Medicare Endorsed Prescription Drug Discount Card Program

CRS Report for Congress
Medicare Endorsed Prescription
Drug Discount Card Program
Updated August 19, 2004
Jennifer O’Sullivan
Specialist in Social Legislation
Domestic Social Policy Division

Congressional Research Service ˜ The Library of Congress

Medicare Endorsed Prescription
Drug Discount Card Program
On December 8, 2003, the President signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (MMA, P.L. 108-173). This
legislation provides for the implementation of a Medicare prescription drug program,
effective January 1, 2006. In the interim, MMA requires the Secretary of Health and
Human Services (HHS) to establish a temporary program to endorse prescription
drug discount card programs meeting certain requirements. The purpose is to provide
access to prescription drug discounts to persons who voluntarily enroll with a private
card plan. Each card sponsor is to provide each enrollee with access to negotiated
prices. The program will also provide up to $600 in transitional assistance in both

2004 and 2005 for low-income persons enrolled in endorsed card programs.

All Medicare beneficiaries, except those receiving Medicaid drug coverage, are
eligible to enroll in a discount card program. Card enrollees with incomes below
135% of poverty are eligible for transitional assistance provided they do not have
drug coverage under a group health plan. Not all persons eligible to enroll will
actually enroll in the card program. Many persons who currently have access to
discount prices through other sources will likely elect not to enroll in the temporary
program. An individual can be enrolled in only one card program at a time.
Sponsors may charge a uniform annual enrollment fee, not to exceed $30; the Centers
for Medicare and Medicaid Services (CMS, the agency administering Medicare) will
pay the fee for those receiving transitional assistance.
A card sponsor must be a nongovernmental single legal entity doing business
in the U.S. A Medicare Advantage (MA)organization (i.e., a Medicare managed care
plan) may apply to become an exclusive card sponsor by limiting enrollment to
persons enrolled in its managed care plan; certain requirements otherwise applicable
to card programs are waived for this group. At a minimum, card programs are
required to offer a negotiated price for at least one drug in each of the 209 therapeutic
categories identified by CMS on a list of medications frequently used by Medicare
beneficiaries. The sponsor must contract with a sufficient number of pharmacies
(other than mail-order) in its service area to ensure that access requirements are met.
Several issues have been raised since the program began operating June 1, 2004.
All beneficiaries not enrolled in an MA plan have a choice of at least 34 national
plans; in all but nine states, beneficiaries may also select from additional regional
cards. CMS has placed on its website comparative information, by zip code, on plans
available in the area and plan prices for drugs specified by a senior. Many observers
have stated that beneficiaries are faced with too many confusing choices. While over
4 million persons have enrolled in the program, there is concern that many persons
eligible for the $600 subsidy have not yet enrolled; special education efforts are being
targeted toward this population group. Some observers have also suggested that
discounts may not be that much when compared with other discounts available to
seniors. Two recent studies suggest that these programs do provide savings when
compared with retail prices and some other discount programs. This report will be
updated as events warrant.

Program Overview.................................................1
Key Program Features..............................................1
Program Eligibility.............................................1
Basic Requirements........................................1
Eligibility for Transitional Assistance..........................2
Transition Period to 2006 Prescription Drug Benefit..............2
Transitional Assistance.........................................3
Card Sponsor Qualifications and Endorsement.......................4
Experience ...............................................4
Service Area..............................................4
Medicare Endorsement.....................................4
Enrollment in an Endorsed Plan..................................4
Enrollment Process........................................4
Enrollment Fees...........................................5
Program Design...............................................6
Covered Discount Card Drugs................................6
Formularies ..............................................6
Pricing ..................................................7
Pharmacy Network Access..................................8
Other Requirements............................................8
Information and Outreach Activities; Customer Service............8
Transitional Assistance.....................................9
Medical Errors; Drug Interactions.............................9
Grievance Procedures......................................9
Reporting ................................................9
Privacy ..................................................9
Special Endorsements.........................................10
Special Endorsement for Managed Care Plans..................10
Special Endorsements.....................................10
Territories ...............................................11
CMS Cost Projections.............................................12
Medicare ...................................................12
Costs for Sponsors............................................13
Current Status....................................................13
Card Sponsors...............................................13
Beneficiary Education.........................................14
Enrollees ...................................................15
Manufacturer Assistance Programs...............................15
Issues ..........................................................15
Beneficiary Enrollment and Selection of Plan.......................15
In General...............................................15
Auto-Enrollment .........................................16
Formularies .................................................17

Measuring Negotiated Discounts.................................18
Health Policy Alternatives (HPA) Analysis.....................18
Lewin Group Analysis.....................................19
Price Changes Over Time..................................20
Pharmacy Access.............................................21
Transition to Permanent Drug Benefit.............................21
Eligibility ...............................................21
Plan Choices............................................22
Beneficiary Choices.......................................22

Medicare Endorsed Prescription
Drug Discount Card Program
Program Overview
On December 8, 2003, the President signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (MMA, P.L. 108-173). This
legislation provides for the implementation of a Medicare prescription drug program,
effective January 1, 2006. In the interim, the legislation requires the Secretary of
Health and Human Services (HHS) to establish a temporary program to endorse
prescription drug discount card programs meeting certain requirements. The purpose
of these programs is to provide access to prescription drug discounts to persons who
voluntarily enroll with a private card plan. Each card sponsor is to provide each
enrollee with access to negotiated prices. The program will also provide up to $600
in transitional assistance in both 2004 and 2005 for low-income persons enrolled in
endorsed card programs.
On December 15, 2003, the Centers for Medicare and Medicaid Services (CMS,
the agency that administers Medicare) issued interim final regulations for the1
endorsed card program. Sponsors began enrolling beneficiaries in May 2004 and
began offering access to discounts and transitional assistance in June 2004. As of
July 2004, over 4 million persons had enrolled in card programs; nearly 1 million of
these persons received transitional assistance.
This report provides an overview of the major features of the card program and
highlights some of the major implementation issues raised to date.
Key Program Features
Program Eligibility
Basic Requirements. Persons enrolled in Medicare Part A and/or Part B are
eligible to enroll in a discount card program. However, persons receiving any drug
coverage through Medicaid (including under a Section 1115 waiver program) are
ineligible to enroll in a drug card program.2 Conversely, an individual enrolled under

1 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Services, Medicare Program; Medicare Prescription Drug Discount Card, Interim final rule
and notice; 68 Federal Register 69840, Dec. 15, 2003.
2 States are required to provide CMS with the necessary data to make this determination.

