V I E W P O I N T

Update on Medicare Part D: Seniors Beware Prescription Drug Changes to Expect in 2008

The open enrollment period for beneficiaries to select a prescription drug plan under Medicare Part D runs from November 15, 2007 through December 31, 2007. Seniors changing plans or enrolling in the program for the first time are urged to submit their forms by December 7 th to give the private companies time to process their applications before the new drug benefit begins on January 1 st , 2008. Unfortunately, this gives seniors about 3 weeks to understand complicated changes to their drug plans before most are locked into their chosen plans for all of 2008.

Many of the most popular Part D plans are raising premiums in 2008, others are lowering premiums but increasing co-payments on the drugs they cover, making it harder to make an informed choice about the best plan to choose.

The challenges seniors will confront as they attempt to select their Part D prescription drug plans for 2008 are inherent in the flawed design of the program. Instead of providing a stable, affordable, comprehensible benefit, the exclusive use of private companies to deliver prescription drug coverage for seniors has resulted in continued rising costs and an overwhelming array of confusing choices. Without fundamental reforms to the prescription drug program, these problems will only get worse with time.

Premiums are Going Up

In August 2007, the Centers for Medicare & Medicaid Services (CMS) announced the new average premium for Part D plans in 2008 would be $25, an amount about $2 lower than in 2007. This statistic is very misleading because it includes the premiums of both Medicare Advantage (MA) drug plans and stand-alone prescription drug plans (PDPs). MA plans are heavily subsidized by the federal government, and these subsidies have allowed them to offer reduced or no-cost premiums. However, they generally have more restrictions than traditional Medicare and only about one-fifth of Medicare beneficiaries are enrolled in them.

Medicare beneficiaries enrolled in stand-alone (PDP) drug plans do not receive any benefit from the subsidies to MA plans. In 2008, premiums for the average beneficiary in a stand-alone plan will increase by 21 percent. ¹According to a survey by the Kaiser Family Foundation, three-quarters of all PDP enrollees will face higher premiums in 2008 unless they switch to a lower-premium plan. Nearly one in five PDP enrollees face annual premium increases of more than $120 in 2008, and nearly half face annual premium increases of more than $60. Overall, about one-fourth of PDP enrollees who have not switched plans between 2006 and 2008 will end up facing a premium increase of at least 50 percent across the three-year period. ²

Cost Sharing is Going Up

In addition to the underlying drug prices themselves, Part D plans can change their formularies (the drugs they cover), their pricing tiers (how they charge for different categories of drugs), and their utilization management rules (restrictions on usage, such as "step" requirements). Plans can make these changes throughout the year, even though most beneficiaries are locked into their chosen plans until the next open enrollment period. Numerous plans have announced new pricing tiers for 2008 that will make plan selection even more complicated for seniors.

In previous years, PDPs basically had four tiers of drugs: Tier 1 (generic drugs), Tier 2 (preferred brand-name drugs), Tier 3 (non-preferred brand-name drugs) and Tier 4 (specialty and injectable drugs). Each tier had a different pricing structure, with Tier 1 the least expensive. Virtually all generic drugs were in Tier 1.

For 2008, many plans have divided generic drugs into multiple "sub-tiers", classified as "value" generics, "preferred" and "non-preferred" generics and "specialty" generics. Each plan is free to decide into which sub-tier each generic drug will be placed and how it will be priced. This new structure will increase costs for seniors using generic drugs that fall into the more expensive tiers. It will also make it increasingly complicated to effectively compare drug costs between plans. ³

The "Doughnut Hole" Will Grow Larger

A unique feature of the Medicare Part D drug benefit is a so-called "doughnut hole", a coverage gap in which beneficiaries must continue to pay premiums even though they are no longer receiving benefits. Nearly all Part D plans have this gap in coverage, and because its size is tied to inflation in the cost of prescription drugs, it will continue to become larger in future years.

In 2006, the first year of the Part D program, the "doughnut hole" totaled $2,850. It began after beneficiaries incurred a total of $2,250 in covered drug costs, and ended when they reached the catastrophic threshold of $5,100 in covered drug costs. In 2008, the "doughnut hole" totals $3,216 for plans offering the standard Medicare Part D benefit (an increase of 13 percent in only two years). It begins after beneficiaries have incurred covered drug costs of $2,510 (an increase of 11.5 percent) and extends until the new catastrophic drug threshold of $5726.25. By 2016, the coverage gap is projected to exceed $6,000.

“Doughnut Hole” Coverage Becomes Harder to Find

The "doughnut hole" in Part D coverage is not mandatory - the law provides a framework for prescription drug coverage but plans are free to provide more generous benefits if they choose. From the beginning of the Part D program, there were very few plans offering drug coverage in the "doughnut hole", and the coverage was expensive, but seniors who wanted to protect themselves from the unpredictable cost of drugs in the coverage gap had at least one option available to them.

