PRESIDENT’S PLAN TO STRENGTHEN AND MODERNIZE MEDICARE
FOR THE 21st CENTURY
II. MODERNIZING MEDICARE’S BENEFITS
1. Prescription Drug Benefit
Overview. This proposal would create a new and voluntary outpatient Medicare prescription drug benefit that is
accessible and affordable to all beneficiaries. Medicare beneficiaries would have the option to enroll in
"Part D" of the program. All Part D beneficiaries would immediately be able to purchase their
prescriptions at the lower drug prices which private-sector benefit mangers are able to negotiate. In addition, the
new benefit would have no deductible and would pay half of participants’ drug costs up to a limit of $5,000
($2,500 in Medicare payments) when fully implemented. Medicare would also provide a 50 percent premium subsidy for
this coverage to assure that it is affordable for all beneficiaries. Its premiums are estimated to be $24 in 2002
and $44 in 2008 when fully implemented. Low-income beneficiaries (below 135 percent of poverty) would not pay for
premiums or cost sharing (improving the protections that they have for the Medicare Part B premium), and those between
135 and 150 percent of poverty would pay a reduced premium. Enrollees in Medicare managed care plans would receive
their benefit as they do today although plans, for the first time, would be paid directly for providing this
coverage. Beneficiaries in the traditional program would get their benefits through private pharmacy benefit
managers (PBMs) or other qualified entities. Medicare would contract out for this management through competitive
bidding similar to that used by most private insurers and large employers. This proposal also includes incentives
to develop and retain employer-provided retiree drug coverage.
Despite the indisputable importance of prescription drugs to health care today, Medicare does not explicitly cover
outpatient prescription drugs. As a consequence, nearly 15 million Medicare beneficiaries lack drug coverage
altogether many of whom are middle income. Millions more have retiree health coverage, which is declining;
Medigap, which is unstable and increasingly expensive; Medicaid, which restricts eligibility to the lowest income
seniors and people with disabilities; or Medicare managed care. Medicare manage care plans are restricting their
extra benefits, including prescription drugs, reinforcing the need for a minimum, national drug benefit option for
all Medicare beneficiaries.
a. Benefit design
Policy: There are several major design features of the prescription drug benefit:
- No deductible: Coverage would begin with the first prescription.
- Discounts: From the first prescription on, beneficiaries would get the same discount that the private
group purchaser who manages the benefit gets. This discount would continue even after the benefit limit is
- Coinsurance: Beneficiaries generally would be responsible for coinsurance amounting to 50 percent of the
cost of any prescription. Benefit managers would be allowed to reduce the coinsurance charged to beneficiaries if
they could demonstrate as part of their bid proposal that they could achieve savings without undermining quality
health care and access to needed medications.
- Benefit limit: There would be a limit on total amount of spending that the plan would pay each year on
behalf of a particular beneficiary. The limit would be set at $2,000 ($1,000 in Medicare payments) for calendar
years 2002 and 2003; $3,000 for 2004 and 2005; $4,000 for 2006 and 2007, and $5,000 for 2008. In 2009 and subsequent
years, the limit would be increased each year by the increase in the consumer price index (CPI).
In general, all therapeutic classes of drugs would be covered under the Medicare Part D benefit. In addition,
beneficiaries would be guaranteed access to off-formulary drugs when medically necessary, and have basic appeal
rights where coverage is denied. The only exceptions would be the set of drug classes currently excluded under
Medicaid (Title XIX) (including drugs for weight loss or gain, promoting fertility, cosmetic purposes or hair growth,
symptomatic relief of cough or colds, prescription vitamins and minerals, and all nonprescription drugs), except that
prescription smoking cessation drugs not covered under Title XIX would be covered under Medicare Part D. Prescription
drugs currently covered under Medicare Part A or B would still be covered under current arrangements and would not be
counted against the Part D benefit limit. If there are drugs for which there have been documented abuses, benefit
managers would be permitted to take certain measures to assure appropriate utilization, as is the case in both private
sector and Medicaid prescription drug programs. No formulary would be established by the Medicare program, but
private benefit managers could establish formularies, subject to the coverage requirements (described below), as
virtually every PBM and private insurer does today. This would help them negotiate better prices and evaluate optimal
therapeutic interventions. Benefit managers would also be authorized to create appropriate incentives for generic
substitution, a practice widely used in private plans today.
