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News Release

Analysis of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003

Innovations in medical science, especially pharmaceuticals, have shifted the focus of medicine from highly invasive treatments and surgeries with potentially serious risks to less-invasive therapies focused on prevention and health maintenance. This shift has allowed many older Americans to remain healthy and independent.

As changes evolve in the way medical conditions are treated and managed, the health system should change accordingly. The life expectancy of the average American is increasing, and the rates of mortality, morbidity, and disability among Americans over age 65 have steadily decreased. In the past, aging has been associated with the development of chronic medical conditions, such as cancer, arthritis, diabetes, and heart disease, which limit participation in daily activities and reduce the quality of life. However, recent advances in the prevention and treatment of chronic diseases have radically altered the quality of life for older Americans.

Critical to these advances has been an unprecedented innovation in pharmaceuticals and biotechnology. Prescription drugs are an important and expanding part of health care delivery. While most Americans have health plans that can efficiently deliver the drugs they need, the Medicare program lacks a prescription drug benefit, forcing many seniors and disabled Americans who do not have additional insurance to pay full retail prices for their outpatient prescription drugs.

The new drug benefit in the Act will allow more Medicare beneficiaries access to prescription drug coverage and reduce the prices they pay for those drugs. This new benefit provides more generous coverage for those individuals with limited means and low incomes. Additionally, a prescription drug discount card will be available for almost all beneficiaries until the full benefit is available nationwide. The Act also includes provisions for savings for many state governments; better coordination of services for the most needy; and modernization of the drug delivery infrastructure.

New Benefits for Medicare Beneficiaries

The recently enacted prescription drug benefit will help Medicare beneficiaries in several ways.

• The benefit provides access to discounted prescription drugs. Under the fully implemented benefit, those who now pay full retail prices could see their prescription drug prices reduced by an estimated 20 percent or more. ¹In addition, their overall out-of-pocket drug spending could fall by about 50 percent or more-in exchange for a premium of about $35 per month in 2006.
• It provides catastrophic protection for all seniors and those with disabilities who have high out-of-pocket prescription drug expenses. A $2, $5, or 5 percent coinsurance amount per prescription will be required once a beneficiary accumulates $3,600 in out-of-pocket prescription drug spending.
• It provides additional coverage for millions of Medicare beneficiaries of limited means and with incomes below 150 percent of the federal poverty level. Those of limited means and with incomes below 135 percent of poverty will pay no monthly premium, no deductible, and only $1 to $5 per prescription in cost-sharing, while those of limited means and with incomes between 135 percent and 150 percent of poverty, will pay reduced premiums, a significantly reduced deductible of $50, and reduced cost-sharing.²
• It provides a prescription drug discount card program and immediate assistance of $600 for those individuals with limited savings and low-incomes who do not have other coverage.
• It provides savings for states and better coordination of care for Medicare beneficiaries who also qualify for Medicaid.

¹ Calculation assumes 20 percent savings, on average, for the fully implemented benefit through a combination of management techniques. CMS Office of the Actuary.
² In 2006, 150 percent of poverty would correspond to about $14,000 in annual income for a single individual and about $19,000 for a couple. 135 percent of poverty would be about $13,000 for singles and $17,000 for couples. Projection of 2003 Federal Poverty Levels.

Prescription Drug Coverage Today

While some seniors have access to prescription drugs, nearly a quarter of Medicare beneficiaries have no drug coverage during the year, and others have only partial coverage or have a drug plan that does not negotiate price discounts on their behalf (see chart below). As a result, millions of seniors and disabled Americans pay full retail price for their prescriptions. By contrast, the vast majority of Americans who have private insurance coverage pay significantly lower prices for their brand-name prescriptions.³

³ HHS found that customers with third party payers paid 15 to 20 percent less for prescriptions and the third parties generated rebates of an additional 2 percent to 35 percent of drug sales prices. These rebates are not reflected in retail prices, but are instead paid directly to insurers and other organizations that manage drug benefits after they have already reimbursed the pharmacy. See "Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices." Department of Health and Human Services. April 2000. http://aspe.hhs.gov/health/reports/drugstudy/

Paying full retail drug prices is likely to result in financial hardship for those seniors of limited means and with incomes between 100 and 150 percent of poverty, since they are more likely to go without drug coverage than other beneficiaries.

Those beneficiaries living in rural areas are also at a disadvantage. In non-metropolitan areas, as many as 50 percent of beneficiaries lack drug coverage ⁴-and these 3 million seniors and persons with disabilities account for more than one-third of all the Medicare beneficiaries who are uninsured for their drug spending.

