Background

HISTORY

In the years since Medicare’s creation in 1965, the cost of prescription drugs in U.S. patient care has increased significantly. As new and expensive drugs have come into use, people – particularly senior citizens for whom Medicare was originally designed – have found prescriptions harder to afford.

In his first term as president, William Clinton’s health care reform proposal included prescription drug coverage, but the proposal was not enacted. It was not until Mr. Clinton’s January 1999 State of the Union Address that interest and debate was sparked for prescription coverage under Medicare. In an era of budget surpluses, both Democrats and Republicans quickly became enmeshed in political competition over the Medicare prescription drug benefit.

After George W. Bush was elected president in 2000, he called repeatedly for a prescription drug bill as part of a larger Medicare reform bill. Only after the 2002 midterm elections was prescription drug legislation hammered out. In the fall of 2003, the conference committee finally announced a proposed plan. On November 17, 2003, AARP decided to back the plan. This helped push the bill into passage, and AARP’s massive advertising campaign afterwards helped the law gain acceptance.

The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) was signed into law by President Bush on December 8, 2003. The bill created Medicare Part D, a voluntary drug benefit that became available to Medicare beneficiaries in 2006. This law produced the largest overhaul of Medicare in its then 38-year history.

WHO ADMINISTERS THE PROGRAM

The overall responsibility for administering the Medicare Part D benefit lies with the Centers for Medicare & Medicaid Services (CMS), an agency of the Department of Health and Human Services, which also administers Medicare Parts A and B. However, CMS does not administer Part D directly. It contracts with private companies, either through a stand-alone prescription drug plan or a Medicare Advantage prescription drug plan, that are approved to sell Part D prescription drug coverage.

FUNDING

Medicare Part D is financed through a combination of beneficiary premiums and federal revenues. In addition, certain monetary transfers are made from the states. These transfers, referred to as “clawback payments,” represent a portion of the amounts states could otherwise have been expected to pay for drugs under Medicaid, if drug coverage for the dual eligible population (beneficiaries of both Medicare and Medicaid) had not been transferred to Part D.

EMPLOYER OR UNION SPONSORED PART D RETIREE PLANS

Employers and unions may offer Part D coverage (if offered it must be creditable coverage, that is, coverage at least as good as or better than Medicare Part D) to the Medicare-eligible employees and retirees through their own plans. These plans are only available to eligible employees and retirees and are not open to the public. Employer sponsored Part D plans must follow all of the same rules as commercial Part D plans. Likewise, members of these plans have the same rights as members of commercial plans.

Employers and unions that offer their retirees Part D creditable prescription drug coverage may qualify for a federal Retiree Drug Subsidy. The purpose of this subsidy is to discourage employers from eliminating private prescription coverage to retired workers. The subsidy helps to reduce the employer’s/union’s cost in providing coverage. However, if a beneficiary who is enrolled in an employer/union plan that receives the federal government’s retiree drug subsidy and enrolls into a Part D plan, the employer/union will no longer receive the subsidy and may therefore decide to drop the retiree from their drug coverage, and possibly from other retiree benefits as well. The beneficiary should review with his/her employer/union what would happen if s/he decides to enroll into a Part D plan.

Summary of the Medicare Part D Benefit

The Medicare Part D prescription drug benefit provides insurance coverage for prescription drugs for Medicare beneficiaries. CMS has contracted with private drug plan companies that offer prescription plans to Medicare beneficiaries. Although Part D offers a “basic” or “standard” benefit, the prescription plans offered by the various companies have different formularies and different cost-sharing costs (premiums, deductible and co-payment amounts) depending on the plan selected. However, all plans must offer coverage at least as generous as the basic coverage model outlined in the Medicare Modernization Act. See below, Description of Medicare Part D, Medicare Part D Benefit.

Unlike Original Medicare (Parts A and B), which is administered by the Federal Government, Part D is only available through private plans, either a stand-alone prescription drug plan or as part of a Medicare Advantage prescription drug plan . Medicare contracts with these private companies and are both regulated and subsidized by Medicare, pursuant to one-year, annually renewable contracts.

Medicare beneficiaries access Part D by either enrolling in a stand-alone prescription drug plan (PDP), which offers drug-only coverage for beneficiaries who choose to receive all other Medicare benefits from Original Medicare, or by enrolling in a Medicare Advantage prescription drug plan (MA-PD) that covers all Medicare benefits, including prescription drug coverage, through a managed care plan. For more information on Medicare Advantage plans, refer to Health Programs, Medicare, Managed Care: Medicare Advantage Plans.

Other Benefits under the Medicare Part D Benefit

LOW-INCOME SUBSIDY OR “EXTRA HELP”

The Medicare Prescription Drug program provides a subsidy called the Low-Income Subsidy (LIS) or “Extra Help” for low-income Medicare beneficiaries whose income falls below 150% of the federal poverty level and whose resources are limited. This subsidy pays for most of the out-of-pocket expenses under the Part D benefit. There are two levels of Extra Help: full or partial, which provide different subsidy amounts based on the beneficiary’s income and resources. For a complete description of this benefit, who qualifies and how to apply, see below, Low-Income Subsidy.

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