issue guide: Medicare Prescription Drug Act

Background & Facts

Drugs and seniors

Prescription drugs are the fastest growing cost in health care. In 2001 Americans spent a total of $141 billion on prescription drugs, a 16% increase from 2000. (Kaiser)
Seniors are hardest hit by the rise in costs – although they are just 14% of the population, they account for 42% of drug spending. (Families USA) Almost all seniors (99%) receive health coverage through Medicare, but because Medicare didn't cover out-patient drugs, before MMA became law over a third of seniors had no coverage for prescribed drugs (those that did, had their own public or private plans).

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)

The act came in two stages.

The first stage, which began in June 2004, was a program designed to give seniors drug savings immediately. For a one time payment of $30, Medicare recipients could purchase a card allowing them to receive discounts ranging from 5% to 25% off prescription drugs (see note below).

In the second stage, beginning in January 2006, the full benefits from the plan went into effect. Medicare recipients could choose between two options: either a private health plan in their area that offers prescription drug coverage through Medicare, or a private insurance plan that also covers hospital costs and doctors' visits, such as a preferred provider organization (PPO) or health maintenance organization (HMO).

Recipients started off paying a monthly premium of $25 (on average since each private provider sets their own premium - NYT); premiums for 2007 are about $24 or $29 a month, depending on who you ask (WP) - but may inch up in the near future (WP). Coverage depends on how much a senior spends on drugs:

How Much Seniors Spend:	Medicare pays:	Seniors save/lose:
$0-$250	none	seniors lose $300*
$250-$2,250	75%	seniors who spend less than $650 will lose money; seniors who spend more than $650 will save $0-$1200
$2,250-$5,100*	none	seniors save $1200
above $5,100	95%	seniors save $1,200 plus almost all costs above $5,100

*known as the "donut hole" in coverage

How much Medicare pays:

Seniors on the plan have to pay the first $250 in drug costs (called a deductible).
Medicare then pays 75 percent of prescription drug costs up to $2,250.
Past that amount, a gap in the coverage – known as a doughnut – requires each beneficiary to pay full costs up to the $5,100 mark, when coverage kicks in again (which adds up to $3,600 out of pocket).
After that point, seniors on the plan are in the clear, with Medicare paying 95 percent of prescription drug costs for the remainder of the year.

How much seniors save or lose:

Seniors who spend less than $650 a year on prescription drugs would lose money by joining the plan (the money they save wouldn't cover their monthly premium);
Seniors would start saving money if their costs were above $650, with savings growing the more is spent up to $2,250 when savings would reach $1,200.
Seniors spending between $2,250 and $5,100 would also only be saving $1200 in costs by being on the plan.
After they spend over $5,100, seniors clearly benefit from being on the plan – with every dollar past that point almost entirely paid by Medicare.

Note on formula: plans may vary, as each private health care company works with Medicare has some flexibility, although they can never offer less coverage than seniors would receive under this formula. *The amount a senior saves or loses, as calculated in the chart above, factors in the $300 a year premium a senior on the plan must spend. Our math on these numbers comes to the same numbers on AARP's website. They are, however, different from the White House estimates, we think in part because the White House does not factor in the $300 a year premium seniors pay to be in the plan.

Finding a plan: On November 7, 2005 Medicare posted a tool for seniors to find the cheapest plan in their area.

Low income seniors

Low income seniors have a much more generous deal. In the first stage, seniors with incomes less than $12,124 per year could receive a subsidy of $600 in both 2004 and 2005 to pay for prescription medicines. In the second stage, for individual seniors with an income less than $12,124 a year, or married couples with combined income of less than $16,363 – and with liquid assets less than $6,000 for singles/$9,000 for couples -- the premium and the deductible is waived, there is no gap in coverage, and co-payments would be only up to $5. Seniors who made less than $13, 470 or under $18,180 as a couple, with assets less than $10,000/$20,000, can also sign on for reduced premiums, a $50 deductible and co-insurance payments of 15%
(Medicare picking up the other 85%). (White House)

The rules

The Department of Health and Human Services released the "rules" for the drug plan in January 2005. Among the details on how the plan will work are:

Subsidies for employers with drug plans: To make sure employers who currently offer drug coverage plans to their retirees don't drop those plans now that Medicare has a substitute plan, Medicare will subsidize those employers $668 per retiree (on average) to continue with the private plan.
How many and what kinds of drugs providers must offer on their plans.
How a senior can appeal if they are denied coverage for a drug.