An estimated 91 percent of Medicare beneficiaries have a pharmacist fill at least one prescription per year, but the extent of their drug spending varies ⁵. In 2006, when a full Medicare drug benefit will take effect, over 50 percent of Medicare beneficiaries are projected to use about $2,000 or less worth of drugs. But about 17 percent are projected to have costs over $5,000.⁶

Estimated Savings for Medicare Beneficiaries

Seniors and those with disabilities will have the opportunity to save an estimated 10 percent to 25 percent on their prescriptions through a Medicare-endorsed drug discount card program. ⁷ The card program will begin no later than six months from enactment. Discounts off retail prices will also be a feature of the drug benefit, beginning in 2006.

Under the full drug benefit, those paying full retail prices are expected to save an estimated 20 percent, on average, for their prescription drugs as plans compete to serve them by offering price discounts and other help to lower their total spending.⁸ Seniors benefit from the efficiencies of pharmaceutical benefit management and of pooling their purchasing power. In many cases, once seniors have paid their estimated $35 monthly premium and a $250 deductible, they will pay 25 percent of these reduced costs-giving them additional savings on their prescription drug spending:

⁴Kaiser Family Foundation. "Fact Sheet on Medicare and Prescription Drugs." April 2003.
⁵Medicare Current Beneficiary Survey, 2001
⁶CMS, Office of the Actuary.
⁷CMS estimated that total savings for beneficiaries for a similar drug discount card would be in the range of 10 percent to 15 percent. Savings of 25 percent or more would be possible on some individual drugs. Testimony of Thomas A. Scully, Administrator, Centers For Medicare & Medicaid Services. "Medicare Reform and Prescription Drugs." Before the Senate Special Committee on Aging. March 20, 2003. Additionally, in January -April 2002, AARP calculated average savings of 19 percent and up to 47 percent using their MembeRx Choice card.
⁸CMS Office of the Actuary.

Seniors and those with disabilities receive prescriptions from their physicians for a variety of medicines to treat a wide range of conditions. With subsidized plan coverage, Medicare beneficiaries could receive savings on each of their medicines. As illustrated below, seniors could save through discounts and subsidized plan coverage.

Table 1. Comparison of Possible Cost-Sharing for Drugs Seniors Use Under the New Medicare Drug Benefit

The above illustration shows how discounted drug prices can help seniors get the drugs they need. For instance, under the new benefit, a senior who buys $2,000 worth of drugs today could see her total prescription costs reduced to an estimated $1,600, of which she will pay just under $600 out of pocket, in exchange for a monthly premium of about $35. ⁹

⁹ Calculation assumes 20 percent cost management savings. CMS Office of the Actuary.

New Protection For Individuals with High Drug Costs

The new benefit also includes catastrophic protection for seniors with high out-of-pocket drug expenses. Once an individual's out-of-pocket spending reaches $3,600, he is only responsible for paying the higher of $2 for a generic or preferred brand-name drug, $5 for a non-preferred brand-name drug, or a 5 percent coinsurance on any one prescription. This approach focuses government help on reducing the out-of-pocket costs of Medicare beneficiaries who otherwise stand to spend large amounts of money and potentially high percentages of their incomes on prescription drugs.

The new benefit also establishes that beneficiaries will have a range of options so they can choose the drug plan that provides standard drug coverage or alternatives that may better meet their needs.

• To keep premiums lower for Medicare beneficiaries-regardless of age, health status, or income-the new benefit provides seniors a subsidy to purchase needed prescription drugs. This could assist beneficiaries by both lowering their out-of-pocket costs and preventing the kind of "adverse selection" problems that have made drug coverage difficult for many to obtain.

• It also provides reinsurance subsidies for drug plan sponsors so that they are not penalized for attracting less healthy enrollees. The Act provides a reinsurance subsidy of 80 percent for each beneficiary who is enrolled in a plan and has drug spending above the catastrophic limit. In all cases, however, plans will face appropriate incentives to manage the benefit efficiently and to get the best value for their enrollees and the Medicare program. Additionally, a system of risk corridors will be employed to insure against higher-than-expected drug costs. ¹⁰

• The Act also authorizes the program's administrator to take the steps necessary to ensure that all beneficiaries have a choice of prescription drug plans.

¹⁰ A risk corridor is a financial risk sharing arrangement between the insurer and the government. If spending for the year is much higher than expected, the government will share the cost. However, the reverse is true. If spending for the year is much lower than expected, the government will share in the savings

Additional Assistance for Beneficiaries of Limited means and with Low Incomes

Medicare beneficiaries of limited means and with income below 135 percent of poverty will be given immediate assistance through a Medicare-endorsed prescription drug discount card with $600 to apply toward purchasing their medicines.

