Prescription For Change Revamped Medicare Part D Will Pay For Prescriptions — To An Extent

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 contains the most extensive changes to Medicare since the program was enacted in 1965.


Last month, we discussed the first phase of the changes, the prescription drug discount card to be launched this June. This month, we delve into the comprehensive drug coverage to be provided under a new Medicare Part D beginning in January 2006 — and the areas in which the program is not comprehensive.

The Hole Truth

Under the new Medicare Part D, in 2006, Medicare beneficiaries will be able to sign up for a stand-alone drug plan offering drug coverage in addition to other health coverage.

The premium for drug coverage will be approximately $420 per year, and the deductible will be $275 annually. After the deductible is met, insurance will pay 75{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the drug costs up to $2,250, and the beneficiary will pay the remaining 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}. If the out-of-pocket expenses exceed $3,600, insurance will pay 95{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of drug costs exceeding that limit, or will require a small co-payment. Note, however, that there is no coverage for drug costs between $2,251 and $3,600. This is commonly referred to as the ‘donut hole’ in coverage.

Low-income individuals receive a subsidy under Part D. Eligible beneficiaries will receive a sliding-scale or full-premium subsidy and will pay either a reduced annual deductible or no annual deductible, depending on income level. There is no ‘donut hole’ or gap in coverage for this group.

The Part D Access will require sponsors to allow the participation of any willing pharmacy that meets the terms and conditions under the plan. Discounts will be allowed for in-network pharmacies through the reduction of co-insurance or co-payments. The sponsor must have a sufficient number of pharmacies participating to ensure convenient access, and mail-order only is not an option.

Much is still unknown about how the Part D benefit will work. The Centers for Medicare & Medicaid Services (CMS) is charged with promulgating rules to fill in many of the gaps.

Impact on Hospital Pharmacies

Part D requires sponsors to allow participation of any willing pharmacy, and there can be additional discounts for in-network pharmacy purchases. The discount card regulations specifically require point-of-service information relating to the remaining transitional assistance benefit. Therefore, it would seem likely that some sort of point-of-service information will also be required for Part D benefits so that beneficiaries know if they have entered the ‘donut hole’ and will be required to pay the full cost of their prescriptions.

Impact on Institutional Pharmacies

The discount-card regulations recognized the unique nature of pharmacies serving long-term-care facilities. Therefore, an optimistic view is that the Part D regulations will provide flexibility to permit institutional pharmacies to operate in a reasonable manner without undue administrative burdens. For patients that are eligible under both Medicare and Medicaid, the Medicare drug benefit will be the primary insurer. Governors, state Medicaid plans, beneficiaries, and others will be forming a State Pharmaceutical Assistance Transition Commission to identify administrative problems and report recommendations to Congress before the benefit is available in 2006.

Medicare Part B Changes

The current Part B drug coverage provided will continue to be Part B coverage even once Part D is in effect. However, the Act changes the payments for certain Part B drugs.

For covered outpatient drugs, beginning in 2004, reimbursement is reduced from 95{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the average wholesale price (AWP) to 85{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of AWP, with infusion drugs excluded from the reduction. Beginning in 2005, non-self-administered drugs furnished in connection with other Medicare covered services will be paid at 106{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the average sales price (ASP). ASP will be determined quarterly and based on average sales prices for each drug, taking into account discounts, rebates, free goods, and chargebacks. In addition, in 2006, a competitive bidding process will be established.

For drugs that are included within the hospital outpatient prospective payment system (PPS), the Act initially ties payment rates to AWP. For 2004 to 2006, PPS drugs will be paid anywhere from 46{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} to 95{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of AWP depending on whether the drug is a sole-source, multi-source, or innovator drug. Starting in 2006, payment rates will be tied to the ASP.

The Act also reduces the threshold for a separate payment from $150 to $50 to allow for the unbundling of more drugs. This lowered threshold will remain in place for 2005 and 2006. Although these changes are expected to negatively affect hospitals, no one has a true measure of their impact.


The changes to Medicare drug benefits will involve significant efforts by all concerned. Assuming that enough insurers elect to participate, pharmacies will be faced with decisions about whether to participate in new discount drug programs.

Beneficiaries will be faced initially with a choice of whether to participate in a drug discount program, and later with a choice of whether to budget for annual trips through the ‘donut hole’ in coverage or seek haven in an HMO that offers more comprehensive drug coverage.

Finally, federal and state regulators will face the daunting task of trying to fill in all of the gaps in policy and administration that Congress has left open. All this will take place against a background that may see Congress revisit the Act it just passed.

Marissa A. Olsen is an associate with Davis Wright Tremaine, LLP in Seattle. She specializes in employee benefits, health law, and health care compliance.

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