For more details on the rules, see Kaiser's update.

The costs

The longterm pricetag for Medicare's drug program has been a moving target. At first thought to cost $400 billion between 2004-2013, in February 2005 the administration recalibrated the program's costs to be $720 billion between 2006-2015. (CBO)
(The reporting on these numbers was mixed; the administration said at the same time that the gross costs of the program would be $1.2 trillion between 2006-2015, but that, when you add in other cost cutting measures, senior premiums and state funding, the ultimate costs during that time will be $720 billion). (WP and NYT)
In March, 2005 the Congressional Budget Office put the 2006-2015 cost at $850 billion. The latest numbers from Medicare's office are $678 billion from 2006-2015. (NYT)

For the first year, 2006, the cost of the program is thought to be $30 billion, rising to $48 billion in 2007 (WP).

Getting enrolled

Seniors started signing up for coverage on November 15, 2005 - and had until May 15 to enroll before premiums started inching up. Early estimates from the administration say that 38 million out of 42.5 million eligible seniors now have drug coverage (other numbers say 44 million seniors are eligible). 10.6 million seniors were automatically enrolled and about 10 million were previously on private insurance plans. (NYT and WP) The administration says 2/3rds of those not enrolled would qualify for the low income plan. (WP)

When prescriptions under the new program started being filled January 1, 2006, the roll out was more than a little bumpy, with many seniors unable to pay for prescriptions, states jumping in to the rescue, the president ordering insurers to guarantee enrollee prescriptions for 30 days, and the administration promising to pay states back for costs they laid out above what the private insurers now owe them. (USAT, NYT)

Early feedback on how the plan is helping seniors are mixed. A March survey from the administration shows that while most seniors on the new plan say they had no problem getting their drugs and that they're saving money, one in five seniors who were switched over from Medicaid to Medicare say they're prescriptions aren't all covered under the new plan. (WP) An April Washington Post survey showed similar ups and downs (WP), while two additional studies find that 20% of seniors may be paying more for their drugs under the new plan (USAT).

Note on discount card savings: It depends on who you ask. AARP says 10-15% savings, the White House puts the number at 25% savings, Kaiser has a conservative 5%.

Taking care of clients

The Medicare drug act put the business of providing drug coverage into private hands. There was some concern that it wouldn't be in the interest of seniors to let private enterprise handle their drug insurance. According to audit reports the NYTimes got a hold of in '07, those concerns are at least partly valid: many companies have been charged with misleading advertising and unjustifiably denying coverage. Medicare, however, counters that their audits show that they're on top of overseeing the private companies - which are able to save seniors money in premiums. (NYT)

Changes in '07

Congress was considering directing Medicare to negotiate drug prices directly with drug companies (which it isn't allowed to do now), in the hopes that it can use the muscle of the feds to get seniors cheaper drugs. The administration says direct negotiations won't help, but will just undermine the current system, where private insurers who run the Medicare drug program are already negotiating cheap drug deals.

Dems also promised to close the "donut hole" in
seniors' drug coverage, but at a possible cost of $450 billion over 10 years closing the hole may be a near fiscal impossibility. (WP)

Meanwhile - in an effort that may make no headway - the president and some in Congress want to raise premiums for seniors making $82,000 or more. (WP)

Updated September, 2007

Did we miss something, let some slant slip in, lose a link - or do you just have something to say? Drop a line below! In the spirit of open dialogue, cJ asks you keep it civil, keep it real and keep it focused on the message, not the messenger. See our policy page for more on what that all means.