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

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

2. In December of 2003, Congress passed and the President signed into law the most sweeping changes of Medicare law since its inception in 1965. The final enactment of the new legislation, called the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA 2003), covered a wide spectrum of issues that embodied much more than the first part of the title implies: “Medicare Prescription Drug Improvement.” The “Modernization” portion of the title became a major factor in redesigning and implementing a large part of the structure of Medicare

3. In an initial analysis of MMA 2003, prescription drugs would seem to be the major part of the legislation, and indeed, they were a major part. But this law includes several components outside of the scope of what became “Part D” of the new Medicare structure.

4. The components of MMA 2003 are the following: * New preventive medicine coverages were included in the menu of Medicare covered services. * A new Medicare plan and terminology, Medicare Part D, was implemented, which completely revised previous prescription drug treatment of the Medicare program. As a precursor to the inception of the comprehensive plan in 2006, during 2004 and 2005, Medicare recipients could apply for a Medicare discount card worth up to $600 per year for discounts or for free prescription drug purchases. The $600 program was available through December 31, 2005, at which point the program was curtailed when the full Medicare Part D program went into effect. * Medicare +Choice was renamed Medicare Advantage, and the new Medicare Advantage program was implemented. * Changes and incentive programs were developed for employers to continue providing group health insurance coverage to retired (Medicare-age eligible) employees. * Medicare supplement rules were revised, which changed the scope of the benefits of Plans H, I, and J after January 1, 2006. Plans K and L were added at that time.

5. New Medicare BenefitCoverages As of January 1, 2005, Medicare began covering * diabetes screening tests for people with Medicare at risk of getting diabetes (includes diabetes screening tests and diabetes self-management training); * a one-time initial preventive physical exam within six months of the day the Medicare enrollee first enrolls in Medicare Part B (named a “Welcome to Medicare” physical examination, which includes height, weight, and blood-pressure measurements, an EKG, education and counseling); and * cardiovascular screening blood tests for early detection of cardiovascular (heart) disease (includes blood tests to check cholesterol, lipid, or triglyceride levels, and other tests for early detection of or to identify a high risk for developing cardiovascular disease).

6. These coverages were added to the list of existing preventive services, which already included bone mass measurement, colorectal cancer screening, glaucoma testing, Pap test and pelvic examination (including a clinical breast exam), prostate cancer screening, screening mammograms, and vaccinations. With this ever-expanding list of preventive services, Medicare joined the American medical community in providing medical services designed to increase health-care awareness through detecting and preventing future medical problems. This preventive care then limits the cost of treating pre-existing conditions before they manifest themselves as acute medical problems.

7. Introduction of Medicare Part D(Prescription Drug) Program In a 12-page bulletin issued January 21, 2005, CMS released its “Final Rules Implementing the New Medicare Law: A New Prescription Drug Benefit for All Medicare Beneficiaries, Improvements to Medicare Health Plans and Establishing Options for Retirees.” The first paragraph of the report summarizes the intent of the law established by MMA, and its content can be used as a starting point for our discussion of the new Part D program.

8. The U.S. Department of Health and Human Services’ Centers for Medicare and Medicaid Services (CMS) today issued the final regulations implementing the new prescription drug benefit that will help people with Medicare pay for the drugs they need. This benefit begins in January 2006 and allows all Medicare beneficiaries to sign up for drug coverage through a prescription drug plan or Medicare health plan. The final regulations also provide new protections for retirees who currently receive drug coverage through their employers or unions, and they strengthen the Medicare Advantage program.

9. Two significant points contained in this paragraph serve as the course of our discussion. The first point is “. . . drug coverage through a prescription drug plan or Medicare health plan.” This means utilization of the Medicare Part D Plan, or utilization of a Medicare Advantage plan. The second point, “. . . new protections for retirees who currently receive drug coverage through their employers or unions,” refers to the fear that employers will drop retirees from their existing group health insurance because of escalating prescription drug costs.