Background/rationale: This benefit would provide meaningful coverage to all beneficiaries regardless
of their level of drug utilization. Because of the zero deductible, beneficiaries would be covered from their first
prescription each year. The 50 percent coinsurance would help to make the coverage affordable to the government and
beneficiaries through lower premiums, and would help guard against overutilization. The cap on total benefit payments
helps keep the program affordable for taxpayers. Over 90 percent of beneficiaries would not reach the cap when fully
This benefit is designed to assure beneficiaries have access to needed drugs while allowing private managers set
procedures for accessing drugs. This flexibility allows the Medicare drug benefit to adapt to future pharmaceutical
advances without major new legislation or regulation.
Policy: In general, the new Medicare prescription drug benefit would be operated as a separate part of
the Supplemental Medical Insurance (SMI) Trust Fund. Using this Trust Fund would eliminate the additional bureaucracy
associated with a new trust fund. In no way would Part D costs or income affect Part B costs or premiums. The
beneficiaries and government would equally split the cost of the Part D benefit. Thus, beneficiaries would pay a
premium in the amount of 50 percent of the cost of the program. The estimated premium in 2002 is $24 per month,
rising to $44 per month in 2008 when the benefit is fully phased in. Beneficiaries would also pay cost sharing, as
Premiums for those beneficiaries opting for Part D coverage would be collected in the same way as Part B premiums, as
a deduction from Social Security checks for most beneficiaries. Once enrolled, beneficiaries would be notified of the
annual premium in the same notice in which they learn about the Part B premium for the next year.
Background/rationale: The Part D prescription drug benefit is financed on a shared voluntary basis,
similar to the structure of Medicare Part B. Financing will be split between beneficiaries and government (each pays
50 percent of the full premium). This level of subsidy is designed to keep premiums low enough to be affordable to
beneficiaries and to avoid risk selection (see section III-2 for a description of the offsets for this benefit).
Policy: In general, beneficiaries would have a one-time opportunity to sign up for the voluntary benefit,
in either the first year the benefit is offered (2002) or their first year of Medicare eligibility. There are two
exceptions: (1) beneficiaries who are covered by their employer while still working (or by the employer of a working
spouse) have a one-time opportunity to enroll after retirement (or retirement or death of the working spouse); and
(2) beneficiaries who are covered by employer-based retiree coverage have a one-time opportunity to enroll if the
former employer drops coverage of prescription drugs for all retirees.
In the first year of implementation, all Medicare beneficiaries would be able to sign up for the benefit during an
open enrollment period, held at the same time as the Medicare+Choice enrollment period in November 2001. During 2001,
the Medicare program would conduct a major education campaign about the new benefit option. After the first year of
implementation, all newly eligible Medicare beneficiaries could enroll for the optional Part D coverage, under the
same procedures as established for enrollment in optional Part B coverage.
Background/rationale: Similar to Medicare Part B, enrollment in Medicare Part D is done on a one-time
only basis. This approach is critical to reducing or eliminating selection bias; if enrollment were allowed on
an annual basis, beneficiaries could make the decision to select coverage only for years in which they anticipate high
drug costs. Beneficiaries who have adequate employer-sponsored coverage could continue that coverage without paying
twice for the same benefit. The exceptions are designed to ensure that beneficiaries with employer-sponsored coverage
are protected if that coverage becomes unavailable.
d. Management, payments, and beneficiary protections
Policy: Medicare would not administer this benefit directly, but instead contract out with private
sector entities. This could include pharmacy benefit managers (PBMs), retail drug chains, health plans or insurers,
states (through mechanisms established for Medicaid), or multiple entities in collaboration (e.g., alliances of
pharmacies), provided that the collaboration increases their scope or efficiency and is not anti-competitive.
Private benefit managers would competitively bid to manage the benefit for a particular geographic area. The number
and boundaries of the geographic areas designated should be set to ensure that multiple entities would have an
opportunity to compete for the single contract awarded in each area and that enrollment in each area is large enough
to encourage efficiency. At the same time, rules would be established to assure that a few private benefit managers
do not dominate the Medicare market and that there are multiple areas.
Competition for contracts to administer the Part D benefit would be held periodically, probably every two or three
years. The Secretary would develop specific criteria for selecting the winning entities, and would solicit bids in
response to these criteria. In general, Medicare would follow the best practices of large private employers and
plans, including consultation and recommendations from benefits experts. The selection process would consider the
entity’s administrative fees, as well as its clinical quality programs, its formulary, information and management
systems, the likely ability of the entity to control drug costs for beneficiaries and government, disease management
programs, relationships with drug manufacturers, and other factors. Any entity that meets a set of criteria
(described below) would be eligible to compete for the contracts.
