Medicare Part D

In the years since Medicare’s creation in 1965, the role 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. 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, after passing in Congress by a close margin. The bill created Medicare Part D, a voluntary drug benefit that became available to Medicare beneficiaries in May 2006. This law produced the largest overhaul of Medicare in its then 38-year history.

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 that are approved to sell Part D insurance coverage.

Medicare Part D is financed through a combination of beneficiary premiums and federal revenues. In addition, certain 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.

Employers and unions may offer Part D coverage (that is, creditable coverage – 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 pans 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 prescription drug coverage actuarially equivalent to Part D may qualify for a federal Retiree Drug Subsidy. The purpose of this subsidy is to discourage them employers from eliminating private prescription coverage to retired workers. The subsidy (28%) helps to reduce the employer’s/union’s cost in providing coverage. Beneficiaries enrolled in an employer/union plan that receives a Retiree Drug Subsidy cannot enroll in a Part D plan.

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 see below Description of Medicare Part D, in actuality there is no standard benefit. Each prescription plan company offers different formularies and different premium, deductible and co-payment amounts depending on the plan selected.

Unlike Parts A and B, which are administered by Medicare itself, Part D is “privatized.” That is, Medicare contracts with private companies that are authorized to sell Part D insurance coverage. These companies are both regulated and subsidized by Medicare, pursuant to one-year, annually renewable contracts. In order to have Part D coverage, beneficiaries must purchase a policy (enroll in a plan) offered by one of these companies.

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.

Prescription drug plans vary by co-payments, deductibles, premium amounts, and formularies (list of covered drugs) see below, Description of Medicare Part D, Formularies. However, all plans must offer coverage at least as generous as the basic coverage model outlined in the Medicare Modernization Act. Even so, the scope and shape of benefits can vary widely among plans. See below, Description of Medicare Part D, Medicare Part D Benefit.

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.