a state pharmaceutical assistance program could be eligible provided he or she meets
the other requirements.
It should be noted that not all persons eligible to enroll will actually enroll in the
card program. Many persons who currently have access to discount prices through
other sources will likely elect not to enroll in the temporary program.
Eligibility for Transitional Assistance. Certain low-income persons will
be eligible for $600 in transitional assistance in both 2004 and 2005. Individuals will
not be eligible for this assistance if they have drug coverage under a group health
plan or other health insurance coverage, TRICARE coverage, or Federal Employees
Health Benefits Program (FEHB) plan coverage. Persons qualifying for assistance
are those with incomes below 135% of the poverty line ($1,048 per month for a
single, $1,406 for a couple). Persons who meet the definition of qualified Medicare
beneficiary (QMB), specified low-income beneficiary (SLIMB), or qualifying
individual-1 (QI-1) will be deemed to meet the income requirements.3 An individual
deemed eligible will be considered eligible for the duration of the individual’s
enrollment in an endorsed card program. There are no assets tests for transitional
Transition Period to 2006 Prescription Drug Benefit. The new
Medicare prescription drug benefit under Part D becomes effective January 1, 2006.
Current Medicare beneficiaries will have a six-month open enrollment period,
beginning November 15, 2005, to decide whether they wish to enroll for the new
benefit. Beneficiaries who are enrolled in the endorsed drug card program can
continue their enrollment in the card program until the effective date of their

2 (...continued)
On Dec. 15, 2003, CMS sent a letter to state Medicaid directors advising them of the
information requirements; this requested information was designed with input from states
and pilot tested. The law specifies that state costs of this activity are reimbursable as
administrative expenses under Medicaid; the federal matching rate for these expenses is


3 QMBs are aged or disabled persons with incomes at or below the federal poverty level.
In 2004, the monthly level is $796 for an individual and $1,061 for a couple. (These figures
include a $20 per month income disregard). They must also have assets below $4,000 for
an individual and $6,000 for a couple. Certain other assets such as the home are excluded
from this limit. QMBs are entitled to have their Medicare cost-sharing charges, including
the Part B premium, paid by the federal-state Medicaid program. Medicaid protection is
limited to payment of Medicare cost-sharing charges (i.e., the Medicare beneficiary is not
entitled to coverage of Medicaid plan services) unless the individual is otherwise entitled
to Medicaid. SLIMBs are persons who meet the QMB criteria, except that their income is
over the QMB limit. The SLIMB limit is 120% of the federal poverty level. In 2004, the
monthly income limits are $951 for an individual and $1,269 for a couple. Medicaid
protection is limited to payment of the Medicare Part B premium (i.e., the Medicare
beneficiary is not entitled to coverage of Medicaid plan services) unless the individual is
otherwise entitled to Medicaid. QI-1s are persons who meet the QMB criteria, except that
their income is between 120% and 135% of poverty. Further, they are not otherwise eligible
for Medicaid. In 2004, the monthly income level for QI-1 for an individual is $1,068 and
for a couple $1,426. Medicaid protection for these persons is limited to payment of the
monthly Medicare Part B premiums.

enrollment in Part D or May 14, 2006 (the end of the six-month Part D enrollment
period), whichever occurs first. Any such time occurring on or after January 1, 2006,
is considered as the individual’s transition period. During this transition period no
enrollment fee can be charged and any transitional assistance remaining on December
31, 2005 must be applied to the cost of covered discount card drugs purchased during
the transition period. The endorsed card enrollment program terminates no later than
May 14, 2006 for all enrollees.
Transitional Assistance
An individual determined eligible for transitional assistance in 2004 is entitled
to $600 in assistance in 2004 and $600 in 2005. For individuals determined eligible
in 2005, the amount available will be based on when the completed application is
received. If such application is received during the first quarter of 2005, the full $600
is available; the amount drops to $450 for applications received in the second quarter;
$300 for those received in the third quarter, and $150 for those received in the fourth
quarter. CMS has clarified that any assistance received under the transitional
assistance program will not affect eligibility or amount of assistance under any other
federal program.4
Transition assistance payments are to be applied only toward the costs of
“covered discount card drugs” (i.e., all drugs that could be covered under a card
program if there were no formulary limitations.) This includes any drug obtained
through the sponsor’s endorsed program. The drug is covered whether or not it is
on or off the formulary (if any) and regardless of whether or not a discount has been
negotiated for that drug.
Transitional assistance individuals are required to pay coinsurance charges.
Beneficiaries with incomes under 100% of poverty are liable for coinsurance charges
of 5% of the drug’s price; those with incomes between 100% and 135% of poverty
are liable for coinsurance charges of 10% of the price. Pharmacies are permitted to
waive these coinsurance charges; however they can not do so routinely, nor can they
advertise the fact.
Any transitional assistance remaining at the end of 2004 can be rolled over into
2005; any amount remaining at the end of 2005 can be rolled over into the
individual’s transition period, if any, at the start of 2006. These rollover provisions
only apply if the individual remains in the same endorsed card program, changes the
program during the annual coordinated election period in 2004 (for 2005), or is
eligible for a special election period and changes card enrollment during such period.
(See enrollment, below.)
CMS will reimburse endorsed sponsors for any transitional assistance applied
toward the cost of covered discount drugs obtained by transitional assistance
enrollees. Sponsors will submit requests to CMS to debit the enrollees balance.

4 Bolten, Joshua. Medicare Modernization Act and Federal Programs. Memorandum for
the Heads of Executive Departments and Agencies, Executive Office of the President,
Office of Management and Budget, July 18, 2004.

CMS will only reimburse for those claims that are fully adjudicated for payment, not
for pending claims.
Card Sponsor Qualifications and Endorsement
Experience. An entity wishing to be a card sponsor must demonstrate certain
experience. It must be a nongovernmental single legal entity doing business in the
United States. It must have three years private sector experience in pharmacy benefit
management including (1) adjudicating and processing drug claims at the point of
sale; (2) negotiating with prescription drug manufacturers and others for discounts,
rebates, and other price concessions on drugs; and (3) administering and tracking
individual subsidies or benefits in real time. At the time of application, the applicant
or subcontractor must operate a pharmacy benefit program, a prescription drug
discount card program, a low-income drug assistance program or similar program
that serves at least 1 million covered lives. In addition it (and any subcontractor the
applicant relies on to meet the three years experience and 1 million covered lives
requirements) must demonstrate a satisfactory record of financial stability and
business integrity. CMS notes that the three years and 1 million lives requirements
were included to ensure that the applicant (and subcontractors) are familiar with
federal laws and will be able to quickly establish endorsed programs. Entities that
could meet these requirements include pharmacy benefit management companies
(PBMs), wholesale or retail pharmacy delivery systems, and insurers.
Service Area. Card programs are required to meet certain requirements with
respect to service areas. Service areas must cover one or more states. The sponsor’s
program must be available to all eligible individuals residing in such state(s). It
should be noted that the statewide requirement does not apply to Medicare managed
care plans offering exclusive card programs (see discussion below).
Medicare Endorsement. CMS solicited applications from entities seeking
to become endorsed sponsors. The law permits the agency to limit the number of
endorsed sponsors in a state to two. However, the agency noted in the preamble to
the interim final rule that it intended to endorse all applicants that (together with their
subcontractors and other entities with which they have entered into a legal
arrangement) meet or exceed the requirements for endorsement. Applicants meeting
the requirements will enter into a contract with CMS. They will be able to use a
Medicare-Endorsed Prescription Drug Card emblem.
Card sponsors will not be able to begin enrollment activities until they have
completed certain activities including finalizing pharmacy network contracts,
negotiating manufacturer rebates or discounts, entering into all subcontracts
necessary to assure full compliance with the conditions of endorsement, and
obtaining CMS approval of information and outreach materials.
Enrollment in an Endorsed Plan
Enrollment Process. Enrollment in the card program is voluntary.
Individuals must first select the card program they wish to enroll in. They will then
complete a standard enrollment form and submit it to the selected sponsor. If they