All PBMs or other entities would be required to meet access and quality standards established by the Secretary. These
standards would include (but are not limited to): inclusion of strategies to encourage appropriate use of medications;
use of a medical panel with outside experts free of conflicts of interest in creating the formulary; use of objective
criteria in selecting drugs for the formulary; open and fair dealing with all drug and biologic companies; publication
of criteria for any cost containment measure that could affect patient care; submission of data about costs and
utilization on a regular basis to help improve quality of care; compliance with standards for capacity and pharmacy
availability to serve all beneficiaries in the geographic area; and compliance with contract requirements and consumer
protections, including grievance and appeals procedures, that apply to Medicare+Choice plans to the extent that these
requirements are relevant. No balance billing could be collected by the pharmacy. We would also require that, once
beneficiaries have exceeded their benefit caps, that they would continue to have access to prices established by the
Private benefit managers could use various cost containment tools in administering the program, subject to limitations
and guidelines in the contract. Benefit managers would be required to negotiate with pharmacies that meet a set of
qualifications, including having the necessary information systems to process electronic point-of-sale transactions
and create utilization records. Dispensing fees would have to be high enough to ensure participation by most
pharmacies. They would also be required to use drug utilization review programs and meaningful clinical criteria to
The government would bear most of the risk for the cost and utilization of services under the prescription drug
benefit. The PBM serving each geographic area would be paid a fee for managing the benefit, and would have some
contractual incentives to control cost and utilization. The Medicare program would test the use of various arrangements
such as bonuses (retaining portion of discounts they arranged), withholds, or risk corridors to provide incentives to
the private benefit managers to manage the benefit effectively.
Under this proposal, Medicare would not set prices for drugs. Prices would be determined through negotiations between
the private benefit administrators and drug manufacturers. Thus, the proposal differs from the Medicaid program in
that a "rebate" would not be required and from the Veterans’ Administration program in that no fee schedule
for drugs will be developed. Instead, the competitive bidding process would be used to yield the best possible drug
prices and coverage, just as it is used by large private employers and the Federal Employees Health Benefit Plan
Medicare+Choice plans would be required to provide a prescription drug benefit for all enrollees who have elected to
participate in Part D. Those beneficiaries enrolled in Medicare managed care plans would receive their drug benefit
through their plan and the government would explicitly subsidize this coverage. Like the Part B premium, which would
be based on the plan’s price, this Part D premium would be competitively set. If beneficiaries leave a Medicare+Choice
plan and return to fee-for-service Medicare, they would receive their Medicare Part D benefit through the contracting
PBM for their geographic area.
Background/rationale: The Part D benefit would rely on administration by private entities, such as PBMs.
Beneficiaries enrolled in managed care plans would receive a drug benefit from that plan which would receive a
government payment for that coverage. Beneficiaries in traditional Medicare would get their benefits through private
benefit managers. This approach mirrors the administration of most private insurance programs, which increasingly use
PBMs or similar organizations to administer their drug benefits. These organizations have experience managing drug
utilization and have developed numerous tools for cost containment and utilization management. Contracting with
multiple private entities, each with claims processing and program management experience, will increase Medicare’s
ability to run this benefit smoothly. The number of contracts and the number of years in the contracting cycle will
be set by the Secretary at levels that will help attract existing PBMs to this program and that will encourage new
entrants into this market.
Private benefit managers would have the authority to use the tools that are commonly used for managing drug costs and
utilization in the private sector, subject to basic standards set by Medicare. In particular, Medicare would require
drug utilization review to help ensure that adverse drug interactions are prevented, that proper drug protocols are
followed, and that compliance by patients is monitored. A key goal would be to reduce unnecessary hospitalizations
and adverse drug events where possible.
In today’s private-sector marketplace, PBMs do not typically accept full risk for the management of drug benefits.
To be consistent with market practices and to assure that PBMs participate, Medicare would share only limited risk in
its contracts. To provide some incentive for managing utilization and costs, Medicare would establish performance
bonuses or other means of rewarding benefit managers that manage the benefit effectively.
The program would also establish certain basic beneficiary protections, an essential feature of any health program.
