Medicare Part D Prescription Drug Benefit: A Primer

Medicare Part D Prescription Drug Benefit:
A Primer
Updated August 20, 2008
Jennifer O’Sullivan
Specialist in Health Care Financing
Domestic Social Policy Division

Medicare Part D Prescription Drug Benefit: A Primer
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA, P.L. 108-173) established a new voluntary prescription drug benefit under
a new Medicare Part D, effective January 1, 2006. Prescription drug coverage is
provided through private prescription drug plans (PDPs) or Medicare Advantage
prescription drug (MA-PD) plans. Beneficiaries must enroll in one of these private
plans in order to obtain their drug benefits. The program relies on these private plans
to provide coverage and to bear some of the financial risk for drug costs; federal
subsidies covering the bulk of the risk are provided to encourage participation.
At a minimum, plans offer “standard coverage” or alternative coverage with
actuarially equivalent benefits. They may also offer enhanced benefits. All plans are
required to meet certain minimum requirements, including those related to
beneficiary protections. However, there are significant differences among plans in
terms of benefit design, drugs included on plan formularies (i.e., list of covered
drugs), cost-sharing applicable for particular drugs, and monthly premiums.
In general, beneficiaries can enroll in a plan, or change plan enrollment, when
they first become eligible for Medicare or during the annual open enrollment period.
The open enrollment period for 2008 was from November 15, 2007, to December 31,

2007. Plans can change from year to year. Beneficiary needs may also change.

Therefore, beneficiaries should review their plan choice annually to make sure that
their chosen plan continues to meet their needs.
As of January 2008, approximately 25.4 million Medicare beneficiaries were
enrolled in PDP and MA-PD plans. Of these, approximately 9.4 million were
receiving low-income subsidy assistance. An additional 6.7 million beneficiaries had
prescription drug coverage through a former employer that is receiving a federal
subsidy for a portion of such coverage. Approximately 7.5 million beneficiaries had
drug coverage through another source. An estimated 4.6 million or 10.4% of
Medicare beneficiaries had no drug coverage.
A major focus of the drug benefit is the enhanced coverage provided to
low-income individuals who enroll in Part D. Low-income enrollees, including
persons (known as “dual eligibles” — those persons enrolled in both Medicare and
Medicaid) who previously received drug benefits under Medicaid, have their
prescription drug costs paid under Part D. Persons with incomes below 150% of
poverty have assistance with some portion of their premium and cost-sharing charges.
Persons with the lowest incomes have the highest level of benefits. Dual-eligibles,
as well as certain other low-income enrollees, are enrolled in plans with premiums
at or below the low-income subsidy level for the region. They pay a zero premium
for such plans (though they may select a plan with a higher premium and pay the
difference). Some plans with premiums below the low-income subsidy level in 2007
no longer qualified as zero premium plans in 2008. As a result, effective January 1,

2008, 1.6 million beneficiaries were assigned to a new plan with a new organization,

and an additional 965,000 were assigned to a new plan with their existing
organization. This report will be updated as events warrant.

Overview ........................................................1
Enrollment in Part D...............................................2
Plan Information..............................................2
Enrollment Periods.............................................3
Initial Enrollment Period....................................3
Annual Open Enrollment Period..............................3
Creditable Coverage........................................3
Special Enrollment Periods..................................3
Late Enrollment Penalty.....................................3
Part D Benefits....................................................4
Qualified Coverage............................................4
Defined Standard Coverage..................................5
Actuarially Equivalent Plans.................................6
Enhanced Coverage........................................7
Access to Negotiated Prices......................................7
Special Provisions for Low-Income Populations..........................7
Eligibility for Low-Income Subsidy (LIS) Assistance..................7
Definition of Eligible Groups................................7
Definition of Income and Assets..............................9
LIS Benefits.................................................10
Premium Subsidies.......................................10
Cost-Sharing Subsidies....................................11
Enrollment ..................................................12
Dual Eligibles............................................12
Enrollees in Medicare Savings Programs......................12
Other Low-Income Persons.................................13
2008 Enrollment.........................................13
Interaction with State Pharmacy Assistance Programs................14
Part D Plans.....................................................15
PDP Regions................................................15
Approval of PDP Plans........................................15
Contracts ...................................................16
Plan Monitoring..............................................17
Drug Payments...................................................17
Plan Characteristics/Beneficiary Protections............................17
Marketing/Beneficiary Communications...........................17
Covered Drugs...............................................18
Covered Drugs...........................................18
Excluded Drugs..........................................19
Part B Versus Part D......................................19
Vaccine Administration....................................19