are applying for transitional assistance, they will need to certify, under penalty of
perjury, that the income information they are providing is accurate. An endorsed
sponsor cannot enroll a Medicare beneficiary in its program until CMS verifies the
beneficiary’s eligibility. If a beneficiary has applied for both the card program and
transitional assistance and is determined eligible for the card program, but not
transitional assistance, he/she has the option of deciding whether or not to enroll in
the card program.
CMS will verify that the applicant meets the eligibility requirements, including
income eligibility requirements in the case of transitional assistance. Every
beneficiary determined ineligible for the program and/or transitional assistance can
request a reconsideration of the decision.
An individual can only be enrolled in one endorsed card program at a time. An
individual enrolling in 2004 may change the election for 2005 during the annual
coordinated election period (November 15, 2004-December 31, 2004). An individual
may voluntarily disenroll at any time. In general, an individual who disenrolls in
2004 must wait until the annual coordinated election period to enroll in another plan
for 2005. In general, an individual who disenrolls in 2005, will no longer be eligible.
However, under certain circumstances, individuals who disenroll from a program will
be entitled to a special enrollment period during which they can change their card
enrollment. The special enrollment period will apply for persons who move out of
the service area of the card sponsor, change residence to or from a long-term care
facility, enroll in or disenroll from a Medicare managed care plan, or are in a plan
which terminates or is terminated. A person eligible for transitional assistance, who
disenrolls other than for one of these specified reasons, forfeits any remaining
transitional assistance for the year.
CMS suggests that beneficiaries planning to change residence during the year
should enroll in a national program.
It should be noted that while beneficiaries can only enroll in one endorsed
program at a time, they may enroll in other card programs which are not Medicare-
endorsed programs.
Enrollment Fees. Sponsors may charge a uniform annual enrollment fee, not
to exceed $30. Card sponsors must assure that enrollees are not charged any
additional fees for products and services inside the scope of the endorsement.
Products and services inside the scope of a sponsor’s discount care program would
include covered discount drugs as well as discounted nonprescription drugs.
Enrollees will pay the fee directly to the card sponsor. CMS will pay the fee for
persons receiving transitional assistance. States may pay some or all of the
enrollment fees for some or all persons not eligible for transitional assistance;
payments are to be made directly to the sponsor. States may also pay some of the
coinsurance amounts for transitional assistance enrollees. No federal matching
payments would be available for these expenditures.

Program Design
Covered Discount Card Drugs. “Covered discount card drugs” are defined
as virtually all recognized prescription drugs. However, an individual plan does not
have to include all drugs on its formulary (see below) and not all formulary drugs
have to be discounted. Individuals will select a card program based on which
program will offer the discounted drugs they expect to use. Specifically, covered
discount card drugs are defined in the law as prescription drugs and biologicals
covered under Medicaid, vaccines licensed under Section 351 of the Public Health
Service Act, and insulin. Necessary supplies associated with the injection of insulin
are also included; syringes, needles, alcohol swabs, and gauze meet the definition
while test strips or lancets do not.
The definition of covered discount drugs includes drugs when they are used for
a medically accepted indication. In general this means the use is approved under the
Federal Food Drug and Cosmetic Act or the use of which is supported by one or more
recognized compendia.
Specifically excluded from the definition of covered discount card drugs are
drugs excluded under Medicaid, except for smoking cessation. Thus, the following
categories are specifically excluded: (1) agents when used for anorexia, weight loss,
or weight gain; (2) agents when used to promote fertility; (3) agents when used for
cosmetic purposes or hair growth; (4) agents when used for the symptomatic relief
of coughs and colds; (5) prescription vitamins and mineral products, except prenatal
vitamins and fluoride preparations; (6) nonprescription drugs;5 (7) outpatient
prescription drugs for which the manufacturer seeks to require associated tests or
monitoring services be purchased exclusively from the manufacturer or its designee
as a condition of sale; (8) barbiturates; and (9) benzodiazepines (central nervous
system depressants).
Additionally, drugs which would otherwise be covered under the card program
are not covered if they can be covered under Medicare Part A (in connection with
covered inpatient services) or under Part B (which provides coverage for limited
categories of outpatient prescription drugs including drugs which cannot be self-
administered, immunosuppressive drugs under certain circumstances, and some
oncology drugs).
Formularies. Endorsed card programs may use formularies. For purposes of
the card program, a formulary is defined as the list of specific drugs from among
covered discount card drugs for which an endorsed sponsor offers negotiated prices
to Medicare beneficiaries enrolled in its card program. CMS expects that allowing
sponsors to use formularies will result in deeper discounts for card enrollees and
enhanced use of generic drugs. In the interim final regulation, CMS stated that it
wanted sponsors, when constructing their formularies, to include, at a minimum, the
types of drugs commonly needed by beneficiaries (both aged and disabled). It
developed a list of therapeutic classes and subclasses for medications frequently used

5 However, MMA allows sponsors to offer discounts on nonprescription drugs through their
discount card program.

by Medicare beneficiaries. At a minimum, card programs will be required to offer
a negotiated price for at least one drug in each of the 209 categories identified in the
list. A drug can be used only once to satisfy this requirement. Further, sponsors
must provide at least one generic drug for a negotiated price in at least 55% of the
required categories.
CMS indicated that there are several key issues applicants should consider in
developing their formularies. These are: (1) evaluation of whether some drugs, not
widely recommended for use in the elderly but appropriate in individual cases, should
be included in the formulary; (2) importance of assuring discounted prices are
available to special populations for the specific medication combinations they require
(for example, for those persons who are HIV positive or those with mental illness);
and (3) ensuring that there are appropriate selections and dosage forms within each
class or subclass (for example, long-acting versus short acting).
Pricing.Negotiated Prices; Price Concessions. Card sponsors are
required to provide beneficiaries access to negotiated prices. As a condition of
endorsement, sponsors must obtain discounts, rebates, subsidies, or other price
concessions on at least some covered discount card drugs. Any such price
concessions obtained by endorsed sponsors are to be taken into account in
determining negotiated prices.
The interim final regulation requires that a share of such price concessions
should be passed along in the form of lower prices; it does not specify what should
constitute a share. The preamble to the regulation states that CMS would not set a
minimum quantitative requirement either for the level of price concessions endorsed
sponsors must obtain or the share of such concessions that must be passed along to
card enrollees. Rather, CMS states that it will allow endorsed sponsors to determine
this in “light of their understanding of consumer preferences and the impact of
market forces on their business model.” CMS further notes that PBMs frequently
obtain and pass through substantial rebates for their commercial populations.
CMS states that establishing a minimum level for price concessions could
potentially undercut market competition, because manufacturers might tend to set
their prices around the minimum level. It states that the CMS price comparison
website will enable beneficiaries to compare maximum negotiated prices for drugs
under different endorsed programs. (See discussion below.)
Price Variation. It is expected that the level of discounts offered to card
enrollees will vary across the spectrum of drugs offered. CMS is also allowing
sponsors to vary prices and formularies by enrollee characteristics. For example,
lower prices could be offered to transitional eligible enrollees or enrollees with a
particular disease.
Updates. CMS will allow pricing changes to be made. (Its fact sheet on the
program states that changes can be made on a weekly basis.) However, any increase
in negotiated price is not allowed to exceed an amount proportionate to the change
in the drug’s average wholesale price and/or an amount proportionate to the changes
in the endorsed sponsor’s cost structure, including any change in price concessions