10. Timelines of Implementation * December 8, 2003—The bill became law. * January 21, 2005—CMS established the final rules for implementing the law. * May 2005—SSA began sending notices to 20 million Medicare beneficiaries (nearly half),informing them that they may be eligible for a low-income subsidy to assist with their Medicare Part D premiums and copayments. Mailings continued through August. * June 2005—CMS sent notices to beneficiaries who were deemed eligible for the low-incomes subsidy, stating that they do not have to apply for the subsidy. * Fall 2005—Medicaid agencies began sending notices to dual eligibles (Medicare and Medicaid recipients), stating that they will be losing their Medicaid Prescription Drug coverage on January 1, 2006, and would be automatically enrolled in a Medicare Part D Plan. * October 15, 2005—CMS sent information to all Medicare beneficiaries describing the Part D Plans that would be available to them. * November 15, 2005 to May 15, 2006—initial enrollment period for the Part D program for all beneficiaries. Existing beneficiaries who enroll after May 15, 2006, must pay a penalty (1 percent per month), unless they can show that they had creditable coverage under another drug program (such as group health insurance). * January 1, 2006—The Medicare Part D Prescription Drug benefit began. Dual eligibleswere transferred from various Medicaid drug plans to Medicare Part D.

11. These timelines were important to Medicare enrollees, Medicare supplement producers, and Medicare Advantage enrollers, but the most important timeline was the enrollment period of November 15, 2005, through May 15, 2006, because this timeline represented the initial enrollment period for citizens who were already enrolled in Medicare. The importance of these dates is that anyone who did not take advantage of the enrollment premium would be assessed an additional 1 percent per month (cumulatively) for each month they delayed enrollment, unless they could prove creditable coverage from an existing plan, such as an employer-sponsored group health insurance program. These rules of the Part D Plan are still in force for the remainder of the Part D program as it is written.

12. As an example, currently and in the future, anyone who delays enrollment for three years (36 months) will see a 36 percent additional charge in the enrollment premium. In short, the Part D premiums are surcharged for late enrollees, and the amount charged at the time of enrollment is cumulative. In other words, the additional charge is added in perpetuity

13. Why would someone delay their enrollment? Suppose an enrollee feels that he or she does not need Part D at age 70, because he or she feels completely healthy and does not need prescription drugs. Then, at age 78, conditions arise that indicate a need for Part D coverage. The result is a 96 percent surcharge for the 96 months of delayed enrollment. Now the premiums for the Part D coverage alone can become a financial hardship when the surcharge is added, as do the inflationary increases in the price of the prescription drugs.

14. This concept, one of true insurance, is a sensible part of MMA 2003. In other words, the concept of delaying buying to save premium money could also be relative to any other insurance product, wherein individuals feel that they are not going to pay premiums until they absolutely need the coverage, and then they buy it at the current rate. Age-rated insurance products use this concept, and Part D certainly uses the right strategy in developing this fundamental principle.

15. Basic Foundations of Medicare Part D Rules, Costs, and Benefits Title I of MMA 2003 describes the parameters of the act: • MMA 2003 establishes a voluntary prescription drug benefit. • The benefit is for outpatient drug purchases. • The beneficiary must be enrolled in Part A and/or Part B of Medicare. • Coverage is provided through one of the following: * private prescription drug plans (known as PDPs), which offer drug-only coverage, and * the beneficiaries remain in traditional Medicare for their Part A and Part B services, OR * Medicare Advantage plans, which offer both prescription drug and health-care coverage (known as MA-PD plans) and combine or integrate the Part D Prescription Drug coverageswith the coverage for Part A and Part B services.

16. A new type of Medicare Advantage plan can be offered, which is a Regional Preferred Provider Organization (Regional PPO) plan. Regional PPOs must follow special rules: (1) they must offer Medicare Part D Prescription Drug benefits; and (2) they must place a cap on annual beneficiary out-of-pocket expenditures on Medicare cost-sharing. • Every Medicare beneficiary must have access to a prescription drug plan, either through an MA-PD plan in his or her region, or through a stand-alone PDP. • Both types of plans (PDP and MA-PD) must offer a standard drug benefit but must have the flexibility to vary the drug benefit within actuarial equivalency parameters. • Assistance with premiums and cost sharing are provided to eligible low-income beneficiaries (low income subsidy, or LIS, also known to Medicare as “Extra Help”). • Covered Part D drugs are essentially the same drugs and biologicals that are approved for the Medicaid program. Drugs and biological products that are already paid by Medicare Part A or Part B are not included. • Covered Part D drugs must be dispensed by a prescription and on an outpatient basis.

