Medicare Part D, also called the Medicare prescription drug benefit, is an optional United States federal-government program to help Medicare beneficiaries pay for self-administered prescription drugs through prescription drug insurance premiums (the cost of almost all professionally administered prescriptions is covered under optional Part B of United States Medicare). Part D was originally proposed by President Bill Clinton in 1999, then by both political parties and Houses of Congress and President Bush during 2002 and 2003. The final bill was enacted as part of the Medicare Modernization Act of 2003 (which also made changes to the public Part C Medicare health plan program) and went into effect on January 1, 2006. The various proposals were substantially alike in that Part D was optional, it was separated from the other three Parts of Medicare in most proposals, and it used private pharmacy benefit managers on a regional basis to negotiate drug prices. The differences included consistent benefits nationwide in the Clinton/Democratic proposals (as opposed to multiple options in the Republican plans and the bill finally enacted) and a wide array of deductibles and co-pays (including the infamous "donut hole"); Bush's initial proposal included true catastrophic coverage for middle income seniors, but it was not in the final version and is a feature still not available in Part D.
Program specifics
Eligibility and enrollment
Individuals on Medicare are eligible for prescription drug coverage under a Part D plan if they are signed up for benefits under Medicare Part A and/or Part B. Beneficiaries obtain the Part D drug benefit through two types of plans administered by private insurance companies or other types of sponsors: the beneficiaries can join a standalone Prescription Drug Plan (PDP) for drug coverage only or they can join a public Part C health plan that jointly covers all hospital and medical services covered by Medicare Part A and Part B at a minimum, and typically covers additional healthcare costs not covered by Medicare Parts A and B including prescription drugs (MA-PD). (NOTE: Medicare beneficiaries need to be signed up for both Parts A and B to select Part C whereas they need only A or B to select Part D.)
About two-thirds of all Medicare beneficiaries are enrolled directly in Part D or get Part-D-like benefits through a public Part C Medicare health plan. Another large group of Medicare beneficiaries get prescription drug coverage under plans offered by former employers or through the Veterans Administration. It is also possible that a former employer or union might sponsor a Part D plan for former employees/members (such plans are called Employer Group Waiver Plans).
Medicare beneficiaries can enroll directly through the plan's sponsor, or indirectly via an insurance broker or the exchange—called Medicare Plan Finder—run by the Centers for Medicare and Medicaid Services (CMS) for this purpose; the beneficiary's benefits and any additional assistance payments and rights are the same regardless of enrollment channel. Beneficiaries already on a plan can choose a different plan or drop Part C/D during the annual enrollment period or during other times during the year under special circumstances. For some time, the annual enrollment period has lasted from October 15 to December 7 of each year but that is changing for Part C in 2019. In particular, low-income seniors on Social Security Extra Help/LIS and many middle-income seniors on state pharmaceutical assistance programs can choose a different plan or drop Part C/D more often than once a year.
Medicare beneficiaries who were eligible for but did not enroll in a Part D when they were first eligible and later want to enroll, pay a late-enrollment penalty, basically a premium surtax, if they did not have acceptable coverage through another source such as an employer or the U.S. Veterans Administration. This penalty is equal to 1% of the national premium index times the number of full calendar months that they were eligible for but not enrolled in Part D and did not have creditable coverage through another source. The penalty raises the premium of Part D for beneficiaries, when and if they elect coverage.
In May 2018, enrollment exceeded 44 million, including both those on standalone Part D and those enrolled in a Part C plan that includes Part-D-like coverage. About 20% of those beneficiaries are on an EGWP drug plan where a former employer receives a Part D subsidy on his or her behalf. The latter two groups lack the same freedom of choice that the standalone Part D group has because they must use the Part D plan chosen by the Part C plan's sponsor or their former employer.
Plans offered
Unlike Medicare Part A and B, there is no public option for Medicare Part D; all plans are provided by private companies.
As of May 2018, over 700 drug plan contracts had been signed between CMS and administrators, which in turn means multiple thousand plans because administrators can vary plans by county. Individual counties might have as few as three to as many 30 plans from which beneficiaries can choose. This allows participants to choose a plan that best meets their individual needs. Although the number of plans available has been trending down since the inception of the program, almost all counties offer many choices.
