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\$2,400

15%

\$2,040

\$698

\$440

\$1,138

\$1,263

53%

\$3,000

15%

\$2,550

\$1,050

\$440

\$1,490

\$1,510

50%

\$4,000

15%

\$3,400

\$1,900

\$440

\$2,340

\$1,660

42%

\$5,100

15%

\$4,335

\$2,835

\$440

\$3,275

\$1,825

36%

\$6,000

15%

\$5,100

\$3,600

\$440

\$4,040

\$1,960

33%

\$7,500

15%

\$6,375

\$3,664

\$440

\$4,104

\$3,396

45%

\$8,500

15%

\$7,225

\$3,706

\$440

\$4,146

\$4,354

51%

\$10,000

15%

\$8,500

\$3,770

\$440

\$4,210

\$5,790

58%

\$15,000

15%

\$12,750

\$3,983

\$440

\$4,423

\$10,578

71%

\$20,000

15%

\$17,000

\$4,195

\$440

\$4,635

\$15,365

77%

Tom Conlon 2005

more than \$1,000 in drug costs in 2006, joining a PDP may make sense.  Given various annual drug costs and retail discount estimates, beneficiary savings range from 20% to more than 70%.  But remember, these savings assume the beneficiary has received no previous drug discounts.

The "Doughnut Hole"

The "Doughnut Hole" is the gap in coverage for the Medicare prescription drug plans.  As noted above, this means that no insurance coverage exists for out-of-pocket expenditures between \$2,250 and \$5,100.  For example, say a beneficiary has \$3,250 in drug costs in 2006.  After paying the \$250 deductible, the beneficiary will pay 25% of the cost of their prescription drugs up to \$2,250.  The beneficiary would then pay 100% of the costs above the \$2,250 threshold—in this case \$1,000 (\$3,250-\$2,250).  The \$1,000 represents the hole in the doughnut—the amount of drug costs not covered at all by the PDP.

The coverage gap was designed to help lower the federal cost of the prescription drug plan, which as currently designed is expected to cost \$82 billion dollars in 2006—or approximately \$2,196 per Medicare beneficiary.  The per beneficiary cost is projected to increase to \$3,830 in 2014.  Total Medicare prescription drug cost from 2005-2014 is projected to be \$1.1 trillion.  The federal government will cover about \$850 billion of this total.4

Keep two things in mind about the “Doughnut Hole”.  One is that, even with the gap, if you have more than \$1,000 in annual drug costs, the plans may be worth joining—even with the hole in the middle of the coverage (See Table 1).     Secondly, substantial cash outlays will still be required for those beneficiaries incurring between \$2,250 and \$5,100 (or about \$190-\$425 per month)—though overall this expense would be less than if the beneficiary had no drug insurance coverage or had no access to drug discount programs.

Substantial Support for People with Low Incomes and Limited Assets

Of the estimated 43 million Medicare beneficiaries projected for 2006, approximately 14.4 million—about one third—are low income beneficiaries eligible to participate in the prescription drug benefits low income subsidy program.  Eligibility for the subsidy is determined by the income and assets a person or married couple has.  The low income support program offers substantial cost relief and nearly 11 million beneficiaries are expected to enroll in the subsidy program.5

People who have incomes below 150% of the Federal Poverty Level (\$14,355 for an individual and \$19,245 for a couple in 2005) and who have limited assets (up to \$10,000 for individuals, \$20,000 if married) are eligible to receive subsidized drug benefits.  The assets qualifying for this determination are limited, including checking and savings accounts, stocks, bonds and other assets that can be quickly converted to cash.  A family home, personal car and other personal property do not count toward the asset determination.  The benefits include waving or substantially reducing the premiums, deductibles and co-payments, and a limitation of the “Doughnut Hole”.   For qualifying individuals the plans pay between 80% and 100% of all drug costs from the first prescription.5

Here are some hypothetical examples Medicare has provided on how beneficiaries benefit from the low income program.5

Example 1

Mrs. Smith is an 80 year old widow.  She has an annual income of \$9,000 and no countable assets.  She is a Medicare and Medicaid (“dual eligible”) individual and her annual drug costs are \$750.  In 2006, she will be eligible for the new Medicare prescription drug benefits low income subsidies.  She will pay no premium, no deductible and will have no gap in coverage.  She will pay either \$1 dollar or \$3 dollars for each prescription depending on whether she uses generic or non-preferred drugs.  Under the Medicare prescription drug program Mrs. Smith will pay only about \$20 a year for her drug costs.