Pharmacy and Therapeutic (P&T) Committee...................19
Minimum Requirements...................................20
Six Classes of Clinical Concern..............................20
CMS Review............................................21
Specialty Tier............................................21
Formulary Changes During Plan Year.........................21
Transition Policies........................................22
Formulary Change Notice in Advance of Upcoming Year.........22
Pharmacy Access.............................................23
Retail Pharmacy Access....................................23
Long-Term Care (LTC) Pharmacy Access.....................24
“Any Willing Pharmacy”...................................24
Payments to Pharmacies........................................24
Public Disclosure of Prices.....................................25
Privacy, Confidentiality, and Accuracy of Enrollee Records............25
Grievances, Coverage Determinations, and Appeals..................25
Grievances ..............................................25
Coverage Determinations...................................25
Appeals ................................................26
Cost Control and Quality Improvement............................27
Drug Utilization Management...............................27
Quality Assurance........................................28
Medication Therapy Management............................28
E-Prescribing ................................................28
Payments to Plans................................................29
Direct Subsidies..............................................29
Plan Bid................................................29
National Average Monthly Bid Amount.......................29
Payment to Plans.........................................30
Reinsurance Subsidies.........................................30
Risk Corridor Payments........................................30
Low-Income Subsidy (LIS) Payments.............................32
Reconciliation ...............................................32
Beneficiary Premiums.............................................32
Base Beneficiary Premium..................................33
Adjustments .............................................33
Program Financing................................................33
General Revenues and Beneficiary Premiums.......................33
General Revenues........................................33
Beneficiary Premiums.....................................33
State Contributions...........................................34
Formula for State Contribution Amount.......................34
Impact on States..........................................34
Part D Account Data..........................................34
Employer Subsidies...............................................35
Qualifications ................................................35
Qualified Plans...........................................35

Subsidy Benefits.............................................36
Alternatives .................................................36
Subsidy Data................................................36
Employer Actions........................................36
Retirees Covered.........................................37
Issues ..........................................................37
Low-Income Individuals.......................................37
High-Income Enrollees........................................37
Beneficiary Experience........................................38
Drug Prices..................................................39
Noninterference Clause....................................39
Data ...................................................39
Pharmacies ..................................................39
Key Part D Facts.................................................40
Enrollment ..................................................40
Enrollment by State.......................................40
Plan Enrollment..........................................47
Plan Features............................................48
2008 Plan Overview...........................................48
Cost Estimates...............................................51
List of Tables
Table 1. Part D Standard Benefits, 2008................................6
Table 2. Low-Income Benchmark, by Region, 2008......................11
Table 3. Plan Liability Under Risk Corridor Provisions...................31
Table 4. Statement of Operations of Part D Account, Calendar Year 2007....35
Table 5. Total Number of Medicare Beneficiaries with Drug Coverage, as of
January 2008................................................40
Table 6. State Enrollment in Prescription Drug Plans.....................42
Table 7. LIS-Eligible Medicare Beneficiaries With Drug Coverage..........45
Table 8. LIS-Eligible Medicare Beneficiaries with Medicare Part D Coverage,
by State.....................................................46
Table 9. Stand-Alone PDPs: Characteristics, by State, 2008................49
Table 10. Part D Benefit Payments, Selected Years......................51