Plan administrators are required to offer a plan with at least the "standard" minimum benefit or one that is actuarially equivalent to the standard, and they may also offer plans with more generous benefits (e.g., no deductible during the initial spend phase). The terms "standard," "actuarially equivalent," and "more generous" relate to the plan's deductible/co-pay/formulary/"donut-hole" (see Note)/pharmacy-preference aspects and has no direct relevance to the beneficiary other than increasing or decreasing personal choice. Each plan is approved by the CMS before being marketed.
(NOTE: It is often said the donut hole will be eliminated; that is not technically true. The "donut hole" is also called the gap phase of spending; at one time the co-pay in the gap was 100%. As of 2020, the "standard" co-pay in the gap will be 25%, the same as in a "standard" initial spend phase policy. It is also important to note that relatively few people as a percent of the total number of people on Medicare are ever financially affected by either the donut hole or catastrophic phases of spending.)
Medicare offers an interactive online tool called the Medicare Plan Finder that allows for comparison of coverage and costs for all plans in a geographic area. The tool lets users enter a list of medications along with pharmacy preferences and Social-Security-Extra-Help/LIS and related status. The Finder can show the beneficiary's total annual costs for each plan along with a detailed breakdown of the plans' monthly premiums, deductibles and prices for each drug during each phase of spending (initial, gap, catastrophic). Plans are required to update this site with current prices and formulary information every other week throughout the year.
Costs to beneficiaries
Beneficiary cost sharing (deductibles, coinsurance, etc.)
The Medicare Modernization Act (MMA) established a standard drug benefit that all Part D plans must offer. The standard benefit is defined in terms of the benefit structure and without mandating the drugs that must be covered. For example, in 2013, the standard benefit required payment by the beneficiary of a $325 deductible, then required 25% coinsurance payment by the beneficiary of drug costs up to an initial coverage limit of $2,970 (the full retail cost of prescriptions). Once this initial coverage limit is reached, the beneficiary had to pay the full cost of his/her prescription drugs up until the total out-of-pocket expenses reached $4,750 (excluding premiums and any expense paid by the insurance company) minus a 52.5% discount in this gap, referred to as the "Donut Hole". Once the beneficiary reaches the Out-of-Pocket Threshold, he/she becomes eligible for catastrophic coverage. During catastrophic coverage, he or she pays the greater of 5% coinsurance, or $2.65 for generic drugs and $6.60 for brand-name drugs. The catastrophic coverage amount is calculated on a yearly basis and a beneficiary who reaches catastrophic coverage by the end of the benefit year will start his or her deductible anew at the beginning of the next benefit year. Although uncommon, not all benefit years coincide with the calendar year. The donut-hole and catastrophic-coverage thresholds dropped slightly in 2014 and typically go up and down slightly between given years.
The standard benefit is not the most common benefit mix offered in Part D plans. Only 11% of plans in 2010 offered the defined standard benefit described above. Plans vary widely in formularies and cost-sharing. Most eliminate the deductible and use tiered drug co-payments rather than coinsurance. The only out-of-pocket costs that count toward getting out of the coverage gap and into catastrophic coverage are True Out-Of-Pocket (TrOOP) expenditures. TrOOP expenditures accrue only when drugs on plan's formulary are purchased in accordance with the restrictions on those drugs. Monthly premium payments do not count towards TrOOP.
Under the Patient Protection and Affordable Care Act of 2010, the effect of the "Donut Hole" coverage gap was to be gradually reduced through a combination of measures including brand-name prescription drug discounts, generic drug discounts and a gradual increase in the percentage of out-of-pocket costs covered while in the donut hole. The "Donut Hole" will continue to exist after 2020 but its effect will be changed in some way yet to be determined, because plan administrators must treat out of pocket costs below the catastrophic level the same whether or not the insured is in the donut hole or not. That is, under the "standard benefit" design all prescriptions in all tiers could be subject to a 25% co-pay whereas as of 2014 many drugs in Tier 1 are available with no co-pay.
Most plans use specialty drug tiers, and some have a separate benefit tier for injectable drugs. Beneficiary cost sharing can be higher for drugs in these tiers.
