The Medicare Prescription Drug, Improvement, and Modernization Act of 2003

1. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 Presented byTricia Neuman, Sc.D.Vice President and Director, Medicare Policy ProjectThe Henry J. Kaiser Family FoundationforGrantmakers In Health Washington, DC January 15, 2004

2. The Medicare Prescription Drug Law • Signed into law December 8, 2003 • - Passed House, 220 to 215, with 16 Democrats voting in favor, 25 Republicans against • - Passed Senate, 54 to 44, with 11 Democrats voting in favor, 9 Republicans against • Supported by AARP, AMA, AAHP, PhRMA, and AHA • Opposed by AFL-CIO, Families USA, ANA, and the Heritage Foundation • New law estimated to cost $395 billion over 10 years

3. Overview of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 • $400 billion over 10 years • In the short term (2004 and 2005): • Access to Medicare-endorsed discount drug cards for all beneficiaries • $600 annual drug subsidy for low-income seniors • Beginning in 2006, beneficiaries would have choice of:  • Traditional, fee-for-service Medicare, with access to private drug-only plans for drug coverage • "Medicare Advantage," access to integrated plans that cover Medicare benefits and drugs • “Voluntary” - with penalty for delayed enrollment • Standard drug benefit – or its actuarial equivalent • Plans can modify cost-sharing requirements • Flexibility with formularies/preferred drug lists • Premium and cost-sharing subsidies below 150% poverty

4. How Major Controversial Issues Were Resolved • Competition/Premium Support • Demonstration in 2010 in six sites • “Fallback” for areas without choice of health plans • Included, but more limited than in Senate plan • Incentives for employers to maintain retiree health • $89 billion in direct subsidies and tax benefits • Health Savings Accounts • Included, but more limited than in House version • Reimportation • Dropped

5. Out-of-Pocket Spending Medicare Part D Benefit Catastrophic Coverage 5% $5,100 (equivalent to $3,600 in out-of-pocket spending) No Coverage $2,850 Gap $2,250 Partial Coverage up to Limit 25% $250 Deductible Medicare Beneficiaries’ Out-of-Pocket Drug Spending Under New Medicare Rx Benefit, 2006 + ~$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. 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 • Comparing plans and deciding which to join • Could face wide variations in premiums, benefit design, formularies and preferred drug lists • Facing potential consequences of a bad decision • Annual lock in • Tracking their total and out-of-pocket Rx costs

8. Low-Income Subsidies and Treatment of Duals • $192 billion in subsidies for low-income assistance • Could assist 14 million beneficiaries below 150% poverty who meet asset test (including the 6.4 million with Medicaid drug benefits) • 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 • 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

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 next 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 of beneficiaries into Medicaid expected, the “woodwork” effect • Elimination of Medicaid drug coverage for dual eligibles • As of January 1, 2006, states can use general revenue funds to supplement Part D coverage, but Medicaid matching funds no longer available

10. Key Issues for Low-Income Beneficiaries • Eligibility • Asset test (CBO estimates that 23% of beneficiaries who meet the income test will fail the asset test) • Level of assistance varies by income • Enrollment • Voluntary (CBO estimates 75% participation at <135% of poverty declining to 35% between 135% to 150% of poverty) • Financial penalties for delay in signing up • Apply at SSA or State Medicaid offices, states screen and enroll applicants for Medicaid • 6.4 million dual eligibles will need to transition to Medicare Part D coverage, including those in nursing homes • Scope of the Benefit • Formularies under new Medicare Part D plans may be limited • Out-of-pocket costs could lead to access problems • Medicaid is prohibited from supplementing new Medicare benefit (cost-sharing and formulary) unless they use state-only funds • Appeals process may be difficult to navigate

11. Potential Next Steps • Identifying key issues for beneficiaries and their families, including low-income individuals • Developing public education materials (e.g., consumer guide, local media campaign) • Holding local meetings and public forums to educate consumers • Assisting with enrollment and obtaining of subsidies for low-income beneficiaries