received. An exception is provided for the week of November 15, 2004 (which
coincides with the beginning of the annual enrollment period for 2005.)
Guarantees; Information. Card sponsors are required to guarantee that
network and mail order pharmacies provide the lower of the customary price or the
negotiated price.
They are also required to guarantee that a network pharmacy inform an enrollee
at the point of sale of any difference between the price of a prescribed drug and the
lowest price covered generic drug that is therapeutically equivalent and bioequivalent
and available at the pharmacy. Mail order pharmacies are required to provide the
information at the time of delivery of the drug.
Card sponsors are to synchronize changes in the list of and negotiated prices for
drugs included in the formulary with those published on the CMS price comparison
Pharmacy Network Access. The sponsor must contract with a sufficient
number of pharmacies (other than mail-order) in its service area to ensure that the
following access requirements are met:
!On average, 90% of beneficiaries in urban areas are within two miles
of a network pharmacy; urban areas are defined as zip codes with a
population density over 3,000 persons per square mile.
!On average, 90% of beneficiaries in suburban areas are within five
miles of a network pharmacy; suburban areas are defined as zip
codes with a population density between 1,000 and 3,000 persons
per square mile.
!On average, 70% of beneficiaries in rural areas are within 15 miles
of a network pharmacy; rural areas are defined as zip codes with a
population density less than 1,000 persons per square mile.
As required by law, these are the same standards established for use by the
Department of Defense under the TRICARE Retail Pharmacy program.
The sponsor’s network may be supplemented by mail order pharmacies.
Other Requirements
Information and Outreach Activities; Customer Service. Sponsors
will be required to provide specified information (through the Internet and some
other tangible medium, such as a mailing) to Medicare beneficiaries. The stated
purpose is to promote informed choice among endorsed card programs. Information
to be provided includes the enrollment fee, negotiated prices for covered discount
card drugs, discounts (if offered) on nonprescription drugs, and any other products
or services offered under the endorsement program. The information and outreach
materials may not describe services outside the scope of the endorsement. Sponsors
must also provide information on a website (which is to include information on when
the site was last updated and a disclaimer that the information may not be the most
current). In general, CMS must approve outreach materials prior to distribution. The

sponsor must also maintain a toll-free customer call center open during normal
business hours.
Transitional Assistance. Card sponsors are required to administer
transitional assistance funds received from CMS for transitional assistance enrollees.
They are required to establish accounting procedures to manage the funds for each
Medical Errors; Drug Interactions. An endorsed sponsor must provide a
system to reduce the likelihood of medical errors and adverse drug interactions and
to improve medication use. The preamble to the regulations states that sponsors have
the flexibility to design their own individual systems. However, published scientific
and clinical literature (as well as the experience, if any, of the sponsor) should
support the proposed approaches.
Grievance Procedures. Sponsors are required to establish and maintain a
grievance process to handle a card enrollees’s complaint or dispute regarding the
manner in which he or she has received services under the endorsed program. The
subject of a grievance may include such items as timeliness, appropriateness, access
to and/or setting of services; failure to offer discounts on particular drugs; and
incorrect administration of transitional assistance. The CMS application solicitation
states that card sponsors must make enrollees aware of the process, accept grievances
filed within 60 days of the event, respond within 30 days, and provide CMS, on a
monthly basis, aggregate information on the number and disposition of grievances.
Reporting. Endorsed sponsors must report to CMS, on a periodic basis,
information on key features of the endorsed card program including information on:
!Savings from pharmacies and manufacturers obtained through
rebates, discounts, and other price concessions;
!Savings shared with enrollees by manufacturers, by all retail
pharmacies, by all mail order pharmacies, and by all brand name and
all generic covered discount card drugs;
!Dispensing fees;
!Certified financial records on transitional assistance used by
transitional assistance enrollees;
!Utilization and spending for selected drugs;
!Performance on customer service measures;
!Grievance logs;
!Compliance with pharmacy network access standards.
Further, the sponsor must provide notice of and the rationale for negotiated price
increases due to reasons other than changes in the average wholesale price. (This
requirement does not apply during the week of November 15, 2004.)
Privacy. Sponsors are covered by the requirements of the Health Insurance
Portability and Accountability Act (HIPAA) including the privacy requirements. A
beneficiary’s individually identifiable health information can only be used for health
care operations and marketing of products and services covered under the
endorsement. A sponsor may not request an enrollee to authorize the sponsor to use

such information for purposes of marketing products and services not covered under
the endorsement. Further, the sponsor is prohibited from using or disclosing any
individually identifiable information for marketing purposes following termination
of the sponsors’s endorsement or termination of the drug discount card program.
Special Endorsements
Special Endorsement for Managed Care Plans. A Medicare managed
care organization (i.e., Medicare Advantage organization)6 may apply to become an
exclusive card sponsor by limiting drug card enrollment to eligible persons enrolled
in any (but not necessarily all) of its managed care plans. Although many managed
care plans already offer drug coverage, not all do so and most offer limited coverage.
The discount card would be used in situations of no coverage or limited coverage
under the plans.
Plans may limit their service area to the Medicare managed care plan’s service
area. If the plan uses a pharmacy network for its Medicare managed care plan, that
network may be used for its endorsed program provided it is not limited to mail order
pharmacies. If the managed care plan does not use a pharmacy network for its
managed care plan, the Secretary must determine that the network for the card
program provides sufficient access to covered discount card drugs at negotiated
prices. Certain requirements otherwise applicable for drug card sponsors are deemed
to be met or waived for Medicare Advantage plans.
Exclusive card sponsors are required to apply transitional assistance funds only
to the cost to transitional enrollees of any discount card drugs obtained from a
network or mail order pharmacy included in the sponsor’s pharmacy network. The
plan may wrap around the managed care plan’s drug benefit (if any) by applying the
$600 toward the plan’s copayments and deductibles as well as toward additional
drugs not included under the plan’s benefit or when the plan’s benefit cap is reached.
Discount card eligible individuals enrolled in a Medicare managed care plan
offering an exclusive card program may only enroll in that program. They are not
permitted to enroll in another endorsed sponsor’s program. The exclusive card
sponsor may conduct group enrollment, i e., enroll all or a subset of eligible persons.
The sponsor must give all individuals it is enrolling in the group the opportunity to
decline enrollment and the opportunity to apply for transitional assistance.
Special Endorsements. An applicant for endorsement may submit an
application to become a special endorsement sponsor to provide transitional
assistance to residents of long term care facilities through long-term care7
pharmacies. Similarly, an applicant for endorsement may submit an application to

