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Understanding Medicare's Prescription Drug Benefit

In late 2003, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (P.L. 108-173) into law, creating the first ever prescription drug plan for Medicare beneficiaries.

 

Since then, the news media, senior advocacy organizations, like AARP, healthcare providers and other groups have published information directed at seniors to help them understand what benefits they're entitled to under the new law.

 

Results have been mixed. The Alliance for Retired Americans, which boasts 2.5 million members nationwide, says the Medicare drug discount cards have been "mired in confusion" since they were rolled out in early June 2004. "Many seniors feel the cards will provide little benefit, which explains the low enrollment rates," the Alliance says.

 

For some seniors, a reverse mortgage may offer a solution to pay for prescription drug costs not covered by Medicare or to cover the monthly premiums once the prescription drug coverage kicks in.

 

Transitional Discount Card Program

The new Medicare Prescription Drug Plan is being implemented in two phases. The first phase began in May 2004 when Medicare beneficiaries were offered the choice to purchase a discount drug card to save money on future drug purchases. The discount drug cards were activated on June 1, 2004.

 

Discounts will vary by card. Melissa Powers, a GeorgiaCares Coordinator at the Atlanta Regional Commission, estimated that seniors could save between 10-20 percent�and each plan will be slightly different. For example, some cards can only be used at certain pharmacies.

 

Medicare contracted with private companies�drug companies and insurance companies�to offer these cards. In Atlanta, seniors have 17 different drug cards to choose from, said Powers.

 

The annual cost for a card is capped at $30. The card is optional. Enrollees can sign up for only one Medicare-endorsed card per year.

 

This is a temporary program that phases out when the second stage of assistance, a Medicare drug benefit, goes into effect on January 1, 2006. Once this begins, the discount cards will no longer be used.

 

"It's important to understand that the drug discount card is not in any way shape or form provided by Medicare," added Powers. Any problems that a senior has with their discount drug card needs to be resolved with the private company offering the card, not Medicare.

 

Special Help For People With Low Incomes

Drug card beneficiaries whose annual incomes fall below 135 percent of the poverty level�$12,569/single or $16,862/couple in 2004�can receive up to $600 to help pay for prescription drugs in 2004 and again in 2005. The government will cover the $30 annual enrollment fee as well. To determine whether a person is eligible to receive this special benefit, the government only looks at the beneficiaries' annual income. There is no asset test, so a person's investments, bank accounts, etc., are not taken into consideration, just their annual income.

 

"These people will get $600 worth of prescription drugs free for the remainder of this year, beginning June 1, and they'll get another $600 on January 1, 2005," noted Powers. "They will in essence get $1,200 worth of free prescription drugs."

 

A senior will have to a low �co-payment� (5%-10%) each time they use the card while it still has a balance on it. Once the $600 is used up, the card can still be used for discounts. If a senior�s drugs are already covered by Medicaid, he or she could not get a discount card. Also, if there is drug coverage from an employer or the federal government, the senior is ineligible for the special low-income features of the discount card, according to AARP. AARP provides additional tips on picking the most appropriate discount drug card.

 

Prescription Drug Benefit

Medicare will begin to pay for outpatient prescription drugs through private plans beginning in January 2006 using a four-tier drug benefit system. The following are some important factors to consider:

 

• The drug benefit is voluntary. A senior does not have to sign up. However, there may be a penalty if it is decoded to sign up at a later time;
• There will be a monthly premium, which will likely be about $35. Some plans will charge more, others will charge less;
• The plans will vary. Some plans may offer coverage that looks like the standard benefit. Others may look different, but are worth the same. Still others will include additional drug coverage. Premiums will vary based on what each plan offers and where it is offered; 

�      Tier 1: Beneficiaries pay the first $250 in drug costs (deductible);

�      Tier 2: After the deductible is met, a co-insurance plan kicks in where Medicare covers 75% of drug costs, up to $2,250. Beneficiaries will pay 25% of drug costs up to $2,250. 

�      Tier 3: After total drug costs reach $2,250, beneficiaries pay an additional $2,850 in out-of-pocket drug costs before Medicare will continue coverage. This has been referred to by critics of the plan as the �coverage gap,� also known as the �doughnut hole.� 

�      Tier 4: Once out-of-pocket drug costs, not including premiums, reach approximately $3,662.50 ($250 deductible + $562.50 co-pay + $2,850 coverage gap) Medicare will start paying again. 

 

Medicare will cover up to 95% of drug costs in Tier 4 (also called catastrophic benefit.)

Beneficiaries will pay either $2 for generic drugs and $5 for brand-name drugs, or 5% of the prescription drug cost; whichever is greater. 

 

Drugs plans may have lists of drugs they cover. These lists are called "formularies" or preferred drug lists. The drugs will be in groups. The groups are called therapeutic classes. There will be at least one drug for each therapeutic class. There will also be an appeal process to get a drug not in the formulary. 

 

Late Enrollment Penalty: There will be a penalty for not enrolling in the Medicare drug benefit in the first six months that you are eligible. The penalty will be about 1% for each month you delay. This penalty does not apply if you lose drug coverage that you had from another source, which was at least as good as the Medicare drug benefit.

The deductibles, benefit limits, and catastrophic thresholds are expected to increase from $2,850 in 2006 to $5,066 in 2013.

 

Medicare will provide additional assistance to beneficiaries who qualify based on low incomes and limited assets. The Congressional Budget Office estimates 14.1 million beneficiaries will be eligible for such assistance.

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