17. Medicare Part D Drug Benefit Medicare has allowed four modifications to the basic standard plan of Medicare Part D, but these modifications must follow certain rules regarding construction of benefit packages and cost-sharing. These modifications are known as • alternative basic standard plan, • alternative enhanced plans, • alternative enhanced plans that offer supplemental prescription drug coverages, and • alternative enhanced plans that offer optional prescription drug coverage.

18. One additional plan, called the fallback plan, can be offered in any region or in a local area of any region where a choice of at least two qualifying plans, one of which is a stand-alone PDP, does not exist. These plans can be offered by Medicare Advantage plans (MA-PD).

19. The four modification plans have a wide variety of complexities and differences. Only the basic standard plan is discussed here, because it is the basis on which the other variations are built. The basic standard plan is the most commonly described plan and is the foundation of the Part D program. Consider the following facts of the Part D basic plan.

20. Part D premiums were originally set at an anticipated benchmark of $37 per month for the basic standard plan, but in actuality, the prescription drug providers obtained lower premiums through bidding for the first year. (Premiums, however, are expected to rise each year as the program moves into maturity

21. Part D premiums were originally set at an anticipated benchmark of $37 per month for the basic standard plan, but in actuality, the prescription drug providers obtained lower premiums through bidding for the first year. (Premiums, however, are expected to rise each year as the program moves into maturity. • The annual deductible in 2007 was $265. (This deductible is expected to rise each year.) • Coinsurance is 25 percent for the next $2,400 of expenses (2007). For expenses from $265 to $2,665, the recipient pays $600 and Part D pays $1,800. • Part D does not cover the next $3,051of expenses (as of 2007). The beneficiary pays 100 percent of this cost out-of-pocket. This is referred to as the donut hole, because the beneficiary must pay prescription drug costs out-of-pocket until the out-of-pocket cost has totaled $3,850 in what are called, TROOP (true out-of-pocket) costs, to a total annual “catastrophic level.” • The catastrophic benefit was achieved for 2007 at $5,451. (This amount is expected to rise each year.) • At this level ($5,451 for 2007), the beneficiary pays 5 percent coinsurance, and Part D pays 95 percent, OR the beneficiary pays a $2.15 or $5.35 co-pay, depending on the type of drug. So, at the catastrophic level, Medicare Part D essentially covers the remainder of the annual drug costs at 95 percent or better.

22. In Medicare Part D, the premiums, deductibles, coinsurance amounts, and donut hole gaps paid by the beneficiary are designed to increase annually. The Congressional Budget Office (CBO) has projected those increases to reach the following amounts by 2013: • premium—$696 • deductible—$445 • coinsurance plateau—$4,000 donut hole gap—$5,066 • catastrophic plateau—$9,068

23. Low Income Provisions and Formulas Are Included Several low-income provisions and formulas are built into the final rules for implementation of MMA 2003. These are formulas related to the federal poverty level (FPL) guidelines for • those whose incomes are 150 percent of FPL; • those whose incomes are between 135 percent to 149 percent of FPL; • those whose incomes are below 135 percent of FPL; Medicaid eligibles over 100 percent of poverty level; and • Medicaid eligibles under 100 percent of poverty level.

24. The variations relate to the deductible, co-pays, and reduction or elimination of the donut hole, ranging from no deductible, no co-pay on the part of the beneficiary, and as much as 100 percent of the donut hole being paid for by the Part D program

25. The matter of low income provisions is especially significant, because the Congressional Budget Office estimated that in 2005, 14.1 million beneficiaries would be eligible for assistance based on low income and limited assets. Those eligible for full Medicaid benefits (approximately 6.3 million beneficiaries) are considered dual eligibles. In 2006, these beneficiaries began receiving drug benefits from Medicare rather than Medicaid

26. The issue of dual eligibles (those who receive Medicare and are eligible for Medicaid) was addressed in the final rules issued in January 2005. The issue had become one of concern because of the loss of drug benefits through Medicaid. As a result of MMA 2003, many state Medicaid programs felt their constituencies were in peril of losing prescription drug services. However, the final rules were designed to alleviate these fears by ensuring that those beneficiaries were placed into a Medicare Prescription Drug plan before the end of 2005; they continued to receive the drugs their physicians prescribe. CMS also set up training and transition programs for state Medicaid people and worked with the Social Security Administration to identify and enroll low income beneficiaries during the open enrollment period (through May 2006

27. In addition to these programs is a program known as the Medicare Savings Programs (MSP). Many people do not enroll in Part B at the required eligibility date because they cannot afford the monthly premium. For those with incomes below 135 percent of the federal poverty levels and with few resources, MSPs, which are operated by state Medicaid programs, pay the Part B premium. In addition, an MSP called “Qualified Medicare Beneficiary Program” will pay other Medicare cost sharing expenses for those with incomes below 100 percent of poverty levels.

