600.

This gap in coverage is commonly called the "doughnut hole" and represents a flaw in the plan caused by fiscal limitations placed on the overall plan. Low-income individuals below 135 percent of poverty are exempt from co-payments after $3,600, individuals between 135 and 150 percent of poverty pay from $2 to $5 on a sliding fee scale and individuals above 150 percent of poverty pay a 5 percent coinsurance.

For the first time in history, Medicare will become a means tested program with higher income beneficiaries paying more for Part B coverage. This includes individuals with annual incomes over $80,000 ($160,000 for couples) and is scheduled to start in 2007.

In addition, asset testing is now required for low-income beneficiaries. This could result in as many as three million people losing their current coverage.

A new preventive health benefit is available starting in 2005. Beneficiaries will be covered for an initial physical examination. New preventive benefits and disease management initiatives will be available. Increased payment for mammography is also included.

Concerns mounting

The legislation is expected to cost at least $400 billion over the next 10 years. It has a provision that requires the president to monitor the costs of the program and submit legislation to address rising costs if future benefit expenditures exceed the budget cap of $400 billion.

This language is of concern to some because it could force deep budget cuts in the program or benefit reductions should Congress decide not to fund increased costs.

The bill prohibits the federal government from using its buying power to obtain discounts from the pharmaceutical industry. This is a provision of significant concern to plan opponents.

It does allow the importation of prescription drugs from Canada but only if the Secretary of the Department of Health and Human Services certifies that it is safe. To date, HHS has been unwilling to do this. It does contain provisions to accelerate the availability of new generic drugs. Generic drugs are usually less costly than brand names.

Employer "crowd out" is of concern by many. Crowd out occurs when employers drop coverage on employees or retirees hoping they will move to government health programs. In an environment where employers are having difficulty maintaining health benefits for workers, this is a major concern.

The legislation does provide $88 billion in funding to encourage employers to continue coverage for their beneficiaries. This funding is in the form of tax-free subsidies and authority to subsidize employee out-of-pocket costs.

Pharmaceutical medigap policies are prohibited in the new law after January 1, 2006. The idea is to prohibit a repeat of the medigap insurance abuses of the past where individuals were sold duplicative policies to the Medicare benefit.


While preventing redundant and unnecessary policies are good public policy, the effect of this provision is people are unable to obtain insurance policies that cover the out-of-pocket costs of the new benefit.

Patients may have additional costs for drugs that are not on the benefit formulary crafted by private plans. The prohibition also has implications for states that supplement pharmaceutical costs through state-funded programs.

People eligible for Medicare and Medicaid will now be able to have their coverage entirely through the Medicare program. In the past, Medicaid was the primary provider of outpatient drug coverage for low-income Medicare beneficiaries.

Most state Medicaid pharmaceutical programs provide broader formulary coverage than private plans. In some cases, movement into the new program could result in less access to medications.

The costs for the medications for dual eligibles are now split with the federal government. States that choose not to participate will have to pick up the full costs of the medications and are not eligible for program discounts for uncovered drugs.

The biggest concern is the complexity of the program. It will be confusing for many individuals and will require significant analysis to ensure one is getting the best deal when comparing options.

Others benefit, too

Included in the legislation are several provisions supported by various interest groups. Physician fees, which were scheduled for a cut of 4.5 percent, actually got an increase of 1.5 percent for two years.

An increase in the incentive for rural providers was also provided. This was to address the growing number of providers opting out of the Medicare program because of reimbursement concerns. Several administrative changes also passed that are expected to reduce the burden on physicians.

Hospitals are eligible for increases in reimbursement based on quality indicators. Hospitals that serve high numbers of uninsured patients and rural hospitals will receive a specific increase in payment. Additional benefits for federally qualified health centers, home health providers and durable medical equipment are also provided.

Next steps

The HHS will develop regulations to implement the program. Through this process many of the fine points of the program will be decided. Those who oppose the construction of the legislation will be working to change provisions they find most offensive.

Look for efforts to allow the federal government to negotiate prices, medigap policy reform and glitches that are discovered that disadvantage individuals eligible for state-based supplemental programs as initial targets for reform.

While there is little debate on the need for the Medicare outpatient prescription drug benefit, the battle over its future form has just begun.

Georges C. Benjamin, MD, FACP, is executive director of the American Public Health Association in Washington, D.C. He can be reached by phone at 202-777-2430 or by e-mail to

By Georges C. Benjamin. MD, FACP
COPYRIGHT 2004 American College of Physician Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2004, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Health Policy Update
Author:Benjamin, Georges C.
Publication:Physician Executive
Geographic Code:1USA
Date:Mar 1, 2004
Previous Article:Process redesign part 3: implementation.
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