The average (weighted) monthly premium paid by the beneficiary for PDPs was $35.09 in 2009, which is an increase from $29.89 in 2008. Premiums were projected to increase to $38.94 for 2010 as well. In 2014, the average is around $30 a month. The average premium is a misleading statistic because it averages the premiums offered, not the premiums paid. Most insurers offer a very low-cost plan (e.g., $15 a month) that few choose. This lowers the average, but does not reflect what is happening in the market.
In 2007, 8% of beneficiaries enrolled in a PDP chose one with some gap coverage. Among beneficiaries in MA-PD plans, enrollment in plans offering gap coverage was 33% (up from 27% in 2006). Premiums are significantly higher for plans with gap coverage. These plans are becoming less common as the gap closes. The fact that beneficiaries on Social Security Extra Help/LIS were never affected by the gap and the fact that many state pharmaceutical assistance programs protected middle income seniors in the gap are the reasons this gap benefit was never especially popular.
Major Part D plan sponsors are dropping their more expensive options, and developing lower-cost ones.
Low-income subsidies and middle-income help
One option for those struggling with drug costs is the low-income subsidy. Beneficiaries with income below 150% of the poverty line are eligible for the low-income subsidy, which helps pay for all or part of the monthly premium, annual deductible and co-pays. CMS estimated that 12.5 million Part D beneficiaries were eligible for low-income subsidies in 2009.
The subsidy award is given a level with the following effects for the 2013 benefit year:
| Level | Deductible | Generic Copay | Brand Copay | Catastrophic Coverage |
|---|---|---|---|---|
| 1 | $0 | $2.65 | $6.60 | $0 copays on all meds |
| 2 | $0 | $1.15 | $3.50 | $0 copays on all meds |
| 3 | $0 | $0 | $0 | $0 copays on all meds |
| 4 | $66 max | 15% | 15% | $2.65 Generic & $6.60 Brand copays |
Probably the most important benefits of Social Security Extra Help/LIS other than "free" is the fact that the beneficiary has no exposure to "donut hole" costs and can change plans monthly. In addition, in many states, state pharmaceutical assistance programs provide similar protection in the gap to middle-income seniors and allow beneficiaries to change plans one other time during the year in addition to the annual enrollment/re-enrollment period.
Excluded drugs
While CMS does not have an established formulary, Part D drug coverage excludes drugs not approved by the Food and Drug Administration, those prescribed for off-label use, drugs not available by prescription for purchase in the United States, and drugs for which payments would be available under Part B.
Part D coverage excludes drugs or classes of drugs that may be excluded from Medicaid coverage. These may include:
- Drugs used for anorexia, weight loss, or weight gain
- Drugs used to promote fertility
- Drugs used for erectile dysfunction
- Drugs used for cosmetic purposes (hair growth, etc.)
- Drugs used for the symptomatic relief of cough and colds
- Prescription vitamin and mineral products, except prenatal vitamins and fluoride preparations
- Drugs where the manufacturer requires as a condition of sale any associated tests or monitoring services to be purchased exclusively from that manufacturer or its designee
While these drugs are excluded from basic Part D coverage, drug plans can include them as a supplemental benefit, provided they otherwise meet the definition of a Part D drug. However plans that cover excluded drugs are not allowed to pass on those costs to Medicare, and plans are required to repay CMS if they are found to have billed Medicare in these cases. Part D plans may cover all benzodiazepines and those barbiturates used in the treatment of epilepsy, cancer or a chronic health disorder. These two drug classes were originally excluded, until their reassignment in 2008 by the Medicare Improvements for Patients and Providers Act.
Plan formularies
Part D plans are not required to pay for all covered Part D drugs. They establish their own formularies, or list of covered drugs for which they will make payment, as long as the formulary and benefit structure are not found by CMS to discourage enrollment by certain Medicare beneficiaries. Part D plans that follow the formulary classes and categories established by the United States Pharmacopoeia will pass the first discrimination test. Plans can change the drugs on their formulary during the course of the year with 60 days' notice to affected parties.
The Plan's tiered co-pay amounts for each drug only generally apply during the initial period before the coverage gap.
The primary differences between the formularies of different Part D plans relate to the coverage of brand-name drugs.