Example 2

Mr. and Mrs. Jones are retired Medicare beneficiaries.  As a married couple they have annual income of \$16,000 with countable assets valued at less than \$9,000.  Mr. Jones has annual drug spending of \$1,250 while Mrs. Jones spends \$750.  Currently they have no drug coverage.  In 2006 the Joneses will be eligible for the new Medicare prescription drug benefit and subsidies. They will pay no premium, no deductible and will have no gap in coverage.  They will have co-payments of \$2 or \$5 dollars for each prescription.  Under the Medicare prescription drug program, Mr. Jones will pay about \$57 a year for his drug costs and Mrs. Jones will pay about \$34.  Both will achieve about 95% savings on their current drug spending.

Example 3

Mr. Washington is a retired Medicare beneficiary. He has an annual income of \$13,965 and annual drug spending of \$1,750.  Currently he has no coverage.  In 2006 Mr. Washington will be eligible for the new Medicare prescription drug benefit.  Mr. Washington will pay a monthly premium of approximately \$37, a \$50 deductible, 15% co-insurance on each prescription up to the out-of-pocket threshold of \$2,250.  He will have no gap (or Doughnut Hole) in coverage.  When his out-of-pocket spending reaches \$808 (which corresponds to \$5,100 in total spending in 2006), he will pay just \$2 or \$5 for each subsequent prescription.  Under the Medicare prescription drug program, Mr. Washington will pay about \$275 a year for his drug costs, a 73% savings after the premium over his current drug spending.

Other Prescription Drug Plan Features

The Medicare prescription drug plans have no annual or lifetime spending limits.  Each plan must offer enrolled beneficiaries nationwide coverage.  Drug discount cards were established for 2004 and 2005 as a temporary benefit prior to the full program launch in 2006; the card discount program ends on December 31, 2005.

Out-of-pocket costs will increase annually, with the amount tied to the increase in drug costs.  Since drug costs are projected to substantially outpace Social Security cost-of-living adjustments, the standard drug benefit plans as currently designed will become less and less attractive over time.  Especially for chronically ill people just above the income and asset levels that allow for low income subsidies.  See Table 2 for the Congressional Budget Office estimate of the projected out-of-pocket increases for 2006-2013.  The increases are mostly between 7-10% per year.

 Table 2.  Projected Change in Key Program Elements 2006-2013. Year Average Monthly Premium Deductible Main Benefit Limit Catastrophic Limit Coverage Gap  (“Donut Hole”) 2006 \$35 \$250 \$2,250 \$5,100 \$2,850 2007 \$37 \$275 \$2,470 \$5,596 \$3,126 2008 \$41 \$300 \$2,710 \$6,158 \$3,448 2009 \$43 \$325 \$2,920 \$6,596 \$3,676 2010 \$47 \$350 \$3,170 \$7,165 \$3,995 2011 \$49 \$380 \$3,400 \$7,715 \$4,315 2012 \$54 \$410 \$3,690 \$8,360 \$4,670 2013 \$58 \$445 \$4,000 \$9,068 \$5,068 Chart by The Congressional Budget Office Note: When this chart was created in 2003, the 2006 premium estimate was \$35.  Since that time, CMS has revised the projected 2006 premium estimate to about \$37.