According to the Kaiser Family Foundation survey, not a single stand-alone drug plan, and only about 1 percent of MA plans, will offer comprehensive drug coverage throughout the "doughnut hole" at any price in 2008. One PDP (offered only in Florida ) and about 16 percent of MA plans will offer "some" coverage of brand-name drugs in the gap. All but one of the PDPs offering gap coverage and more than one-half of the MA plans offering gap coverage will only cover generic drugs. Generic-only coverage is helpful, but the majority of the most common drugs used by seniors are not available in generic form. As a result, less-healthy seniors with significant drug costs will be unable to protect themselves from the "doughnut hole". ⁴

In addition to the lack of brand-name drug coverage in the gap, the coverage of generic drugs is becoming more limited. About one-half of PDPs offering gap coverage in 2008 are covering only "preferred" or "some" generics. ⁵

Lower Deductibles May be Deceiving

The deductible for the standard Part D plan has increased from $250 in 2006 to $275 in 2008 (a 10 percent increase). However, more PDPs are offering zero or reduced deductible plans in 2008. Because Part D plans generally must offer a benefit package that is actuarially equivalent to the standard benefit package, these plans often compensate by increasing the cost-sharing for their covered drugs. For example, a beneficiary in a plan with no deductible may pay the equivalent of 33 percent for a particular drug, rather than the 25 percent co-payment in a standard drug plan that does have a deductible. ⁶Seniors considering one of these plans need to be especially vigilant to make sure their overall costs do not end up higher.

Massive Disruptions for Low-Income Seniors are on the Horizon

Beneficiaries who receive the low-income subsidy ("extra help") will experience dramatic changes to their Part D coverage. About one out of six beneficiaries who are eligible for the low-income subsidy - 2.5 million people, compared with 250,000 in 2007 - will have to change to another Part D plan in 2008 because their current plan's premium will be higher than the value of their premium subsidy. If they do not change plans, they will have to pay the portion of the premium that exceeds the subsidy amount. ⁷

Beneficiaries who were automatically assigned to a plan when they joined Part D (the vast majority of low-income beneficiaries) will be automatically enrolled in another subsidy-eligible plan chosen at random by CMS. Because this selection is random, the assignments will be made without regard to whether the chosen plans offer the prescription drugs needed by a particular beneficiary. Beneficiaries who selected their current plan themselves rather than being automatically assigned by CMS will need to again affirmatively change plans. Otherwise, they will begin paying premiums in an amount that represents the difference between their subsidy amount and the premium charged by their Part D plan beginning in January.

Low-Income Beneficiaries are Hurt by Medicare Advantage Subsidies

According to FamiliesUSA, there are three principal reasons so many low-income seniors will be displaced in 2008, and these factors will cause similar upheavals in future years unless they are addressed:

• The formula for calculating the premium subsidy includes the cost of premiums in MA drug plans. Many MA plans charge zero or reduced premiums because their sponsors receive large subsidies from the federal government. Including these MA drug plans in the calculation of the low-income subsidy drives down its value, and this results in fewer plans being eligible, even if their own premiums have remained level.
• The value of the subsidy each year is based on the average premium in a region, weighted by enrollment. Because more people have joined the less expensive plans, those plans are given greater weight in calculating the value of the premium subsidy. This results in a decrease in the value of the subsidy.
• Several of the largest plans that were subsidy eligible in 2007 have raised their premiums significantly for 2008, to the point that they exceed the subsidy level in several states. In addition, CMS has changed the rules by which the benchmark can be exceeded. For 2007, CMS instituted a "de minimis" rule that allowed plans to retain their dual eligible enrollees if their premiums were $2 or less above the benchmark. This de minimis threshold has been reduced from $2 in 2007 to $1 in 2008. This change will contribute to the extraordinarily large number of low-income beneficiaries who will be forced to change plans to avoid paying a portion of their premiums out-of-pocket. ⁸

¹ FamiliesUSA. Buyer Beware: Higher Costs, More Confusion for the 2008 Part D Enrollment Season [Health Policy Memo] . Washington , D.C. : November, 2007.

² Jack Hoadley and Jennifer Thompsoni; Elizabeth Hargrave and Katie Merrellii; and Juliette Cubanski and Tricia Neuman. The Henry J. Kaiser Family Foundation . Medicare Part D 2008 Data Spotlight: Premiums. November, 2007.

³ Center for Medicare Advocacy, Inc. 2008 Part D Coverage - Major Changes are Coming . November 1, 2007.

⁴ Jack Hoadley and Jennifer Thompsoni; Elizabeth Hargrave and Katie Merrellii; and Juliette Cubanski and Tricia Neuman. The Henry J. Kaiser Family Foundation . Medicare Part D 2008 Data Spotlight: Premiums. November, 2007.

⁵ Ibid

⁶ Center for Medicare Advocacy, Inc. 2008 Part D Coverage - Major Changes are Coming . November 1, 2007.

⁷ FamiliesUSA. Buyer Beware: Higher Costs, More Confusion for the 2008 Part D Enrollment Season [Health Policy Memo] . Washington , D.C. : November, 2007.

⁸ FamiliesUSA. Buyer Beware: Higher Costs, More Confusion for the 2008 Part D Enrollment Season [Health Policy Memo] . Washington , D.C. : November, 2007.

Government Relations and Policy, November 2007