Typically, each Plan's formulary is organized into tiers, and each tier is associated with a set co-pay amount. Most formularies have between 3 and 5 tiers. The lower the tier, the lower the co-pay. For example, Tier 1 might include all of the Plan's preferred generic drugs, and each drug within this tier might have a co-pay of $5 to $10 per prescription. Tier 2 might include the Plan's preferred brand drugs with a co-pay of $40 to $50, while Tier 3 may be reserved for non-preferred brand drugs which are covered by the plan at a higher co-pay, perhaps $70 to $100. Tiers 4 and higher typically contain specialty drugs, which have the highest co-pays because they are generally more expensive. By 2011 in the United States a growing number of Medicare Part D health insurance plans had added the specialty tier.
Beneficiary support
CMS funds a national program of counselors to assist all Medicare beneficiaries, including duals, with their plan choices. The program is called State Health Insurance Assistance Program (SHIP).
History
Medicare Part D was originally proposed by President Bill Clinton in 1999. It was based on earlier proposals developed by Congresswoman Nancy Pelosi and Senator Tom Daschle. These late-1990s/2000 proposals—with the exception of the spend phase structure but including the fact that Medicare itself would not do the negotiating—are substantially the same as the current Part D. The major change since passage has been the gradual reduction of the "donut hole" co-pay from 100% to 25%.
Prescription drug prices were rising and the population most vulnerable to those rising prices were senior citizens. Then President George W. Bush pushed the Medicare Part D through the House in 2002 but, then it stalled in the Senate. It became apparent that American Seniors (who had already turned to Canada for lower drug prices), needed an advocate who would work to create a commission to accredit Canadian Pharmacies to conduct cross border business between Canadian pharmacies and American consumers. The North American Pharmacy Accreditation Commission was created (by the founders of PBRX), and the CEO's of the largest Canadian Pharmacies traveled to Washington for NAPAC summits and to ultimately meet with President George W. Bush (and many members of the Senate and Congress along partisan lines). In the end, the Canadian pharmacies refused to support NAPAC and opted to certify themselves. The result of self-certification ultimately gave rise to a large number of counterfeit drugs being exported from Canada into the United States.
It was clear that Canadian pharmacies were marketing prescription drugs to Americans at lower prices than U.S. based pharmacies, however, it became evident in April 2018 that the health risk of purchasing drugs from Canada could result in the sale of millions of counterfeit prescriptions being sold cross border. In one such case, one of the largest importers of counterfeit Cancer drugs was CanadaDrugs.com which was seized by the Department of Justice. Canada Drugs was founded in 2001 by Kristian Thorkelson and had earned more than $78 million selling drugs not just from Canada but, from all over the world. Medications were mislabeled and counterfeit versions of the cancer drugs Avastin and Altuzan (which had NO active ingredient), were being sold to unsuspecting cancer patients in the United States.
Gregg Fischer walked the halls of Congress (and the U.S. Senate), speaking to anyone who was willing to listen. President George W. Bush was not only listening he had picked up the gauntlet left behind by President Bill Clinton (who had proposed the idea of a Medicare Prescription Drug Benefit in 1999) but, with both houses in control of Republicans, the idea never turned into reality until President George W. Bush decided it was time to tackle the high cost of prescription drugs in America.
During the ensuing months of lobbying for lower-priced prescription drugs, it became clear that a cause worth fighting for has its price. Pillbot, which offered the first free online drug price comparison tool for consumers which had been featured in Money Magazine for its innovative technology and PillBid (the sister site for low priced prescription drugs) voted the Best of the Web (out of just six websites), by Money Magazine in 2001 are never considered as the recipient of a three million dollar Medicare contract according to the New York Times to develop out the price comparison tool for Medicare. As it turns out, the founders of PBRX offered the technology at no cost to the government, however, those in government decided it was best to pay for technology that was already offered for free.
With mounting pressure from lobbying efforts to bring cheaper drugs across the border from Canada (with the associated risks of millions of counterfeit drugs being sold to Americans), coupled with big pharma lobbying to keep the Canadian drugstore door closed, President Bush signed the Medicare Part D bill in November 2003. In his remarks at the signing of the bill, President Bush stated:
"These reforms are the act of a vibrant and compassionate government. We show our concern for the dignity of our seniors by giving them quality healthcare. We show our respect for seniors by giving them more choices and more control over the decisionmaking. We're putting individuals in charge of their healthcare decisions.