6 MMA renamed Medicare+Choice plans as Medicare Advantage plans. Medicare
Advantage plans receive monthly capitation payments for services provided to their
Medicare enrollees. Certain other managed care plans continue to be reimbursed under cost
contracts; they may also apply for special endorsement.
7 CMS estimates that about 1.3 million Medicare beneficiaries are residents of extended stay

become a special endorsement sponsor to provide transitional assistance to American
Indians/Alaskan Natives (AI/ANs) who use Indian Health Service, Indian Tribe and
Tribal Organization, and Urban Indian Organization (ITU) pharmacies.8 The
Secretary is to select at least two of the best qualified applicants for special
endorsement for each category. Certain requirements otherwise applicable for drug
card sponsors are deemed to be met or waived for these plans.
Territories. Residents of the territories (including those receiving drug
coverage under Medicaid or Section 1115 waivers) are eligible for the endorsed drug
card program.9 However, individuals in territories are not eligible for transitional
assistance under the Medicare drug discount card program. Instead, territories
choosing to provide low-income assistance are required to submit plans to the
Secretary detailing how they intend to use their allotment (totaling $35 million across
the territories for the duration of the card program) to provide such assistance to
some or all Medicare beneficiaries with incomes below 135% of poverty.
An applicant for endorsement may submit an application to become a special
endorsement sponsor for all of the territories to provide access to negotiated prices.
The Secretary will select at least one qualified applicant. The endorsed sponsor must
provide access to negotiated prices.

7 (...continued)
skilled nursing facilities and nursing facilities. An estimated 72% of these individuals are
eligible for both Medicare and Medicaid and will be ineligible for the card program if they
have Medicaid drug coverage. CMS estimates that up to 200,000 of the remaining
population could be eligible for transitional assistance. Approximately 3,000 pharmacies
serve the facilities’ residents. Provision of drug benefits is generally coordinated through
the facility and may be specially packaged.
8 CMS estimates that there are approximately 87,000 AI/ANs over the age of 65 and 20,000
disabled enrollees using the services of the Indian Health Service (IHS). Of the total
approximately 36,000 are covered by Medicaid. An estimated 18,000 may be eligible for
transitional assistance. There are 201 I/T/U pharmacies in 27 states (with eight states having
11 or more, and three states having 20 or more). CMS reports that these pharmacies
generally provide access to drugs off the Federal Supply Schedule (FSS) to AI/ANs. CMS
states that the special endorsement provisions will provide an opportunity to provide
prescriptions at the low FSS rate; coverage of costs would come in part from the IHS and
in part from transitional assistance.
9 CMS reports that there are close to 600,000 Medicare beneficiaries in the territories with
over 95% of those in Puerto Rico.

CMS Cost Projections
When CMS issued the interim final regulations on the card program in
December 2003, it provided estimates of the number of persons expected to enroll
in the program and the associated costs.
As noted earlier, not all persons eligible for the drug card program would elect
to enroll.10 Some of these persons already have access to drug discounts either
through their health insurance or through an existing card program. Further,
transitional assistance is not available for persons who have other drug coverage. In
December 2003, CMS estimated that 15.4 million beneficiaries (slightly over one-
third of the total) would be both eligible for and could benefit from the discount card
program. It estimated that 7.3 million persons would enroll in an endorsed card
program in 2004 and 7.4 million would enroll in 2005; of these it estimated that 4.7
million persons each year will be eligible for transitional assistance.
Beneficiary savings attributable to lower negotiated prices were estimated to
range from $1.4 to $1.8 billion in 2004 and $2.0 to $2.7 billion in 2005.11 This
estimate was based on two main assumptions. First, the program would result in
average drug savings of 10%-15% over costs that would be incurred in the absence
of the card program.12 Second, the effects of beneficiary education would lead to a
greater use of generic drugs and more effective management of expenses. Estimated
beneficiary savings attributable to transitional assistance were $2.4 billion in 2004
and $2.6 billion in 2005.
The savings estimates did not reflect the annual enrollment fees which can range
up to $30 per year. Factoring in the enrollment fees could reduce estimated
beneficiary savings by up to $80 million each year.
Program costs for persons eligible for transitional assistance are funded through
general revenues which are credited to a separate account in the Medicare Part B trust
fund; payments are made from this account. CMS estimated that Medicare program
spending would increase by $2.5 billion in CY2004, $2.7 billion in CY2005, and
$0.1 billion in CY2006 (for those costs incurred during an individual’s transition
period). The vast majority of these costs were associated with transitional assistance

10 CMS notes that because 2004 is the first year of the program, it does not have the benefit
of prior experience. It also notes a number of limitations in the assumptions used in the
impact analysis, for example, it is difficult to determine precisely how many persons will
enroll in the program. Further, the estimate does not assume any increase in utilization
stemming from the drug program.
11 CMS estimates the 2004 (Apr.-Dec.) savings at 0.88-1.18% of total national aggregate
drug spending in that period; 2005 savings are estimated at 0.89-1.18% of such spending.
12 The CMS estimate is based on the 15% figure.

($2.4 billion in 2004, $2.6 billion in CY2005, and $0.1 billion in 2006) with the
remaining costs attributable to payment of enrollment fees for this population group.
In addition, CMS administrative expenses would total an estimated $134 million.
Costs for Sponsors
Card sponsors incur a number of costs in setting up their programs. These
include activities related to: program implementation, information and outreach,
eligibility determination and enrollment processing, customer service operations,
claims processing and claims adjudication, account maintenance, and logging and
responding to grievances. Costs vary by sponsor, though all must have had
experience in running large programs. CMS estimated that sponsors with low costs
would be able to recover their costs through enrollment fees in both 2004 and 2005
and would have a sufficient revenue stream to carry them through the transition
period. For those with the highest costs, enrollment revenues would not exceed such
costs until 2005 (though they might be able to cover any losses through rebate
revenues); they would however, have revenues greater than costs over the entire
Current Status
Approved card sponsors were able to begin enrolling beneficiaries in May 2004.
They could begin offering enrollees access to discounts and transitional assistance
on June 1, 2004.
Card Sponsors
The initial list of approved card sponsors was announced on March 25, 2004;
additional sponsors were subsequently added to the list. As of June 2004, CMS had
approved 39 national sponsors and 33 regional card sponsors. Regional card
programs were offered to beneficiaries in all but nine states. CMS had approved an
additional 84 exclusive card programs offered to enrollees of Medicare Advantage
plans. Special approval was given to three programs to provide access to transitional
assistance through long-term care pharmacies; four to provide discounts to residents
in the territories, and three to serve federally recognized Indian tribe and tribal
organization pharmacies.
A recent analysis by Health Policy Alternatives, Inc.(HPA) found that of the 72
general national and general regional card programs, 53% could be classified as
pharmacy benefit managers (PBMs). Approximately 28% of the 72 sponsors were
third-party administrators (TPAs) or pharmacy benefit administrators, commercial
discount card companies, various medical and information technology companies,
and an alliance of retail and chain pharmacies. The nine managed care organizations
(13% of the total) that sponsored general card programs either operate their own