Adequate access to a pharmacy network should be ensured since benefit managers are required to contract with all
qualifying pharmacies. In addition, beneficiaries would be guaranteed access to off-formulary drugs when medically
necessary, and have basic appeal rights where coverage is denied.
e. Expanded assistance for low-income beneficiaries
Policy: This plan would build on current Medicaid protections for low-income beneficiaries to assure
that they have access to the new prescription drug benefit. The new Part D program would be treated like Part B for
beneficiaries in the qualified Medicare beneficiary (QMB) program. This means that Medicaid would pay for drug
premiums and cost sharing for beneficiaries up to 100 percent of poverty, using the current Medicaid matching rate.
Additionally, the proposal would create two new eligibility categories. First, beneficiaries with incomes between 100
and 135 percent of poverty would, like QMBs, receive full assistance for their drug premiums and cost sharing.
However, the Federal matching rate would be 100 percent. Second, beneficiaries with incomes between 135 and 150
percent of poverty would pay a partial, sliding-scale premium based on their income. The Medicaid costs for this
group would also be matched at 100 percent. States would be obliged to offer this expanded protection.
All states would have some fiscal relief as a result of this benefit since they all provide prescription drug coverage
to dual eligible Medicaid-Medicare beneficiaries. The current qualified Medicare beneficiary (QMB), specified
low-income Medicare beneficiary (SLMB), and qualified individual (QI) programs would continue as under current law to
provide assistance for Part B premiums and cost sharing.
Background/rationale: Low-income beneficiaries tend to have disproportionately high drug costs. An
AARP study found that beneficiaries with incomes below $10,000 spent an average of 8 percent of their income for
drugs. For those with a severe illness or a need for a new, high-cost drug, the costs can be devastating. Only those
beneficiaries who are very poor or who, because of severe health problems, qualify for Medicaid which covers
Medicaid does, however, pay for Medicare Part B premiums and cost sharing for certain low-income beneficiaries. This
coverage, which was expanded by the Balanced Budget Act, would be further enhanced under this proposal. Federal
funding would be available to states to ensure that all poor and near-poor beneficiaries pay no premiums or cost
sharing for this coverage.
f. Incentives to develop and retain employer-provided retiree drug coverage
Policy: The policy is designed to encourage and support the development and retention of
employer-sponsored retiree health benefits. It is the intention of this policy to make certain that current coverage
for prescription drugs in retiree health plans is not lost or diminished. The Administration will work closely with
employers, unions, and other interested parties to make certain that this goal is met.
Under this policy, Medicare would provide a partial drug premium subsidy to employers whose retiree coverage is at
least as good as the Medicare benefit. The Medicare contribution would be 67 percent per beneficiary of the subsidy
that it would otherwise provide for Medicare Part D enrollees. As such, Medicare would save 33 percent of its costs
for each beneficiary in private employer-based retiree coverage.
This incentive payment would operate through the health plan or PBM that administers an employer’s drug benefit, as
follows. First, on an ongoing basis, the health plan or PBM would document for HCFA all retirees for whom they are
providing employer-sponsored drug benefits. HCFA would use these lists to designate beneficiaries who should not be
charged the Part D premium and which employers are eligible for the employer subsidy.
Second, the employer health plan or PBM would attest, at the outset and on an annual basis, that their drug benefit
meets minimum standards (e.g., is as generous as the Medicare benefit and is offered to all retirees in a manner that
does not discriminate based on factors such as age or health status). The standards would be analogous to those
required of Medicare+Choice plans.
Third, HCFA would make the premium subsidy payments to the health plan or PBM that administers the drug benefit on
behalf of the employer, so that the employer’s payment is reduced. Because the PBMs and private plans used by
employers to administer their drug benefits will generally be participating in Medicare, the subsidies would generally
go to entities that are already receiving payments from HCFA.
If the employer drops retiree coverage, beneficiaries who were covered would have a one-time opportunity to enroll in
Medicare Part D.
Background/rationale: Less than 30 percent of Medicare beneficiaries today get coverage through their
former employers. This type of coverage has been eroding in recent years. Between 1993 and 1997, the percent of
large firms offering retiree health benefits for Medicare eligibles dropped 20 percent. This provision is designed
to create an incentive to keep employers in this market by making a payment to the employers (or the plans or PBMs
that manage their drug benefits) and possibly encourage others to offer. The incentive payment is lower than what the
government’s costs would be if the employer coverage was dropped. Because the employer contribution to the drug benefit
is tax-deductible, this policy provides an additional incentive for employers to provide coverage, allowing employers
to offer the same or more generous drug benefits at a significantly lower net cost.