Anyone who is entitled to Medicare Part A (hospitalization) and is enrolled in Medicare Part B (physician services) is eligible for the drug benefit—which is labeled Part D.  The drug benefit programs begin coverage on January 1, 2006.  Enrollment is voluntary, which means people must “opt in” to a program by completing an enrollment form.  The initial enrollment period begins on November 15, 2005 and runs for six months ending May 15, 2006.  For people

enrolling by December 31, 2005, coverage begins on January 1, 2006.  For those enrolling from January 1-May 15, drug coverage starts on the first day of the month following an enrollment.  In later years open enrollment will run from November 15 to December 31.  Once a beneficiary chooses a drug plan they must generally remain in that program for the year.  However in the first six months of 2006 and in the first three months of 2007, enrollees will have options to move to a different program after January.6

Closing Thoughts on the PDPs

The prescription drug plan program is primarily a catastrophic insurance plan for Medicare beneficiaries who do not qualify for the low income subsidy programs.   While most of these seniors will now have lower drug costs, the greatest benefit is for those who have very high drug costs—say about \$600 a month or \$7,200 a year.  If you incur these types of costs, this insurance plan can supply substantial savings.

And if you do qualify for the low income subsidy, the prescription drug plan offers significant benefits if no previous low income support was provided.

2.  Medicare + Choice Expanded, Renamed Medicare Advantage

Medicare offers two health plan choices.  The Original Medicare Plan is a fee-for-service plan, which means a fee is charged for each health care service or supply a beneficiary receives.7  Eighty-eight percent of Medicare beneficiaries (over 36 million people) have their health bills paid by the original fee-for-service program.8

Approximately 11% Medicare beneficiaries are covered by managed-care plans.8  These offerings were formerly known as "Medicare + Choice Plans".  The MMA renamed the managed-care offerings "Medicare Advantage".

Enrollment in Medicare managed-care plans was 4.6 million in 2004, down from 6.3 million in 2000—a drop of 27%.  This drop is largely attributed to beneficiary dissatisfaction with increases in out-of-pocket costs and perceived reductions in benefits.  The decline was also driven by a steep reduction in available plans.  In 2004, 145 plans offered Medicare managed-care, down from 346 in 1998.  The vast majority of beneficiaries belong to Medicare health maintenance organization (HMO) plans.  More than 25% of Medicare managed-care enrollees live in California, where residents are well accustomed to health maintenance organizations.8

Medicare wants to make managed-care services more accessible and affordable to beneficiaries.   Medicare believes that people joining Medicare Advantage plans often receive more benefits than is offered in Original Medicare, such as access to preventative and wellness services, disease management programs and dental and vision care.  These plans may also offer less paperwork than Original Medicare.  Medicare also claims that Medicare Advantage members incur lower out-of-pocket costs, suggesting the average beneficiary saves \$700 per year.  Beneficiaries in poor health achieve nearly \$2,000 in annual savings.9  Over the long-run, many policy makers believe that Medicare Advantage plans will slow the rate of growth of Medicare expenditures, although that has not been the case so far with the Medicare+Choice plans.10

The MMA seeks to boost access and affordability by providing private insurers numerous financial incentives to offer new managed care plans to Medicare beneficiaries.  One change beneficiaries will see as a result of MMA is new regional preferred provider organization plans (PPOs) that will be available in 2006.  PPOs are networks of doctors and hospitals that contractually agree to provide health services at a specified rate, but which allow beneficiaries to go outside the network for health care if desired, albeit at a higher cost.  PPOs may benefit Medicare enrollees, especially those in rural areas, by providing access to more health care providers and services, by lowering out-of-pocket costs while also allowing options to see alternative providers.9

MMA also offers insurers financial incentives to expand their HMOs so that beneficiaries have more access to these types of coordinated care plans.  Finally, MMA extends incentives to insurers to add the prescriptions drug program to their managed care offerings.

