The New Medicare Prescription Drug Benefit: An Overview Prepared by: Michelle Kitchman, M.H.S. Kaiser Family Foundatio

1. The New Medicare Prescription Drug Benefit: An Overview Prepared by: Michelle Kitchman, M.H.S. Kaiser Family Foundation For the: California Senate Health and Human Services Committee and the Senate Subcommittee on Aging and Long Term Care Hearing on the Impact of the Medicare Prescription Drug Bill February 18, 2004

2. Agenda • Key Rx drug provisions of the new Medicare law • - Discount cards (2004 & 2005) • - Rx benefit (2006) • Dual eligibles, other low-income beneficiaries, and state Medicaid programs • Implications for beneficiaries • Future outlook

3. Overview of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 • In 2004 and 2005, beneficiaries have access to: • Medicare-endorsed discount drug cards • $600 annual drug subsidy for some low-income seniors • Beginning in 2006, beneficiaries have choice of: • Traditional, fee-for-service Medicare, with access to private drug-only plans (PDPs) • Medicare Advantage (MA), integrated plans that cover Medicare benefits and drugs • Regional plans (PPOs) • Local area plans (HMOs) • “Fallback” in areas without at least two options • Subsidies to help beneficiaries with low incomes pay premiums and cost-sharing

4. Medicare-Endorsed Discount Drug Card • Cards provide discounts on the purchase of drugs • Enrollment in only one Medicare-endorsed discount card program permitted • Individuals with Medicaid drug coverage not eligible • Price comparisons to be posted at www.medicare.gov • Administration estimates savings of 10-15% on total drug costs • Pays $600 on behalf of low-income beneficiaries in each year + enrollment fee

5. Medicare Beneficiaries’ Out-of-Pocket Drug Spending Under New Medicare Rx Benefit, 2006 Beneficiary Out-of-Pocket Spending Catastrophic Coverage 5% Medicare Pays 95% $5,100 (equivalent to $3,600 in out-of-pocket spending) No Coverage $2,850 Gap $2,250 Partial Coverage up to Limit 25% Medicare Pays 75% $250 Deductible + ~$420 in annual premiums Note: Benefit levels are indexed to growth in per capita expenditures for covered Part D drugs. As a result, the Part D deductible is projected to increase from $250 in 2006 to $445 in 2013; the catastrophic threshold is projected to increase from $5,100 in 2006 to $9,066 in 2013.

6. What Medicare Beneficiaries Will Pay for Their Prescriptions Over Time, 2006 - 2013 Estimated Growth in Average Annual Medicare Drug Premiums and Deductibles: Estimated Growth in Benefit “Gap”: $1,141 $914 $670 $5,066 The Benefit “Gap” $2,850 Source: Congressional Budget Office, November 2003.

7. Projected Sources of Prescription Drug Coverage, 2006 Note: Risk-bearing private plans include Medicare Advantage plans and stand-alone prescription drug plans. SOURCE: CBO, November 2003

8. Low-Income Subsidies and Treatment of Dual Eligibles • $192 billion in subsidies for low-income assistance • Could assist 14 million beneficiaries who meet income and asset requirements (including the 6.4 million with Medicaid drug benefits) • Full dual eligibles qualify for low-income subsidy regardless of income or assets • No premium or deductible; $1 per generic/$3 per brand name if at or below 100% poverty and $2 per generic and $5 per brand-name if >100% of poverty; no copays for institutionalized • Beneficiaries <135% of poverty with low assets (<$6,000/individual; $9,000/couple) • No premium or deductible; $2 per generic/$5 per brand-name up to catastrophic limit, no cost-sharing above catastrophic limit • Beneficiaries from 135% to 150% of poverty with low assets (<$10,000/individual; $20,000/couple) • Sliding scale premium/$50 deductible; 15% co-insurance to catastrophic limit; $2 per generic/$5 per brand-name above catastrophic limit

9. Medicaid/State Issues • Less fiscal relief than anticipated • States required to finance much of the cost of prescription drug coverage for dual eligibles through “clawback” ($88.5 billion) • Net fiscal relief $17.2 billion over 10 years with 91% of savings after 2008 • Significant state-by-state variation in fiscal relief and impact on Medicaid budgets • Administrative burden/costs • States have major new responsibilities for making eligibility determinations for Medicare’s low-income subsidy program • New enrollment into Medicaid expected (“woodwork” effect) • Elimination of Medicaid drug coverage for dual eligibles • As of January 1, 2006, states can only use general revenue funds to supplement Part D coverage; Medicaid matching funds no longer available

10. How Much Will It Cost? • Overall Cost: • CBO estimates $395 over 10 years • OMB estimates $534 over 10 years • Rx Cost Containment: • “Noninterference” – Government is prohibited from direct involvement in Rx price negotiations • CBO assumes private plans will achieve “substantial savings” through price negotiations with Rx manufacturers and pharmacies • Reimportation remains illegal

11. Issues and Challenges for Beneficiaries • Understanding that Medicare discount cards (2004) are not the same as Medicare benefit (2006) • Deciding whether to enroll in Part D in 2006 • Financial penalties for delayed enrollment • Enrolling in low-income subsidy program • Will beneficiaries know they are eligible? Will they sign up? • Comparing plans and deciding which to join • Could face wide variations in premiums, benefit design, formularies and preferred drug lists each year • Facing potential consequences of a bad decision • Annual lock-in • Tracking their total and out-of-pocket Rx costs • Important due to benefit gap

12. Limited Knowledge of the New Medicare Law You may have heard news about recent debates in Congress on a bill that would add a prescription drug benefit to Medicare. To the best of your knowledge, has this bill been passed by Congress and signed into law by President Bush, or not? (Dec. 10-14, 2003 – AFTER bill was passed and was signed by President Bush) Source: Kaiser Family Foundation Health Poll Report, December 2003.

13. Looking to the Future • Reaction of seniors and younger beneficiaries with disabilities unclear • Public education critically needed • Fundamental change in beneficiary responsibilities beginning in 2006 • Annual selections of private plans to supplement Medicare • Response of key players – key to success – but difficult to predict • Will private plans choose to participate? Over the long term? • What will MA and PDP plans look like? Will beneficiaries have access to needed medications? • Will employers take subsidies and retain retiree health? • Will low-income beneficiaries get subsidies? • Uncertain effects on financing and stability of Medicare program over the long term