Once the full benefit begins in 2006, Medicare beneficiaries of limited means and with incomes below 150 percent of the Federal Poverty Level (FPL) will see additional savings under the Medicare prescription drug plan.

• The poorest beneficiaries-those with incomes below 100 percent of the FPL who are eligible for full benefits under Medicaid-will pay no premiums, no deductibles, and will pay cost-sharing of $1 for a generic drug or a preferred multiple-source drug and $3 for all other drugs. This includes the poorest nursing home residents who will have no co-payment requirements.

• All other seniors who are eligible for full benefits under Medicaid, as well as other seniors with incomes below 135 percent of FPL and assets of no more than $6,000 per individual and $9,000 per couple-will pay no premiums, no deductibles, and will pay nominal cost-sharing of $2 for a generic drug or a preferred multiple source drug and $5 for any other drug.

• Those with incomes below 150 percent FPL and assets of no more than $10,000 per individual and $20,000 per couple-will get sliding scale subsidies for their premiums, and pay both a lower deductible ($50) and lower cost-sharing (15 percent) compared with the standard benefit.

• Seniors will be able to retain assets such as their house, automobile, and personal property (such as wedding rings) without having these items count toward the asset limit in determining their eligibility for either low-income subsidy group.

Approximately one-third of Medicare enrollees of limited means and with incomes below 150 percent of FPL will qualify for additional assistance. In many states, 40 percent and more Medicare beneficiaries have limited savings and low incomes and will likely qualify for additional assistance. Many Medicare beneficiaries with incomes below 150 percent of poverty lack any drug coverage today, and thus can stand to benefit significantly from this coverage.

Savings for State Governments and Employers

In addition to providing help to beneficiaries, provisions of the Act will help states by paying for most of the prescription drug costs for those who are enrolled in both the Medicare and Medicaid programs. CBO estimates a net savings of $17.2 billion on state Medicaid costs over the next 10 years.¹¹

In addition, states already operating drug assistance programs for seniors who do not qualify for Medicaid-including Pennsylvania, New York, New Jersey, Connecticut and Massachusetts-could see their spending on drugs reduced.

For employers that offer their Medicare-eligible retirees prescription drug coverage, the legislation also provides a 28 percent subsidy for the cost of drugs used by each enrollee up to $5,000, after a $250 deductible is met. This provision will allow many seniors to continue with the benefits they have today.

¹¹ CBO letter to Hon. Don Nickles, Chairman of the U.S. Senate, Committee on Budget, November 20, 2003.

Examples of How the New Benefit Will Help Beneficiaries Better Afford Prescription Drugs

The combination of discounts and prescription drug coverage will help millions of beneficiaries. Examples of savings for those who now lack drug coverage are listed below.¹²

• Agnes V. currently spends approximately $100 a month on medications to control her high blood pressure. Because she has no drug coverage, she pays full retail prices for these drugs. Under the new benefit, her spending on drugs would fall by about two-thirds-from $1,200 a year to about $430 per year. Adding in her monthly premium costs, her total drug-related expenditures would be cut by almost a third, to just under $850 per year.

• Darla A. has high blood pressure and diabetes, but paying for her prescriptions is difficult because she and her husband have limited savings and live on a fixed income of $15,900 per year. Under the new benefit, they qualify for full coverage of their monthly drug premiums and would generally have co-payments of only $2 or $5 per prescription-so her drug spending could fall to under $100 per year.

• Vernon M. has had a series of open-heart surgeries, and suffers from diabetes and melanoma. He currently spends about $400 a month on drugs to treat his multiple conditions. Under the new benefit, his out-of-pocket spending on drugs would drop from $4,800 per year to $2,340-cutting his expenditures by more than half. With his premium payments factored in, he'll save more than $2,000 a year. These savings come even though Vernon has drug expenses that exceed the initial coverage limit.

• Lani H. recently had a heart attack and spends approximately $700 a month on multiple medications. One of the prescriptions alone currently costs her $300 per month. Under the new benefit, her out-of-pocket spending on drugs would drop from $8,400 per year to around $3,680-a $4,720 reduction. With her premium payments factored in, her total spending for drugs would fall by over 50 percent.

Because the new drug benefit makes drugs more affordable, some beneficiaries may be able to use some of the savings to purchase additional drugs that they need but were previously unable to afford. Therefore, somewhat lower reductions in total drug spending may occur-because more seniors are getting drug coverage.