All Medicare Advantage plans are different, meaning beneficiaries must carefully evaluate plan benefits rules and costs.  For example, beneficiaries should understand which doctors and hospitals will provide most of their care, how disease management programs function and how the prescription drug benefit plan is designed.  This process may be familiar to beneficiaries who made health insurance plan choices offered by an employer.  However beneficiaries not accustomed to understanding managed-care products may find the process daunting.  In either case, beneficiaries should seek help in making the important decision on which type of Medicare plan to join.

The "Medicare Personal Plan Finder" on the CMS Web site offers some help for beneficiaries to compare plan features and estimate out-of-pocket costs.  The "Medicare Personal Plan Finder" can be accessed at http://www.medicare.gov/MPPF/home.asp.  However this information may be less informative than tailored estimates provided by the private insurance plan.11 Family members, senior citizen service agencies and primary care providers are other sources that can help beneficiaries make the best Medicare plan choice.

3.  Other Key MMA Changes for Beneficiaries

The MMA added coverage for a number of preventative services, made changes to the Part B (physician services) deductible and premiums and modified Medigap rules.

An initial preventative medical examination is now offered within six months of when a beneficiary first becomes enrolled in Medicare Part B.  Screening blood tests for the early detection of cardiovascular disease are added, as are diabetes tests for those people most at risk for that disease.  The MMA also adds disease management programs to manage and promote health for those with chronic illnesses.12

The Part B deductible will increase from \$100 to \$110 for 2005 and then increase annually by the same percentage as the Part B premium increase.  MMA also introduces means testing for the Part B premium subsidy beginning in 2007.  Currently 75% of the Part B premium is paid by the federal government and 25% is paid by the Medicare beneficiary.  Beginning in 2007 and phased in over the five-year period, higher income people will have the Medicare Part B subsidy reduced as follows:

 Income Part B Single Married Premium Paid By Medicare Less than \$80,000 Less than \$160,000 75% \$80-\$100,000 \$160-\$200,000 65% \$100-\$150,000 \$200-\$300,000 50% \$150-\$200,000 \$300-\$400,000 35% Over \$200,000 Over \$400,000 20%

According to the Henry J. Kaiser Family Foundation, about 3% of Medicare beneficiaries will be subject to this means testing in 2007, growing to 6% of enrollees in 2013.8  (The Part B annual premium is \$936 in 200513).  What's significant about this initiative is not the subsidy savings that Medicare will achieve.  Rather, this is the first time higher income beneficiaries will receive benefits that are means tested.  This theme will likely recur in future Medicare cost containment debates and legislation.

Medigap plans are insurance policies sold by private insurance companies to fill "gaps" in Original Medicare Plan coverage. Two new Medigap plans will be added in 2006 to help beneficiaries with out-of-pocket costs; these plans have not yet been defined.  Also, no new Medigap policies with drug coverage may be sold, issued or renewed to beneficiaries who have enrolled in a Part D prescription drug plan.  This restriction does not apply to policy renewals for beneficiaries who do not enroll in a Part D drug plan.

4.  Health Savings Accounts

Health Savings Accounts (HSAs) were literally tacked on to the end of the Medicare Modernization Act despite having little to do with the Medicare program.  HSAs are savings accounts designed to encourage the use of high-deductible health plans.  High-deductible health plans should first be understood before examining HSAs.

High-deductible health plans (HDHPs) are insurance plans that have a deductible of at least \$1,000 for individuals and \$2,000 for families.  Proponents of HDHPs believe such plans lower overall health care costs by making consumers more cost conscious of their health care choices and make health insurance more affordable for the uninsured.  Others believe there is little advantage gained by increasing incentives for purchasing HDHPs, as health premiums still remain too costly for most low income people and that altering incentives for health spending below the deductible level has little affect on overall health spending.  Opponents also believe that high-deductible health plans lead to underutilization of needed care.14

