T H E BA SI CS The Medicare Drug Benefit February 7, 2011 Coverage Gap t he M edi c a re Pa rt D D rug Ben efi t Ov erv i e w The Medicare Prescription Drug, Improvement, and Moderniza- tion Act of 2003 (MMA) established a voluntary outpatient pre- scription drug benefit called Medicare Part D that began January 1, 2006.1 Beneficiaries enrolling in Part D pay a monthly premium in addition to cost sharing and any deductible for their drugs. Medicare subsidizes the cost of the drug benefit, generally pay- ing about 75 percent of program costs. The Medicare drug ben- efit is administered through private entities called prescription drug plans (PDPs) for beneficiaries in fee-for-service (also known as “traditional”) Medicare and through Medicare Advantage pre- scription drug (MA-PD) plans for beneficiaries enrolled in Medi- care managed care. Low-income beneficiaries receive assistance in paying premiums, deductibles, and cost sharing; the amount of assistance depends on income level.2 Roughly 27 million ben- eficiaries receive drug coverage through PDPs and MA-PDs, and about one-third of those beneficiaries receive low-income assis- tance. Employers and unions offering retiree coverage that is at least as generous as Medicare’s drug benefit and meeting other requirements may qualify for retiree drug subsidies (RDS) to help defray the cost of providing a drug benefit to their Part D–eligible retirees. Total expenditures for the drug benefit are expected to exceed $71 billion in 2011.3 W h at i s t he Cov er age G a p? One distinguishing feature of the Medicare drug benefit is the coverage gap, popularly known as the “donut hole.” Beneficiaries pay 100 percent of the cost of their drugs during this phase of the February 7, 2011 National Health Policy Forum National Health Policy Forum benefit. The coverage gap is a feature that is unique to the Medi- care drug benefit, and it reduces the federal cost of the benefit. 2131 K Street, NW Suite 500 Prior to changes in law that begin in 2011, the coverage gap had Washington, DC 20037 been a stand-out feature of the Part D “standard” benefit (see T 202/872-1390 illustration below). For 2011, the standard benefit includes a $310 F 202/862-9837 deductible, 25 percent beneficiary coinsurance for covered drug E nhpf@gwu.edu www.nhpf.org spending up to an initial coverage limit ($2,840), and 100 percent coinsurance for drug spending between the initial coverage limit and a beneficiary out-of-pocket limit ($4,550). After a beneficiary’s The National Health Policy Forum is a drug spending reaches this out-of-pocket limit (which equals nonpartisan research and public policy organization at The George Washington $6,448 in total drug spending), catastrophic coverage begins and University. All of its publications since 1998 beneficiaries are only responsible for limited cost sharing (gener- are available online at www.nhpf.org. ally, the larger of 5 percent coinsurance or $2.50 for generic and $6.30 for brand name drugs). The deductible, initial coverage limit catastrophic coverage threshold, and prescription copayments are subject to change each year to account for factors such as inflation. Medicare drug plan sponsors may offer nonstandard benefit plans that vary from this standard benefit, but almost all drug plans have a coverage gap. Plan sponsors may offer plans that Standard Benefit Design, 2011 Beneficiary Pays 5% Plan Pays 95% Catastrophic Limit, $6,448 COVERAGE GAP Beneficiary Pays 100% Initial Coverage Limit, $2,840 Beneficiary Pays 25% Plan Pays 75% Beneficiary Pays 100% Deductible, $310 2 T H E BA SI CS www.nhpf.org The Medicare Drug Benefit Coverage Gap are more generous than the standard benefit, as long as they also offer a plan with the standard benefit or actuarially equiva- lent benefit. About one-third of Medicare drug benefit enrollees receive assis- tance in paying prescription drug premiums, deductibles, and cost sharing because they have low incomes and limited assets. This assistance is called the low-income subsidy. These beneficia- ries receive significant assistance in paying for prescription drugs, including in the coverage gap; indeed, most low-income benefi- ciaries only pay nominal cost sharing in the coverage gap. Impact o f t he Cov er age G a p o n Ben efi c i a ries According to the Centers for Medicare & Medicaid Services (CMS), the agency that oversees Medicare, 8.6 million beneficia- ries (31 percent) had spending in the coverage gap in 2008. More than half of these beneficiaries pay only nominal cost sharing in the coverage gap because they qualify for the low-income subsidy. About 3.9 million non–low income Part D enrollees had prescrip- tion drug spending in the coverage gap in 2009.4 Some Medicare drug plans offer coverage in the coverage gap. About 20 percent of PDPs offered some coverage in the coverage gap in 2010 for more than just a few drugs, and 27 percent will do so in 2011, although the coverage is generally limited to generic drugs.5 Some MA-PDs also offer gap coverage, but it is limited and premiums tend to be higher for these plans.6 Beneficiaries in plans with no coverage in the gap are less like- ly to adhere to drug regimens, and cost seems to be the biggest factor in nonadherence. One study indicates that beneficiaries whose spending put them in the coverage gap were 34 percent more likely not to adhere to their drug regimen because of cost. Low-income beneficiaries who receive help in paying for drugs in the coverage gap were more likely to adhere to their regimens.7 Another study found that 20 percent of beneficiaries taking certain classes of drugs either stopped taking the prescription, switched