New Medicare Prescription Drug Benefit What Does It Mean To You

by Michael Kutzin Goldfarb Abrandt Salzman & Kutzin LLP

Including information on the Health Care Reform Provisions of 2010 Affecting the Medicare Prescription Drug Donut Hole

With great fanfare, on December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act provides for the establishment of a voluntary drug benefit under a new Part D of the Medicare beginning in 2006.

This article is designed to be a summary of the provisions of the new benefit as it is currently written, but we caution our readers that you should consult counsel as to how this new benefit program will ultimately affect you.

Part D Benefit Commencing in 2006

Seniors entitled to Medicare Part A or enrolled in Medicare Part B may enroll in Medicare Part D. Seniors will either receive the benefit as a stand-alone prescription drug plan (a “PDP”), or, for seniors enrolled in Medicare HMOs under Medicare Part C (Medicare + Choice, which will be renamed Medicare Advantage), through their Medicare Advantage plan if the plan offers the prescription drug benefit (“MA-PD plan”), and if not, through a separate PDP.

The law requires that seniors in every region have at least two choices from which to choose to enroll in Medicare Part D. At least one of those choices must be “standard prescription drug coverage.” Once there is at least one provider of standard coverage in a region, a plan may provide “alternative prescription drug coverage.”

In addition, seniors in every region must have access to at least one PDP – in other words, they cannot be forced to join a Medicare HMO simply to obtain access to this new prescription drug coverage.

Standard Prescription Drug Coverage Plan. The standard prescription drug coverage plan provides will cost seniors an estimated $35 per month, or $420 per year. It provides for a $250 deductible on covered drugs, plus coinsurance of 25% of the cost of covered drugs up to $2,250. However, plan sponsors may instead offer tiered copayments under the plan – in other words, with some drugs carrying a greater copayment requirement and others less – as long as the plan provides for the actuarial equivalent of 25% cost sharing. Once the senior reaches $2,250 of drug costs, the senior will have to pay 100% of the next $2,850, before Medicare Part D covers drug costs again.

This has been referred to in the press as the “donut hole” in the coverage of the Medicare prescription drug benefit.

Once the senior has purchased $5,100 in covered prescription drugs, ($2,250 + the doughnut hole of $2,850), the senior’s costs are again covered. The concept is that this provides protection from catastrophic out-of-pocket expenditures. At this point, the senior ‘s copayment for covered drugs is 5% of the cost, or $2 per generic brand and $5 per brand name drug, whichever is greater (PDPs or MA-PD plans are given the option, however, to reduce this copayment to zero). Once the senior reaches this threshold, the senior will have spent $3,600 out-of-pocket (the $250 deductible, 25% of costs from $500 to $2,250 (which equals $500), plus the $2,850 donut hole). The out-of-pocket expense and the copayments will be indexed each year.

 Health Care Reform Provisions affecting the Medicare Prescription Drug Donut Hole

Health Care and Education Reconciliation Act of 2010 passed by Congress provides at section 1101 for a $250 rebate to Medicare beneficiaries who reach the Part D coverage gap in 2010. In any quarter when an individual reaches the threshold for the donut hole coverage gap, Medicare by the 15th of the third month following that quarter shall send a $250 rebate. The individual shall only be entitled to one such rebate.

In addition the Patient Protection and Affordable Care Act and the amendments in the Reconciliation Act will gradually eliminate the Medicare Part D donut hole by 2020. For prescriptions filled in the coverage gap, there will be federal subsidies. For generic drugs the phase in will begin in 2011 and rise to 75% by 2020. For brand name drugs the phase in will begin in 2013 and rise to 25% by 2020. Pharmaceutical manufacturers will be required to provide a 50% discount on brand named drugs in the coverage gap beginning in 2011.

Seniors must be careful in terms of which drugs are actually covered under the plan. Purchases that are not part of the plan’s “formulary” – in other words, drugs that are actually covered under that provider’s plan, or drugs that are not on the provider’s list but are determined to be medically necessary (albeit at a greater out-of-pocket cost) — will not count towards meeting the out-of-pocket expenditure required before coverage for catastrophic out-of-pocket expenditures is triggered.

Alternative Prescription Drug Coverage Plan. As long as seniors in a region have access to at least one standard prescription drug coverage plan, a sponsor can obtain permission from the Department of Health and Human Services to offer an alternative prescription drug plan, provided that the plan design is approved by the Department. Essentially, the plans may deviate substantially from the standard prescription drug coverage plans, as long as they provide coverage that is at least equal to the actuarial value of standard coverage, and the unsubsidized value (in other words, the value absent government payments) must be at least equal to the unsubsidized value of standard coverage.

The deductible cannot exceed the amount under the standard prescription drug coverage. In other words, in 2006, it can be less than or equal to $250.