The MMA created Health Savings Accounts to encourage greater use of high-deductible health plans.  HSAs are savings accounts that have tax advantages but are only available to people who have enrolled in a HDHP.  Funds placed in HSAs are intended to cover out-of-pocket medical expenses.  HSAs have three tax advantages: (1) contributions to the accounts are tax-free; (2) buildup in the account is tax-free; and (3) distributions from the account are tax-free.  Distributions can be used for any un-reimbursed medical expenses, including retiree health insurance, Medicare expenses, prescription drug costs and many other health items.12

HSA contributions can be made by individuals, their employers and family members—all on a tax-free basis.  Up to 100% of the health plan deductible may be saved annually, with a maximum of \$2,600 for individual plans and \$5,150 for family plans.  Individuals age 55-65 can make additional tax-free contributions of up to \$1,000 per year.12

HSAs became available in 2004 and are related to health reimbursement arrangements (HRAs) and Medical Savings Accounts (MSAs) created in the mid-late 1990s.  HRAs and MSAs also provided tax incentives to encourage the use of high-deductible health plans, but these incentives were not highly successful.  Only about 8% of privately insured adults aged 19 to 64 (about 7 million people) had deductibles of \$1,000 or more in 2002.14

Two factors suggest that HSAs and HDHPs will be favored more by higher income people than lower income people.  One, higher income people are more likely to have cash available to place in a tax advantage savings account than lower income people.  Two, higher income people have higher tax rates, making the tax savings incentive more meaningful to them compared to lower income people.  HSAs and HDHPs may also be more attractive to healthier people compared to chronically ill people.  Healthier people will incur lower out-of-pocket health expenditures than chronically ill people, making the accumulation and returns from the tax advantage HSA higher than if the account is depleted every year, as would likely occur for chronically ill people.

When you think about Health Savings Accounts, always think too about high-deductible health plans.  They are inextricably linked.  HSAs and HDHPs are likely to remain health coverage options that will be used by a small minority of American, unless employers make HDHPs the primary or only insurance plan offered to their employees.  Stay alert to this possible development, as HDHPs may offer employers substantial health-insurance savings, which is a goal of the majority of American businesses today.

Medicare Modernization—Some Cautions for Beneficiaries

The Medicare Modernization Act adds many important and potentially valuable options for Medicare beneficiaries.  The most important being the offer of prescription drug insurance coverage for over 40 million Americans.

MMA substantially expands the use of private insurance plans in Medicare.  Private plans deliver the prescription drug programs and receive incentives to increase the number and type of Medicare Advantage managed-care services available.  Proponents of private plans believe that market-based competition will give beneficiaries more access and higher quality services, while lowering the overall costs to the Medicare program.  This may turn out to be true.  It will certainly be what's promised.

But Medicare beneficiaries must be cautious as they consider the prescription drug programs and evaluate Medicare Advantage plans.  The prescription drug plans and Medicare Advantage are similar to and build upon the private insurance model that Medicare+Choice plans were based upon.  The experience with private sector-led Medicare + Choice delivery has not led to improved access and quality and has in fact increased costs to Medicare.  And Medicare beneficiaries have been very dissatisfied with the private insurer health care delivery model.10

Beneficiaries and their supporters should stay alert to three key factors as they manage their Medicare benefits in the years to come.  One, private sector Medicare plans have a history of instability.  Beneficiaries have seen significant changes in premiums and benefits and many plans have entered and left the market quickly.10  Beneficiaries should carefully assess the stability of their private plans and closely watch plan changes that affect their out-of-pocket costs and benefits.

Two, Medicare private insurance plans have historically enrolled healthier beneficiaries than those in Original Medicare.10  Chronically ill beneficiaries must be particularly careful when selecting drug or managed-care plans to ensure that the benefits offered satisfy their chronic health care needs.

The third factor is the most important.  All private prescription drug and managed-care plans will be different, which makes decision-making very complicated.  This will be especially true for urban beneficiaries where many plans will be available.