Medicare Part D Prescription Drug Benefit:
A Primer
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA, P.L.108-173) established a new voluntary prescription drug benefit under a
new Medicare Part D. The new benefit was effective January 1, 2006. Prescription
drug coverage is provided through private prescription drug plans (PDPs) or
Medicare Advantage prescription drug (MA-PD) plans. At a minimum, these plans
offer “standard coverage” or alternative coverage with actuarially equivalent benefits.
Beneficiaries are required to enroll in one of these private plans in order to obtain
their drug benefits. The program relies on these private plans to provide coverage
and to bear some of the financial risk for drug costs; federal subsidies covering the
bulk of the risk is provided to encourage participation.
Unlike other Medicare services, the benefits can only be obtained through
private plans. Further, while all plans have to meet certain minimum requirements,
there are significant differences among them in terms of benefit design, drugs
included on plan formularies (i.e., list of covered drugs) and cost-sharing applicable
for particular drugs.
A major focus of the drug benefit is the enhanced coverage provided to
low-income individuals who enroll in Part D. Low-income enrollees, including
persons (known as “dual eligibles” — those persons enrolled in both Medicare and
Medicaid) who previously received drug benefits under Medicaid, have their
prescription drug costs paid under Part D. Persons with incomes below 150% of
poverty have assistance with some portion of their premium and cost-sharing charges.
Persons with the lowest incomes have the highest level of benefits.
As of January 2008, approximately 25.4 million Medicare beneficiaries were
enrolled in PDP and MA-PD plans. Of these, approximately 9.4 million were
receiving low-income subsidy assistance. An additional 6.7 million beneficiaries had
prescription drug coverage through a former employer that is receiving a federal
subsidy for a portion of such coverage. Approximately 7.5 million beneficiaries had
drug coverage through another source. An estimated 4.6 million or 10.4% of
Medicare beneficiaries had no drug coverage.
The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA,
P.L. 110-275), which became law July 15, 2008, made a few modifications to the
Part D program.

Enrollment in Part D
All persons enrolled in Medicare Part A and/or Medicare Part B are eligible to
enroll in a prescription drug plan under Part D. Beneficiaries enrolled in the “original
Medicare” program obtain drug coverage through a PDP.
Beneficiaries enrolled in a managed care plan through a Medicare Advantage
(MA) organization generally have to obtain drug coverage through their MA
organization. If the MA enrollee wants to enroll in a PDP, he or she must drop their
MA enrollment. There is one major exception to this rule. While most MA
organizations are required to offer a MA-PD plan, private fee-for-service MA plans1
are not required to do so. An individual enrolled in a plan not offering drug
coverage may purchase coverage through a PDP.
Plan Information
Different PDP and MA-PD plans are available in different parts of the country.
Some organizations offer national plans. Information on plan availability and
characteristics can be obtained from a number of sources. These include the
Medicare toll-free information number (1-800-MEDICARE) and the website
[]. Other organizations may also be able to provide
assistance; these include State Health Insurance Assistance Programs (SHIPs) and
other local organizations.
Beneficiaries must enroll with the organization offering their selected plan.
They can enroll by mail, in person, or on the Web.
Beneficiaries (and persons assisting them) can look for a plan meeting their
needs by going to the Medicare drug plan finder on []. An
individual using the WEB tool should have a list of all the medications the
beneficiary currently takes (together with dosage units). The plan finder will then
show the beneficiary the five plans in the area with the lowest total annual cost for
the package of drugs the individual takes. It is important to note that a plan with the
lowest premium and/or no deductible may not, in fact, be the lowest cost plan
overall. Further, the lowest cost plan for one member of a couple may not be the
lowest cost plan for that person’s spouse.
Beneficiaries should review their plan choice annually. Plans can make changes,
effective January 1 each year. By October 31, of the previous year, plans are required
to provide plan enrollees with a summary of the benefits for the following year and
an outline of changes made from the current year. Plans can make a number of
changes from one year to the next, including changing drugs included in the plan’s
formulary and/or changing the required cost-sharing charges for certain drugs.
Therefore, enrollees should review materials provided by the plans to make sure that
their chosen plans continue to meet their needs.

1 See CRS Report RL34151, Private Fee for Service (PFFS) Plans: How They Differ from
Other Medicare Advantage Plans, by Paulette C. Morgan, Hinda Chaikind, and Holly

Enrollment Periods
Initial Enrollment Period. In general, Medicare beneficiaries need to enroll
in a plan during their initial enrollment period in order to avoid the delayed
enrollment penalty. Persons on the Medicare rolls when the drug program began had
until May 15, 2006 to enroll in a Part D plan for 2006.
Persons eligible for Medicare at a later date have an initial seven-month
enrollment period beginning three months before the month of Medicare eligibility.
This initial enrollment period is the same as that applicable for Medicare Part B.
Coverage for these individuals begins on the first day of the first month following the
month of enrollment, but no earlier than the first month they are entitled to Medicare.
Annual Open Enrollment Period. In general, an individual who does not
enroll during their initial enrollment period is only able to enroll during the annual
open enrollment period, which occurs from November 15-December 31 each year.
Coverage begins the following January 1.
Creditable Coverage. Persons who fail to enroll during their initial
enrollment period are subject to a penalty if they decide to enroll in Part D at a later
date. However, they are not subject to the penalty if they have maintained
“creditable” drug coverage through another public or private source. Creditable
coverage is defined as drug benefits whose actuarial value equals or exceeds that of
standard coverage. Sources of possible creditable coverage are retiree health coverage
offered by a former employer or union and military coverage including TRICARE.
A beneficiary who has creditable coverage may wish to enroll in a Part D plan
after the conclusion of their initial enrollment period. Care must be taken to assure
that any noncoverage period between the two events does not exceed 63 days.
Otherwise the beneficiary could be subject to a late enrollment penalty. For example,
a retiree who is enrolled in a plan offered by his former employer decides in July
2008 that he wants to drop the employer coverage and enroll in Part D. The
individual is not able to enroll in a Part D plan until the annual election period
(November 15 to December 31). Coverage will not begin until the following January