Optional Provision of Supplemental Prescription Drug Coverage. The new law also permits sponsors to provide supplemental coverage, which may include certain reductions in the coinsurance percentages, deductible, and the coverage of optional drugs, provided that this supplemental coverage is worth more, on an actuarial basis, than the basic prescription plan coverage. A PDP sponsor may only offer this enhanced coverage in an area if it also offers basic coverage (presumably at a lower cost).

Medigap Prescription Coverage or Medicare Part D – You Can’t Have Both. Unlike Medicare Part A or Medicare Part B, for which you may purchase private insurance to fill in gaps, copayments and deductibles, the new law specifically prohibits Medigap coverage to fill in “gaps,” such as the doughnut hole, in coverage under Medicare Part D. Seniors with existing Medigap coverage of prescription drug coverage will have to choose between retaining coverage under their Medigap policies, or obtaining a new Medigap policy and enrolling in Medicare Part D.

BUT — You Can Have Employer Coverage and Medicare Part D. While you cannot have Medigap coverage to fill in holes in the Medicare Part D drug benefit, the new law permits employers health benefit plans to supplement benefits provided under a PDP or MA-PD plan. If a retiree enrolls in Medicare Part D, Medicare becomes the primary provider of coverage, not the employer.

In addition, employers are also provided generous subsidies to maintain prescription drug coverage for retirees who do not enroll in Medicare Part D, as long as the benefit provided under the employer plan has the same actuarial value as the standard prescription drug plan.

EPIC Program and Medicare Part D. As many of our clients are aware, New York State has an Elderly Pharmaceutical Coverage Program (“EPIC”) for low income seniors. Under current law, seniors who earn less than $35,000, or $50,000 for a couple, can enroll in this plan. Single seniors earning up to $20,000 and married couples earning up to $26,000 pay an annual fee that is pegged to their income (currently the highest annual premiums are $260 for a single person and $300 for a married couple), and eligible seniors earning more than these income floors do not pay annual premiums, but instead must pay a deductible pegged to income (currently the highest deductible is $1,230 for a single person and $1,715 for a couple).

Once seniors who must meet a deductible have done so, and immediately for seniors who instead pay annual premiums, the senior pays, for each subscription, a copayment ranging from $3 for prescriptions costing up to $15, to $20 for subscriptions costing in excess of $55.

Under the new Medicare prescription drug benefit, seniors who incur expenses under EPIC or other state prescription drug programs may have their costs counted towards their annual out-of-pocket thresholds.

PIC is also considered a “creditable” drug plan. EPIC Notice of Creditable Coverage

Enrollment. The initial enrollment period for Medicare Part D is scheduled to begin on November 15, 2005 and will run through May 15, 2006. From that point going forward, a senior wishing to change plans can do so from November 15th through December 31st. Persons who become eligible for Medicare Part D after November 15, 2005, the initial enrollment period will be similar to the initial enrollment period for Medicare Advantage plans and will be at least six months in duration.

Subsidies for Seniors with Low Income and Resources. The new law provides for a sliding scale of subsidization, depending upon the level of income and resources that a senior has. For seniors who have resources in 2006 below $6,000 for an individual and $9,000 for a couple who also have income below 135% of the official poverty line – which is currently $12,568 for an individual and $16,862 — will pay no premium or deductible, are not subject to the “donut hole” in coverage, and have reduced copayments.

For persons who earn below 150% of the poverty line but above 135% of the poverty line, the premium is determined based on a sliding scale, and the deductible is reduced to $50. They will also avoid the “donut hole” in coverage, and also have reduced copayments.

Let the Buyer Beware . Because the prescription drug benefit is being offered through private insurance companies under contract with the United States Department of Health and Human Services, and because the companies are given some flexibility in how they design their prescription drug plan, seniors and their advisors must examine these plans carefully to determine which one, if any, provides the best benefits to them.

Other Changes to the Law by this Act.

While the introduction of a prescription drug benefit was the most dramatic change to the Medicare system by the new law, other important changes were made to the system and to the tax code.

Means Testing for Medicare Part B. For the first time, beginning in 2007 Medicare Part B premiums will be pegged to income.

Increase in Medicare Part B Deductible. Beginning in 2005, the Medicare Part B deductible will increase from $100 to $110, and in subsequent years will increase at the same rate as the rate of increase for the Medicare Part B premium.

Health Savings Accounts. Individuals will be able to contribute to a tax-favored Health Savings Account (“HSA”). Earnings of these accounts will not be subject to taxation, and will be deductible as an “above-the-line” deduction. The most that an individual under age 55 can contribute annually is $2,250, and $4,500 for an individual with family coverage. Larger amounts can be set aside by persons age 55 or older.

In order to qualify, an individual must be covered by a health plan with annual deductibles of at least $1,000 (indexed for inflation) and such plan must impose out-of-pocket expenses of no more than $5,000.

Distributions can be made from an HSA to pay for medical expenses that are not covered by the individual’s health care plan, including long term care expenses that qualify as a tax deductible medical expense.

Conclusion.

There will be many complicated choices going into 2006. Seniors should consult with their advisors before making decisions that will have a major impact on the quality of their lives.