This complicated system is of greatest concern to 50% of the Medicare population that does not have the consumer skills to compare basic information on health plans.15, 16 Studies have also shown that the elderly:

q       are vulnerable to making poor purchasing decisions when insurance options are confusing17

q       are reluctant to change insurers, even when it is in their economic benefit to do so.17  This is a special concern given the substantial out-of-pocket increases expected after 2006 (see Table 2)

q       find too many choices immobilizing18

q       with low education levels or poor English skills have particular difficulty in making insurance decisions19

Most beneficiaries will be confronted with complicated, risky decisions in this modernized Medicare world.  And many beneficiaries will not be able to navigate this decision-making maze.

Medicare beneficiaries must receive ongoing help from family, friends, government agencies and other support sources to help them make the best informed choices for their health care needs.

Works Cited

1.    Center for Medicare & Medicaid Services, "New Medicare drug benefit to help pay for prescription drugs.  Issue Paper #1.," Available from http://www.cms.hhs.gov/medicarereform/issuepapers/title1and2/.

2.    Center for Medicare & Medicaid Services, "Medicare drug benefit uses price negotiation to get best possible drug prices.  Issue Paper 10.," Available from http://www.cms.hhs.gov/medicarereform/issuepapers/title1and2/.

3.     "Generic Drugs By Mail Can Be a Raw Deal," The Wall Street Journal, 15 February 2005.

4.     "2005 Annual Report of The Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds," Available from http://www.cms.hhs.gov/publications/trusteesreport/default.asp?

5.    Center for Medicare & Medicaid Services, "Additional help to those who need it most: those with high drug costs and those with low incomes.  Issue Paepr #3.," Available from http://www.cms.hhs.gov/medicarereform/issuepapers/title1and2/.

6.    Center for Medicare & Medicaid Services, "Part D Benefit Eligibility and Enrollment.  Issue Paper #19.," Available from http://www.cms.hhs.gov/medicarereform/issuepapers/title1and2/.

7.    Center for Medicare & Medicaid Services. Medicare & You 2003.  2003.
Ref Type: Generic

8.    Henry J Kaiser Family Foundation, "Medicare Advantage Fact Sheet," Available from http://www.kff.org/medicare/factsheets.cfm.

9.    Center for Medicare & Medicaid Services, "Choices for Medicare Advantage. Issue Paper #2," Available from http://www.cms.hhs.gov/medicarereform/issuepapers/title1and2/.

10.    B. Biles, G. Dallek, and L. H. Nicholas, "Medicare Advantage: Deja Vu All Over Again?," Health Aff.(Millwood.) (2004).

11.    Medicare Payment Advisory Commission (MedPAC). Healthcare Spending and the Medicare Program.  2004.
Ref Type: Report

12.    US House of Representatives Committee on Ways and Means, "Summary of Medicare Conference Agreement," Available from http://waysandmeans.house.gov/media/pdf/healthdocs/confagreement.pdf.

13.    Center for Medicare & Medicaid Services, "Medicare Part B Premiums and the Adjusted Community Rate," Available from www.cms.hhs.gov/healthplans/letters/partbpremium.pdf.

14.    Davis, K, Doty, M, and Ho, A. How High Is Too High?  Implications of High-Deductible Health Plans.  2005.  The Commonwealth Fund.
Ref Type: Report

15.    J. H. Hibbard et al., "Can Medicare Beneficiaries Make Informed Choices?," Health Aff.(Millwood.) 17, no. 6 (1998): 181-193.

16.    J. H. Hibbard et al., "Is the Informed-Choice Policy Approach Appropriate for Medicare Beneficiaries?," Health Aff.(Millwood.) 20, no. 3 (2001): 199-203.

17.    US Government Accountability Office. Medigap Insurance:Better Consumer Protection Should Result from 1990 Changes to Baucus Amednment.  1991. Washington, GAO.
Ref Type: Report

18.    B Schwartz, "A Nation of Second Guesses," New York Times, 22 January 2004.

19.    The Commonwealth Fund. One-Third At Risk: Medicare Beneficiaries with Health Problems Need Cost Protections.  2001. New York.
Ref Type: Report