1. He will probably want to keep his employer coverage through the end of 2008.

Special Enrollment Periods. In general, individuals can only enroll in Part
D during their initial enrollment period or during the annual open enrollment period.
However, there are a few limited occasions when an individual may have a special
enrollment period including moving to a new geographic area, involuntary loss of
creditable coverage; inadequate information provided on creditable coverage status,
federal error, termination of a PDP contract, and plan failures. Special enrollment
periods also apply for low-income enrollees deemed eligible for a subsidy outside of
the initial or annual enrollment periods (See Low-Income discussion, below.)
Late Enrollment Penalty. The Part D delayed enrollment penalty provision
is intended to prevent adverse selection. Adverse selection occurs when only those
persons who think they need the benefit actually enroll in the program. When this
happens, per capita costs are driven up, thereby causing more persons (presumably
the healthier, and less costly ones) to drop out of the program. Over time, as more

persons drop out, program costs become prohibitive. The intention of the penalty is
to encourage all persons who do not have creditable coverage to enroll. Those who
have creditable coverage are maintaining insurance protection and are not deferring
coverage until they will actually need it.
The late enrollment penalty is assessed on persons who go for 63 days or longer
after the close of their initial Part D enrollment period without creditable coverage
and subsequently enroll in Part D. The penalty is based on the number of months the
individual does not have creditable coverage. The premium that would otherwise
apply is increased for each month without creditable coverage.
The late enrollment penalty is frequently described as being equal to at least 1%
of the otherwise applicable premium for each uncovered month. The actual
calculation is somewhat more complicated. The law specifies that the penalty is the
greater of (1) the amount CMS determines is actuarially sound for each uncovered
month or (2) 1% of the base beneficiary premium for each uncovered month. The
“base beneficiary premium” is a national figure; it may therefore be different than the
premium for the plan selected by the beneficiary. For uncovered months occurring
during 2006 and 2007 the 1% calculation applies.
The penalty applies for as long as the individual is enrolled in Part D. The
dollar amount of the each individual’s penalty is expected to increase each year.
As noted above, individuals first eligible for Medicare on or before January 31,
2006, who failed to enroll by May 15, 2006, were not able to enroll until November
15, 2006, with coverage beginning January 1, 2007. If these individuals did not have
creditable coverage during the period, they would have seven uncovered months.
Their penalty would therefore be 7% of the base beneficiary premium — $1.91 (7%
of the base monthly beneficiary premium of $27.35 for 2007). If these same persons
waited an additional year, their penalty would be 19% of the base monthly
beneficiary premium — $5.31 (19% of the base beneficiary premium of $27.93 for


Special rules apply for persons who qualify for the low-income subsidy outside
of their initial enrollment period or the annual open enrollment period. These
individuals can enroll in a Part D plan at any time during the year and not be subject
to the late enrollment penalty otherwise applicable to persons who miss the
enrollment periods.
Part D Benefits
Qualified Coverage
PDP sponsors and MA-PD plans are required to offer a minimum set of
benefits, referred to as “qualified coverage.” “Qualified coverage” is defined as
either “standard prescription drug coverage” or “alternative prescription drug
coverage” with at least actuarially equivalent benefits (i.e., having at least equivalent
dollar value). In both cases, access must be provided to negotiated prices for drugs.