PBM or contract with a PBM or third-party administrator to run the card program.
No information was available for the remaining 9%.13
The HPA study noted that five of the approved national plans never actually
marketed their plans; this means that as of June 2004, 34 national plans were
available. Further, it noted that the number of options was actually fewer than 34
when looked at in terms of actual variations in programs, drug prices, enrollment
fees, and pharmacy access. This was attributed to the fact that many card programs
are either offered by the same sponsor or work through the same PBM or TPA.
However, the fact that a sponsor uses the same PBM or TPA does not necessarily
result in common card features.
Beneficiary Education
Beneficiaries in fee-for-service Medicare can select from a large number of
endorsed card programs. (Beneficiaries in managed care are required to enroll with
the card program provided by the plan, if such a card program is offered.) CMS has
taken a number of steps designed to make the selection and enrollment process
easier. These efforts have been expanded over time as observers have stated the need
for further improvements.
The key information source is the Prescription Drug Assistance Program
(PDAP) tool put on the Medicare website at the end of April 2004.
[]. Seniors (and their adult children or other persons
assisting them) are able to obtain, by zip code, information on plans available in the
area, plan prices for specific drugs specified by a senior, and pharmacies associated
with available card programs. The site also directs low-income persons to state
assistance programs, if any, which might be available to them.
CMS reports that it has recently made several improvements to the website.
Beneficiaries can now obtain a listing of the “Top 5", that is, a list of the five plans
offering the lowest aggregate prices for the selected drugs. In addition, beneficiaries
will be able to enroll in card programs on the Internet.
Seniors may also call the Medicare toll-free number (1-800-MEDICARE). If
they wish information on the drug card, they should have a list of the drugs they take
frequently. After calling the phone line, they should receive a personalized booklet
in the mail outlining their choices. This information is comparable to what is
available on the website.
Since implementation of the card program, and the corresponding increase in
the call volume, CMS has added additional call takers. In July, CMS reported that
there were 3,000 operators answering an average of 50,000 calls a day. The average
wait time was down to two minutes, considerably less than earlier reported.14

13 Health Policy Alternatives, Inc., Medicare Drug Discount Cards: A Work in Progress,
report prepared for Henry J. Kaiser Family Foundation, July 2004 at []
14 Testimony of CMS Administrator Mark McClellan, Senate Special Committee on Aging

CMS has taken a number of additional steps to assist beneficiaries in obtaining
information. It is making money available to help community-based organizations
to target persons who may be eligible for transitional assistance. This includes
working with the Access to Benefits Coalition, a group of over 80 national non-profit
organizations. CMS has also made available funds to State Health Insurance
Assistance Programs (SHIPs) which provide assistance to beneficiaries through
trained volunteer counselors. Additionally, the Administration on Aging and the
Indian Health Service are working with their constituencies to encourage them to
On July 29, 2004, CMS announced that enrollment in the card program had
passed the 4 million mark on July 19, 2004. Of these persons, nearly 1 million were
receiving the $600 in transitional assistance. Earlier data showed that 2.3 million
persons were automatically signed up by their managed care organizations.
Additional individuals have been automatically enrolled by their state pharmaceutical
assistance program. The actual number of persons enrolling on their own is not
Manufacturer Assistance Programs
As of July 6, 2004, CMS reports that six drug companies are offering additional
assistance toward the costs of certain specified drugs once a transition assistance
beneficiary has exhausted his or her $600 subsidy. The companies offering this
additional assistance are Abbott, AstraZeneca, Eli Lilly, Johnson and Johnson,
Merck, Novartis, and Pfizer.15
Implementation of the drug card raises a number of issues. Some are unique to
the card program itself while others have implications for the Medicare drug benefit
which will be put in place in 2006.
Beneficiary Enrollment and Selection of Plan
In General. As noted, beneficiaries are expected to make a selection from
endorsed drug card programs available in their area. (An exception applies for MA
plan enrollees who will get their card through the MA plan if the plan offers an
exclusive card program.) Many persons have suggested that the enrollment figures
are less than anticipated, while others contend that the numbers are good for a new

14 (...continued)
Helping Those Who Need It Most — Low-Income Seniors and the New Medicare Law, July

19, 2004.

15 See [], accessed
Aug. 13, 2004.

program. Under the card program, beneficiaries are not penalized if they delay
enrollment. However, there is concern that many low-income persons who should
be taking advantage of the $600 subsidy have failed to sign up. As noted above, a
special effort is currently being made to contact and enroll this population group.
Beneficiaries not enrolled with MA organizations can choose between a large
number of card programs. Information on these programs is available on the Internet.
Some people have suggested that beneficiaries have in fact had too many choices.
Many, particularly older and frailer beneficiaries, are not comfortable using the
Internet. Reportedly, both beneficiaries and persons assisting them have had trouble
navigating the website and are confused by the large number of choices available to
them. CMS has responded by making improvements to the website, including the
listing of the best five for an individual in an area. However, some observers
continue to suggest that the site is not user friendly.
Auto-Enrollment. Low-income populations are typically hard to reach. For
example, enrollment in Medicare savings programs (i.e., (QMB, SLIMB, and QI-1)
has traditionally been below desired levels. Some persons suggest that enrollment
figures for the $600 subsidy could be increased through auto-enrollment of selected
populations. While auto enrollment of these groups could potentially increase
enrollment in the transitional assistance program, it would still fail to identify persons
who have not established their potential eligibility through another program.
Medicare Savings Programs. Low-income persons enrolled in Medicare
Savings Programs are potentially eligible for transitional assistance, since by
definition they meet the income criteria. A number of persons have stated that CMS
should automatically enroll them in the card program. CMS has been reluctant to do
this for several reasons. It notes that some persons enrolled in Medicare Savings
Programs may in fact have health insurance for drugs which would make them
ineligible for transitional assistance. There are also questions about how
beneficiaries could exercise a choice among the card programs. However, the biggest
concern is that the law requires beneficiaries to submit an enrollment form certifying
they do not have other drug coverage. Many states do not have representative
authority to make the certification on behalf of Medicare Savings Programs enrollees.
The Access to Benefits Coalition recently commissioned a legal analysis on the
auto-enrollment issue by Hogan and Hartson.16 The analysis concluded that the law
gives the Secretary authority to use alternatives to the standard enrollment form to
enroll and certify persons for the $600 subsidy. This issue is expected to be of
continuing interest as persons look for additional ways to increase the enrollment of
low-income persons.17

16 Hogan and Hartson, Transitional Assistance for Low-Income Beneficiaries in the
Medicare Drug Discount Card Program, memorandum from Sheree R. Kanner and Linda
E. Fishman to the Access to Benefits Coalition, Aug. 3, 2004.
17 CMS has indicated that it does not have authority to allow auto enrollment for the
Medicare Savings population under the new drug benefit that will be implemented in 2006.