28. Part B Premium Increases for High Income Earners In addition, Medicare Part B premium increases for higher income beneficiaries were included in MMA 2003. This process is known as means testing (income-related) and went into effect in 2007. The law allows for higher premium payments for Medicare Part B coverage and relates to the 25 percent payment beneficiaries pay for Part B (“standard” $96.40 in 2008), while Medicare picks up the remaining for actual Part B costs.

29. Under the new law, Part B premiums will be tied to income levels. Beneficiaries who make more than $80,000 ($160,000 for joint filers) will pay a greater percentage of the Part B premium. • Individuals with incomes between $80,000 and $100,000 will pay an additional 10 percent of Part B premiums. • Individuals with incomes between $100,000 and $150,000 will pay an additional 25 percent. • Individuals with incomes between $150,000 and $200,000 will pay an additional 40 percent. • Individuals with incomes over $200,000 will pay an additional 55 percent. These rules have a five-year phase-in which began in 2007, and beneficiaries can appeal if their family situation changes.

30. Incentives for Private Business to Keep Retired Employees on Group Health Plans One of the fears of MMA 2003 manifested itself through a number of American companies that had determined that if a Medicare Prescription Drug bill were passed, they would eliminate retirees from group health coverage, because “now the retirees can buy their own drug coverage from Medicare.” Thus, MMA 2003 was designed to alleviate the fears of Medicare-age corporate and union retirees. It offered $86 billion in payments and tax advantages over ten years to the nation’s employers if they would maintain drug coverage for retirees, thus keeping them on their group health plans. The subsidy, in other words, was intended to discourage companies from dropping retirees from such plans.

31. The subsidy is available only if the actuarial value of the plan’s drug benefit is equal to or greater than the actuarial value of the standard Part D drug benefit, and if the company can certify that their plan(s) qualify as creditable coverage. The “actuarial value” factor was not a great hurdle for most companies or unions; their existing group coverage for prescription drugs was far better than the Plan D coverage because of the donut hole.

32. In the Final Rules Bulletin on January 21, 2005, CMS broached the subject this way (support for retiree drug coverage plans to ensure that beneficiaries will be able to keep the coverage they have): Many employers and unions have dropped retiree drug coverage over the past decade, and the new Medicare law provides the first real effort by the federal government to change this trend and to preserve employer and union-sponsored retiree drug coverage. The Medicare Prescription Drug benefit and the retiree subsidy is expected to significantly lower employers’ and unions’ cost of providing drug coverage, making the provision of high-quality coverage much more affordable to the employer or union and thus, more likely

33. The new rules adopted by MMA 2003 provided employers and unions some options on how to implement the subsidies: 1. The first option provides sponsors with federal subsidies of 28 percent of incurred allowable drug costs between the $250 deductible and $5,000 (but not over) for each qualifying covered retiree. In addition, the subsidy is tax-favored: the payments are made for retired (Medicare age) employees and/or spouses who are entitled to enroll in the new Part D program, but who elect not to. The company or union subsidy is based on what both the employer/union and the retiree spend for prescription drugs. Thus, if the employer/union and the retiree each spend $1,000 on prescription costs, the subsidy is calculated on the $2,000 total. The company/union then receives a payment of $490 from Medicare and can still deduct the $1,000 company reimbursement from income. 2. The second option allows for providing supplemental drug coverage that “wraps around” a prescription drug plan (similar to policies that wrap around Medicare benefits under Part A and Part B). 3. The third option allows for providing an employer/union-sponsored Medicare Advantage (MA-PD) or Part D (PDP) Plan to provide enhanced benefits to their retirees, either by contracting with a Part D Plan or choosing to become a drug plan that offers enhanced benefits to their retirees.