The challenges facing seniors on Medicare were apparent for many years, and those years passed with much debate and a lot of politics and little reform to show for it. And that changed with the 108th Congress. This year we met our challenge with focus and perseverance. We confronted problems, instead of passing them along to future administrations and future Congresses. We overcame old partisan differences. We kept our promise and found a way to get the job done. This legislation is the achievement of members in both political parties. And this legislation is a victory for all of America's seniors." At the start of the program in January 2006, it was expected that eleven million people would be covered by Medicare Part D; of those, six million would be dual eligible. About two million people who were covered by employers would likely lose their employee benefits.
As of January 30, 2007, nearly 24 million individuals were receiving prescription drug coverage through Medicare Part D (PDPs and MA-PDs combined), according to CMS. Medicare offers other methods of receiving drug coverage, including the Retiree Drug Subsidy. Federal retiree programs such as TRICARE and Federal Employees Health Benefits Program (FEHBP) or alternative sources, such as the Department of Veterans Affairs. Including people in these categories, more than 39 million Americans are covered for prescriptions by the federal government.
A survey released by AARP in November 2007 found that 85% of enrollees reported satisfaction with their drug plan, and 78% said that they had made a good choice in selecting their plan.
Program costs
As of the end of 2008, the average annual per beneficiary cost spending for Part D was $1,517, making the total expenditures of the program for 2008 $49.3 billion.
From a budget perspective, Part D is effectively three different programs:
- About 40% is spent for low-income Medicare beneficiaries (20% of those on Medicare overall) mentioned above and the drug costs of low income people on Part C. This expense was previously (before Part D) mostly covered by Medicaid, the Veteran's Health Administration and state pharmaceutical assistance programs. A very large percent of this first group is also on Medicaid.
- About 40% is premium support that allows middle-income Medicare beneficiaries and the rest of the people on Part C (about 40% of those on Medicare overall) get drug coverage. After the first five years of Part D, government-accountability-office research shows that this part of the "Part D budget" appeared to be holding down other Medicare costs related to provider services because beneficiaries were more consistently taking their medications. As a result, the middle-income portion of the Part D program may actually pay for itself in the long term.
- About 20% of the Part D budget covers re-insurance for catastrophic drug costs as described above. Part D pays 95% of costs over the TROOP. This part of the budget helps about 1% of the people on Medicare who are very ill.
Subsidy calculation
As of 2015, the program requested bids from various companies and used those bids to estimate subsidies, then also paid an additional subsidy based on a consumer's risk score.
Cost utilization
Medicare Part D Cost Utilization Measures refer to limitations placed on medications covered in a specific insurer's formulary for a plan. Cost utilization consists of techniques that attempt to reduce insurer costs. The three main cost utilization measures are quantity limits, prior authorization and step therapy.
Quantity limits refer to the maximum amount of a medication that may be dispensed during a given calendar period. For example, a plan may dictate that it will cover 90 pills of a given drug within a 30-day period.
A prior authorization requirement requires a health care worker to receive formal approval from a plan before it agrees to cover a specific prescription. It may be used by insurers for drugs that are often misused. Prior authorization helps ensure that patients receive correct medications.
Step therapy is a process in which a plan requires an individual to try, and prove ineffective, one or more specified lower-cost drugs before a higher-cost drug in the same therapeutic class is approved.
Implementation issues
- Plan and Health Care Provider goal alignment: PDP's and MA's are rewarded for focusing on low-cost drugs to all beneficiaries, while providers are rewarded for quality of care – sometimes involving expensive technologies.
- Conflicting goals: Plans are required to have a tiered exemptions process for beneficiaries to get a higher-tier drug at a lower cost, but plans must grant medically-necessary exceptions. However, the rule denies beneficiaries the right to request a tiering exception for certain high-cost drugs.
- Lack of standardization: Because each plan can design their formulary and tier levels, drugs appearing on Tier 2 in one plan may be on Tier 3 in another plan. Co-pays may vary across plans. Some plans have no deductibles and the coinsurance for the most expensive drugs varies widely. Some plans may insist on step therapy, which means that the patient must use generics first before the company will pay for higher-priced drugs. Patients can appeal and insurers are required to respond within a short timeframe, so as to not further the burden on the patient.
- Standards for electronic prescribing for Medicare Part D conflict with regulations in many U.S. states.