State Pharmacy Assistance Programs (SPAPs). A number of states
operate state-funded pharmacy assistance programs for low-income individuals.
Each state establishes its own eligibility criteria. It is estimated that approximately
half of the enrollees would meet the eligibility criteria for transitional assistance.
(The remaining enrollees generally have incomes above 135% of poverty, which is
the cut-off for transitional assistance.)
As of June 2004, seven states provided for automatic enrollment for their SPAP
enrollees who meet the eligibility criteria for transitional assistance. These states use
authorized representative authority to auto enroll. Six of the states (Massachusetts,
Maine, Minnesota, New Jersey, New York and Pennsylvania) automatically enrolled
persons with a preferred card sponsor; Connecticut chose to implement the program
with several cards. A review of auto enrollment found that it proved to be an
effective strategy.18
A key factor influencing a beneficiary’s choice of card is presumably the drugs
that are available on the plan’s formulary. As noted, each plan is required to offer a
discount on at least one drug in each of 209 identified therapeutic categories; a single
drug can not be used to satisfy the requirement for more than one category. CMS
established these groupings in order to promote timely implementation of the
temporary program and to provide access to discounts on drugs used most often by
At this point it is difficult to assess the degree of variation in formularies that
are offered by different programs. Beneficiaries using the website can tell which card
programs in their area cover the drugs they use on a regular basis. However,
available data and marketing materials do not provide a useful mechanism for
extensive comparisons.
Beneficiaries who need costly drugs need to review available offerings carefully,
since not all plans may cover all of their drugs. Some observers have noted that plans
are permitted to change formularies throughout the year, even though beneficiaries
are locked into their choice for the remainder of the calendar year. However, other
observers have suggested that most plans are unlikely to make significant changes,
in part because they do not wish to antagonize their enrollees.
Beneficiaries can elect to use a drug off the formulary, but they will not be able
to take advantage of any negotiated price for the drug. However, if a beneficiary is
entitled to transitional assistance, payment may be made for a drug, even if it is off
the formulary.

18 Kimberly Fox, Testimony for Public Hearing of the State Pharmaceutical Assistance
Transition Commission, and Supplemental Tables, Rutgers Center for State Health Policy,
July 7, 2004.

Price Negotiation
A related issue is the price that is negotiated for the drugs. Some observers are
concerned that while card sponsors can change both formularies and negotiated
prices after a beneficiary enrolls in a sponsor’s program, beneficiaries are essentially
locked into their choice for the remainder of the calendar year. Some have suggested
that plans will raise their prices. However, a preliminary review of selected drugs
and selected card programs showed that overall prices remained relatively stable over
the initial weeks of the program.
Another concern is the price information that is published. When CMS first
posted price information on the website, there were reportedly a number of
inaccuracies. This was attributed to the short turn around time to post the
information and the submission of incomplete and/or incorrect information by
sponsors. Many of the early problems have been corrected.
Measuring Negotiated Discounts
Virtually all observers agree that the $600 subsidy provides a meaningful benefit
to enrollees with incomes under 135% of poverty. There has been less of a
consensus with regard to the value of a card for other enrollees. Several observers
have suggested that beneficiaries can obtain similar savings through other card
programs. 19
Comparative analysis is made difficult by the fact that PDAP price information
is only accessible by plan and zip code. In the early weeks of the program, CMS was
estimating savings in the range of 10-15%. More recently, two studies have
attempted to further quantify the savings.
Health Policy Alternatives (HPA) Analysis. The HPA analysis, cited
above, was issued July 2004. The study focused on prices available to persons not
eligible for the subsidy. It tracked drug prices for a three-day supply for a set of 10
drugs commonly prescribed for Medicare beneficiaries and seven discount card
programs. The programs picked were ones that offered discounts on all selected
drugs at pharmacies in an urban and rural location in Maryland. The prices were
compared to those reported by the Maryland Attorney General’s (AG’s) office which
tracks retail prices paid by cash customers for selected drugs.

19 For example, an analysis prepared by the minority staff of the House Committee on
Government Relations in Apr. 2004 (prior to the implementation of the program), found that
prices expected to be available under the card program were higher than those that could be
obtained in Canada or through the Veterans Administration and were no lower than prices
that could be obtained without the card. Similarly, a Consumers Reports item in its Aug.
2004 issue, stated that its review of posted prices for five drugs in five cities in mid-May
2004, found that the prices under the card programs were higher than those available from and It should be noted that some early pricing information on
the website was inaccurate; additionally some plans lowered their initial price levels.

The HPA analysis showed that all seven card programs had prices that were
significantly less than those reported by the Maryland Attorney General. For the
basket of 10 drugs, it found that urban prices were 19% to 24% lower than the
aggregate of the median AG reported prices, rural prices were 17%-22% lower than
the AG prices, and mail order prices were 27%-32% lower than the AG prices for
urban areas.
All six of the seven card programs offering mail order had prices for a 90-day
supply for the basket of 10 drugs lower than was
competitive with the card mail order programs; the aggregate price on
for the 10 drugs was 5% higher than the lowest priced card but 2% less than the
highest priced card.
The HPA analysis also concluded that choice of card mattered, with
considerable differences recorded between savings achieved from cards with the
lowest and highest retail prices. Even greater differences were recorded when mail
order prices were compared.
Lewin Group Analysis. On August 13, 2004, the Lewin Group issued its
analysis of potential drug card savings. Its study, commissioned by the Healthcare
Leadership Council, used three different approaches to measure savings available
during June and July 2004. The first approach compared discount card prices to
average retail prices in each state for the 150 most commonly prescribed drugs. This
comparison would be most useful for persons using a small number of drugs. The
second approach compared prices on a card-by-card basis for a market basket of the
25 drugs prescribed most frequently for beneficiaries. This analysis would be useful
for persons taking a number of drugs. The third approach looked at typical drug
regimens used to treat selected chronic conditions. In all cases comparisons were
based on a 30-day supply of the most common form and strength of each drug. Only
discounts available at retail pharmacies were used. They were compared to retail
prices which would be paid by persons without other access to discounted prices.
(Savings would be less for persons with access to other discount cards or enrolled in
a state pharmaceutical assistance program). It should be noted that the savings
estimates factor in the value of the $600 subsidy.20 The following are some of the
key findings form the survey:
!When looking at the top 150 drugs, the best available prices for
brand name drugs represented average savings per prescription of
$12.68 (18.6%); the best available prices for generic drugs
represented average savings per prescription of $4.68 (67.5%).
!Available discounts vary by sponsor; therefore, the card a
beneficiary picks has a significant effect on overall savings. All of
the cards in the top quartile provided savings of at least 19.9% on the
25 drugs included in the market basket. Median card savings were

17.2% or $8.48 per prescription.

20 They do not however, factor in the savings attributable to manufacturer assistance
programs offered to low-income beneficiaries who have exhausted their $600 subsidy during
the year.