¹² Calculations assume 20 percent cost management savings. CMS Office of the Actuary

New Preventive Benefits with the Medicare Prescription Drug, Improvement, and Modernization Act

Beginning in 2005, all newly enrolled Medicare beneficiaries will be covered for an initial physical examination, and all beneficiaries will be covered for cardiovascular screening blood tests, and those at risk will be covered for a diabetes screen. These new benefits can be used to screen Medicare beneficiaries for many illnesses and conditions that, if caught early, can be treated, managed, and can result in far fewer serious health consequences. Such conditions as obesity, diabetes, heart disease, and asthma could be made far less severe for millions of Medicare beneficiaries.

For example, approximately 129 million U.S. adults are overweight or obese, which results in costs to the American health system of between $69 billion and $117 billion per year. Obesity also has a significant impact on Medicare beneficiaries' quality of life and on Medicare spending. For the period between 1996 and 1998, a 15 percent increase in annual per capita Medicare spending is attributable to beneficiaries being overweight, and a 37 percent increase is attributed to being obese.¹³ By providing an initial physician examination for all newly enrolled Medicare beneficiaries, seniors and disabled Americans will have the opportunity to discuss with their physician the importance of preventive care and living a healthy lifestyle.

• Additionally, in 2000, an estimated 17 million people (6.2 percent of the population) had diabetes, costing the U.S. approximately $132 billion. ¹⁴
• Heart disease and stroke are the first and third leading causes of death in the United States. In 2003 alone, 1.1 million Americans will have a heart attack. Cardiovascular diseases cost the U.S. more than $300 billion each year.
• Approximately 23 million adults and 9 million children have been diagnosed with asthma at some point within their lifetime, with costs near $14 billion per year.

Smaller amounts might be spent preventing these conditions. However, the current research indicates that these services are offset by the improvements in beneficiaries' lives and could reduce spending on more serious medical treatment. ¹⁵ There is accumulating evidence that much of the morbidity and mortality associated with these chronic diseases may be preventable. Making an initial health screening available to all new Medicare beneficiaries could result in Medicare spending less overall to treat beneficiaries with these conditions.

¹³ Finkelstein EA, Fiebelkorn IA, Wang G. "National medical spending attributable to overweight and obesity: how much, and who's paying?" Health Affairs-Web Exclusive. 2003 Project Hope.
¹⁴ The American Diabetes Association (ADA) estimated the national cost of diabetes in 1997 to be $98 billion. The ADA has updated this estimate for 2002 to $132 billion.
¹⁵ Covering Preventive Services Under Medicare: A Cost Analysis, Partnership for Prevention, 2003.http://www.prevent.org/docs/SupplementBooklet.pdf

Other Key Provisions of the Legislation

The Act also encourages the use of electronic prescriptions in the delivery systems that will bring prescription drugs to Medicare beneficiaries. Such systems should sharply reduce the substantial number of prescribing errors that occur each year, by helping to better identify and thus prevent potentially adverse drug interactions. In addition, such changes can foster further use of data-driven disease management programs. A recent article estimated that the total cost of all preventable, drug-related mortality and morbidity ranges from $30 to $137 billion per year. The largest cost was for preventable hospitalizations. ¹⁶

For the first time ever, the Medicare prescription drug legislation creates a new fiscal analysis requirement, "The Combined Medicare Trust Fund Analysis," to help policymakers address the future of Medicare's finances. The legislation requires the Medicare Trustees to analyze the combined expenditures and dedicated revenues of the Hospital Insurance and Supplementary Medical Insurance Trust Funds. The legislation requires the Trustees to alert the President and the Congress if spending growth causes general fund revenues to exceed 45 percent of total Medicare expenditures. This new fiscal safeguard will put the program on a stronger financial foundation by alerting future Congresses and Presidents when Medicare's dedicated revenues fall below adequate levels.

The Medicare Prescription Drug, Improvement, and Modernization Act is estimated by CBO to cost a total of $395 billion over 10 years. ¹⁷ The legislation targets the most assistance to beneficiaries of limited means and with low incomes and attempts to strike a fiscal balance so that benefits will be secure for future generations.

¹⁶ Johnson, J. A. and J. L. Bootman, ``Drug-Related Morbidity and Mortality: A Cost-of-Illness Model,'' Archives of Internal Medicine, 1949-1956, 1995.
¹⁷ November 20, 2003 Congressional Budget Office Preliminary Estimate

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Note: All HHS press releases, fact sheets and other press materials are available at http://www.hhs.gov/news.

Last Revised: December 17, 2003