Impact on beneficiaries
A 2008 study found that the % of Medicare beneficiaries who reported forgoing medications due to cost dropped with Part D, from 15.2% in 2004 and 14.1% in 2005 to 11.5% in 2006. The percentage who reported skipping other basic necessities to pay for drugs also dropped, from 10.6% in 2004 and 11.1% in 2005 to 7.6% in 2006. The very sickest beneficiaries reported no reduction, but fewer reported forgoing other necessities to pay for medicine.
A parallel study found that Part D beneficiaries skip doses or switch to cheaper drugs and that many do not understand the program. Another study found that Part D resulted in modest increases in average drug utilization and decreases in average out-of-pocket expenditures. Further studies by the same group of researchers found that the net impact among beneficiaries was a decrease in the use of generic drugs.
A further study concludes that although a substantial reduction in out-of-pocket costs and a moderate increase in utilization among Medicare beneficiaries during the first year after Part D, there was no evidence of improvement in emergency department use, hospitalizations, or preference-based health utility for those eligible for Part D during its first year of implementation. It was also found that there were no significant changes in trends in the dual eligibles' out-of-pocket expenditures, total monthly expenditures, pill-days, or total number of prescriptions due to Part D.
A 2020 study found that Medicare Part D led to a sharp reduction in the number of people over the age of 65 who worked full-time. The authors say that this is evidence that before the change, people avoided retiring in order to maintain employer-based health insurance.
Criticisms
The federal government is not permitted to negotiate Part D drug prices with drug companies, as federal agencies do in other programs. The Department of Veterans Affairs, which is allowed to negotiate drug prices and establish a formulary, has been estimated to pay between 40% and 58% less for drugs, on average, than Part D. On the other hand, the VA only covers about half the brands that a typical Part D plan covers.
Part of the issue is that Medicare does not pay for Part D drugs, and so has no actual leverage. Part D drug providers are using the private insurer leverage, which is generally a larger block of consumers than the 40 million or so actually using Medicare parts A and B for medical care.
Although generic versions of [frequently prescribed to the elderly] drugs are now available, plans offered by three of the five [exemplar Medicare Part D] insurers currently exclude some or all of these drugs from their formularies. ... Further, prices for the generic versions are not substantially lower than their brand-name equivalents. The lowest price for simvastatin (generic Zocor) 20 mg is 706 percent more expensive than the VA price for brand-name Zocor. The lowest price for sertraline HCl (generic Zoloft) is 47 percent more expensive than the VA price for brand-name Zoloft."
— Families USA 2007 "No Bargain: Medicare Drug Plans Deliver High Prices"
Estimating how much money could be saved if Medicare had been allowed to negotiate drug prices, economist Dean Baker gives a "most conservative high-cost scenario" of $332 billion between 2006 and 2013 (approximately $50 billion a year). Economist Joseph Stiglitz in his book entitled The Price of Inequality estimated a "middle-cost scenario" of $563 billion in savings "for the same budget window".
Former Congressman Billy Tauzin, R–La., who steered the bill through the House, retired soon after and took a $2 million a year job as president of Pharmaceutical Research and Manufacturers of America (PhRMA), the main industry lobbying group. Medicare boss Thomas Scully, who threatened to fire Medicare Chief Actuary Richard Foster if he reported how much the bill would actually cost, was negotiating for a new job as a pharmaceutical lobbyist as the bill was working through Congress. 14 congressional aides quit their jobs to work for related lobbies immediately after the bill's passage.
In response, free-market think tank Manhattan Institute issued a report by professor Frank Lichtenberg that said the VA National Formulary excludes many new drugs. Only 38% of drugs approved in the 1990s and 19% of the drugs approved since 2000 were on the formulary.
In 2012, the plan required Medicare beneficiaries whose total drug costs reach $2,930 to pay 100% of prescription costs until $4,700 is spent out of pocket. (The actual threshold amounts change year-to-year and plan-by-plan, and many plans offered limited coverage during this phase.) While this coverage gap does not affect the majority of program participants, about 25% of beneficiaries enrolled in standard plans find themselves in this gap.
As a candidate, Barack Obama proposed "closing the 'doughnut hole'" and subsequently proposed a plan to reduce costs for recipients from 100% to 50% of these expenses. The cost of the plan would be borne by drug manufacturers for name-brand drugs and by the government for generics.