!Savings for beneficiaries using a typical drug regimen for diabetes
ranged from 13% to 26% while those for a typical hypertension
regimen average 28%.
!The best available price offered for a single drug under the card
program seldom varied across markets. Thus while card sponsors
offer uniform pricing nationwide, the savings from the cards vary
geographically and by pharmacy due to variations in retail prices.
!The best available prices can generally be obtained at multiple
pharmacies in an area.
The report also estimated national savings based on these findings. The savings
estimates are based on several assumptions. First, it assumes that enrollment will
reach the CMS estimate by January 1, 2005, namely that 7.3 million will enroll and
61% of enrollees (4.5 million) will be eligible for the subsidy. Second, the report
assumes that beneficiaries will choose a discount card averaging savings of 19.9%,
the 75th percentile of the market basket test. The savings for all beneficiaries over 18
months would average $1,247 (35.5% of median retail spending of $3,514); this
estimate includes the $600 subsidy value. Savings for beneficiaries eligible for the
subsidy would average $1,548 (47.3% of median retail spending of $3,270 for this
group ), while those for persons above 135% of poverty would average $775 (19.9%
of median retail spending for this group of $3,895).21
Overall, the report estimated that savings would total $7.7 billion if enrollment
reaches 7.3 million by January 1, 2005 and beneficiaries select cards in the 75th
percentile with average savings of 19.9%. Of the $7.7 billion total savings, $4.3
billion (56%) is attributable to discounted prices and $3.4 billion to the subsidy
(44%). Taking into account both discounted prices and the subsidy, $5.9 billion of
the total $7.7 billion are estimated to accrue to low-income beneficiaries.
Price Changes Over Time. Both the HPA and Lewin analyses compared
drug prices available through the cards with retail prices available on the same date
to persons not covered under an endorsed discount card or eligible for discounts
through another source (such as private insurance or non-endorsed discount card
program). One question that has not been answered by the recent analyses is to what
extent prices were raised prior to the start of the card program. If there were a sharp
increase in prices prior to the program’s introduction, the value of the discounts
would be somewhat undercut. Pricing information in effect prior to implementation
of the card program is proprietary so precise comparisons are not available.
However, some reviews suggest that recent increases may be considerable. An
AARP report on the first quarter of 2004, showed that manufacturers’ increases to
wholesalers for widely used brand name drugs rose faster in the 12-month period
ending March 2004, than in any of the previous four calendar years. The average
annual percentage change for the period was 7.2% compared to the general increase

21 These estimates assume beneficiaries with higher drug costs are more likely to enroll as
are those eligible for the credit.

in inflation of 2.0%.22 A Families USA study of the top 30 drugs used by seniors
found an average increase of 4.3 times the rate of inflation between January 2003 and
January 2004. (In the three-year period from January 2001-January 2004, the average
increase was 3.6 times the rate of inflation.) 23
Pharmacy Access
As noted earlier, card sponsors are required to contract with a sufficient number
of pharmacies (other than mail order) to ensure that beneficiaries have sufficient
access to retail pharmacies. A number of card sponsors have made network
pharmacy information available to potential enrollees through the PDAP website.
Other sponsors will make pharmacy information available on request.
Questions have been raised regarding the accuracy of network pharmacy
information. One review found that some card sponsors were using “passive
acceptance agreements” to identify participating pharmacies. Unless a pharmacy
specifically told a sponsor it would not be participating, the sponsor listed it as a
participant. In certain cases pharmacies that had no intention of participating, or in
certain cases were no longer in business at the stated address, were listed as
participants on the PDAP.24 It is not clear how widespread this problem may be.
Transition to Permanent Drug Benefit
As noted, the Medicare endorsed drug card program is temporary and will be
replaced by a permanent drug benefit under Medicare Part D in 2006.25
Eligibility. There are several differences between the eligibility requirements
and determination procedures applicable for transitional assistance under the drug
card program and the requirements and procedures applicable for low-income
subsides under the new Medicare drug benefit. This could lead to potential confusion
for beneficiaries.
CMS adopted streamlined procedures for the card program both because of the
short lead time for the program and the fact that it is temporary. For the drug card,
individuals attest that their income falls below the threshold and CMS verifies the
eligibility. Under the permanent program, states will make eligibility determinations
using procedures currently in place for Medicaid.

22 David Gross, Stephen Schondelmeyer, and Susan Raetzman, Trends in Manufacturer
Price Changes for Most Widely Used Brand Name Prescription Drugs, AARP Public Policy
Institute, June 2004.
23 Families USA, Sticker Shock: Rising Prescription Drug Prices for Seniors, July 2004.
24 Henry A. Waxman, and Louise McIntosh Slaughter, letter to Hon. Tommy G. Thompson,
Secretary of the Department of Health and Human Services, July 6, 2004.
25 For information on the new drug benefit, see CRS Report RL31966, Overview of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, by Jennifer
O’Sullivan, Hinda Chaikind, Sibyl Tilson, Jennifer Boulanger and Paulette Morgan.

Another difference involves assets tests. There are no assets tests for the $600
subsidy under the drug card, while there are assets tests for low-income subsidies
under the Medicare drug benefit. It is therefore possible that some persons will
qualify for low-income assistance under the card program but not under the
permanent drug benefit.
Plan Choices. Under the Part D benefit, each Medicare beneficiary will be
entitled to obtain qualified prescription drug coverage through enrollment in a
prescription drug plan (PDP), or in the case of a MA enrollee, through enrollment in
a MA-PDP plan
CMS received a large number of applications from entities wishing to become
drug card sponsors. It unclear how many of these entities will actually submit
applications to become PDP plans. Many may view participation in the card program
as an opportunity to position themselves in the market and make themselves known
to beneficiaries prior to the roll out of the new benefit in 2006. Presumably, the
experience entities gain in administering the drug card, including dealing with the
Medicare population, will prove useful when they take on the responsibilities for the
new benefit. At the same time, CMS expects that information provided through the
card program will assist it in further understanding the pharmaceutical industry.
However, some observers have suggested that many of the card programs may
not apply to become PDP plans. Under the 2006 benefit, PDP plans are to provide
a drug-only benefit and, unlike a discount card program, assume a portion of the
financial risk of coverage. A drug-only product is largely untested; therefore, some
entities may be reluctant to assume the unknown financial risk of the new benefit.
This is less of an issue for MA-PDP plans since most of these entities have
experience offering drug benefits and the drug benefit is offered as part of the overall
benefits package.
Beneficiary Choices. It may be difficult for some seniors to adjust to the
changes between the card program and the new permanent benefit. As noted, there
are differences between the two programs with respect to eligibility requirements and
the process for determining eligibility.
There are also likely to be differences between the formularies and negotiated
prices established under the endorsed card program and those made available by PDP
plans, even if offered by the same entity. The consequences of individual choices
between plans will become more important in 2006. As is the case with the drug
card, negotiated prices will only be available for drugs on the plan’s formulary. In
addition, beginning in 2006, beneficiaries will receive federal subsidies for costs
incurred with respect to drugs on a plan’s formulary, but will not receive such
subsidies (except in the case of successful appeals) for drugs not on a plan’s
formulary. Further, since beneficiaries will be paying premiums estimated at $35 a
month (rather than a maximum of $30 a year for the card), they will want to select
a program that best meets their needs.
These concerns highlight the necessity for beneficiary education on both the
card program and the permanent drug benefit as well as the differences between
them. CMS has begun this process.