to another drug, or reduced their use of the drug (for example, by skipping doses) when they reached the coverage gap.8 3 February 7, 2011 National Health Policy Forum Many believe that the cost pressure induced by the coverage gap, combined with drug plan programs that promote generic use, have encouraged beneficiaries to switch to generic alterna- tives. Greater availability of generic substitutes for brand name prescriptions drugs is also a significant factor. The generic pre- scription drug dispensing rate has increased steadily each year since the start of the benefit in January 2006. About 70 percent of drugs dispensed under Part D in 2008 were generic.9 Because generic drugs generally are lower in price than brand name drugs, overall program costs are lower than they would have been with- out generic substitution. And, beneficiary cost sharing is typically lower for generic drugs. Fi l l i n g i n t he Cov er age G a p The Patient Protection and Affordable Care Act of 2010 (PPACA), as amended by the Health Care and Education Reconciliation Act of 2010, enacted changes to the Medicare drug benefit, includ- ing reducing beneficiary cost sharing in the coverage gap.10 The coverage gap changes will be implemented gradually, starting in 2010 and continuing until the gap is eliminated in 2020. $ 25 0 B e n e f i cia r y Re b a te in 2010 Medicare beneficiaries who were enrolled in PDPs or MA-PDs, who did not receive the low-income subsidy or their drug cov- erage through an employer-sponsored drug plan receiving RDS, and who had prescription drug spending in the coverage gap were given a $250 rebate in 2010.11 The rebate is tax-free, and does not count as income in calculating whether a beneficiary quali- fies for low-income assistance mid-year. The rebate was sent auto- matically; beneficiaries did not need to apply. As of October 2010, 1.8 million beneficiaries received a rebate check. Bra n d N a m e D r u g s For 2011 and 2012, once their spending enters the coverage gap, beneficiaries will receive a 50 percent discount off the negoti- ated price of brand name drugs at the point of sale (usually a retail pharmacy). Beneficiaries remain responsible for the full 4 T H E BA SI CS www.nhpf.org The Medicare Drug Benefit Coverage Gap pharmacy dispensing fee. Pharmaceutical manufacturers wishing to have their drugs covered under Part D must sign an agreement with the Secretary of Health and Human Services stating that they will offer this discount. The dollar value of the discount will count toward the beneficia- ry’s out-of-pocket spending (even though the beneficiary did not incur the cost) so that the presence of the discount does not delay the onset of catastrophic coverage. From 2013 until 2020, beneficiary cost sharing for brand name drugs will gradually decrease until it reaches 25 percent for 2020 and thereafter. G e n e ri c D r u g s Starting in 2011, beneficiary cost sharing will decline gradually until it reaches 25 percent in 2020. Adju s tm e n t in O u t- of- Po cke t A m o u n t The annual adjustment in the out-of-pocket amount beneficiaries pay before the onset of catastrophic coverage will be reduced for 2014 through 2019, effectively lowering the amount of time ben- eficiaries spend in the coverage gap compared with the amount of time they would have spent prior to PPACA enactment. In 2020, the provision expires. En dn ot es 1. See Mary Ellen Stahlman, “The Medicare Drug Benefit (Part D),” National Health Policy Forum, The Basics, January 24, 2011; available at www.nhpf.org/ library/details.cfm/2708. 2. See Mary Ellen Stahlman, “The Medicare Drug Benefit: Update on the Low-Income Subsidy,” National Health Policy Forum, Issue Brief No. 833, July 31, 2009; available at www.nhpf.org/library/details.cfm/2752. 3. 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance Federal Supplementary Medical Insurance Trust Funds, August 5, 2010, p. 141; available at https://www.cms.gov/ReportsTrustFunds/downloads/tr2010.pdf. 4. Healthcare.gov, “Medicare Beneficiary Savings and the Affordable Care Act,” summary, November 4, 2010; available at www.healthcare.gov/center/ reports/affordablecareact.html. 5 February 7, 2011 National Health Policy Forum 5. Jack Hoadley et al., “Medicare Part D Spotlight: Part D Plan Availability in 2011 and Key Changes Since 2006,” The Henry J. Kaiser Family Foundation, October 2010; available at www.kff.org/medicare/upload/8107.pdf. 6. Jack Hoadley et al., Medicare Part D 2010 Data Spotlight: The Coverage Gap, November 2009; available at www.kff.org/medicare/8008.cfm. 7. Iris Wei, “Part D Benefit Design and Cost-Related Non-adherence top Rx in the Medicare CAHPS Sample,” presentation at the Medicare Part D Sym- posium, Centers for Medicare & Medicaid Services, March 18, 2010; avail- able at www.cms.gov/PrescriptionDrugCovGenIn/09_ProgramReports.asp#TopOfPage. 8. Jack Hoadley et al., “The Medicare Part D Coverage Gap: Costs and Con- sequences in 2007,” The Henry J. Kaiser Family Foundation, August 2008; available at www.kff.org/medicare/7811.cfm. 9. CMS Drug Symposium, “Part D Drug Utilization and Cost Trends,” March 18, 2010; presentations available at www.cms.gov/PrescriptionDrugCovGenIn/09_ ProgramReports.asp#TopOfPage. 10. Other changes to Medicare Part D include an income-related Part D pre- mium starting in 2011 for beneficiaries with incomes above $85,000 for a single person and $170,000 for a couple, amounts consistent with the income-related premium for Medicare Part B. 11. The rebate provision was enacted in the The Health Care and Education Reconciliation Act of 2010, which amended PPACA. Prepared by Mary Ellen Stahlman. 6