Defined Standard Coverage. Standard prescription drug coverage is
defined as follows:
!Deductible paid by the beneficiary: $275 in 2008.
!75% of costs paid by the program and 25% of costs paid by the
beneficiary up to the initial coverage limit: $2,510 in 2008. (In 2008,
this represents $833.75 in total out-of pocket costs paid by
beneficiary and $2,510 in total spending.)
!100% of costs paid by the beneficiary for drug spending falling in
the coverage gap up to the catastrophic threshold: between
$2510.01 and $5,726.25 in 2008 (In 2008 this represents $4050 in
total out-of pocket costs paid by the beneficiary and $5,726.25 in
total spending).
!All costs paid by program over the “catastrophic” threshold or
trigger ($5,726.25 in 2008) except for nominal beneficiary cost-
sharing. Nominal cost-sharing is defined as the greater of (1) a
copayment of $2.25 in 2008 for generic drug or preferred multiple
source drug and $5.60 in 2008 for other drugs, or (2) 5%
Each year, the dollar amounts are increased by the annual percentage increase in
average per capita aggregate expenditures for covered outpatient drugs for Medicare
beneficiaries for the 12-month period ending in July of the previous year.
Table 1 shows the standard benefit as well as costs paid by low-income
beneficiaries (discussed later in this report).
True Out-Of-Pocket (TROOP) Costs. Beneficiaries must incur a certain
level of out-of-pocket costs ($4,050 in 2008) before catastrophic protection begins.
Costs are only considered incurred if they are incurred for the deductible, cost-
sharing, or benefits not paid because they fall in the coverage gap (sometimes
referred to as the doughnut hole). Incurred costs do not include amounts for which
no benefits are provided because a drug is excluded under a particular plan’s
formulary. Costs are treated as incurred, and thus treated as true out-of-pocket
(TROOP) costs only if they are paid by the individual (or by another family member
on behalf of the individual), paid on behalf of a low-income individual under the
subsidy provisions, or under a state pharmaceutical assistance program. Any costs for
which the individual is reimbursed by insurance or otherwise do not count toward the
TROOP amount.

Table 1. Part D Standard Benefits, 2008
(by per capita drug spending category)
Subsidy Eligible Individualsa
Other Subsidy
Total drugAll beneficiariesFull Subsidy EligibleEligible
spendingPaid byPaid byPaid by PartPaid byPaid by
(dollar ranges)Part DenrolleeDPaid by enrolleePart Denrollee
$0 up to $2750%$275$2750$219$56
Deduct ible
Between75%25%100% lessInstitutionalized duals: 85%15%
Deductible andenrollee cost-$0
InitialsharingDuals under 100% ofc
Coverage Limit poverty: $1.05/$3.10d
($275.01-Others: $2.25/$5.60
Between Initial0%100%100% lessInstitutionalized duals:85%15%
Coverage Limitenrollee cost-$0
($2,5101.01)sharingDuals under 100% ofc
andpoverty: $1.05/$3.10d
CatastrophicOthers: $2.25/$5.60
Over 95%b 5%e 100% $0 100% $2.25/$5.60d
catastrophic less
trigger enrollee
($5,726.26 andcost-
over) sha r ing
Source: CMS, Notification of Changes in Medicare Part D Payment for Calendar Year 2008 (Part D
Payment Notification), Memo to PDP Sponsors, MA organizations and other Interested parties, April
2, 2007.
a. Subsidy eligible persons are low-income individuals entitled to assistance with Part D premiums and
cost-sharing. Full-subsidy eligible individuals can enroll in plans for which they pay no
premiums; other subsidy eligible individuals can enroll in plans for which a portion of their
premiums are subsidized. Both groups have assistance with otherwise applicable cost-sharing
b. Assumes enrollee has met true out-of-pocket (TROOP) threshold of $4,050.
c. $1.05 per prescription for generic or preferred drugs that are multiple source drugs; $3.10 per
prescription for other drugs.
d. $2.25 per prescription for generic or preferred drugs that are multiple source drugs; $5.60 per
prescription for other drugs.
e. Copayment amounts apply if larger.
Actuarially Equivalent Plans. Plans may offer actuarially equivalent
coverage, providing they meet certain requirements. These plans have the same
actuarial value as the standard benefit, but a different benefit structure. For example,
they may eliminate the deductible, but have cost-sharing requirements higher than the
25% amount under basic standard coverage. They may also used tiered cost-sharing
under which generics have the lowest cost-sharing, preferred brands have the next
level of cost sharing and nonpreferred brand have higher cost sharing requirements.
Some plans may have a specialty tier for very high cost drugs.

CMS recognizes two types of actuarially equivalent plans. Plans labeled
“actuarially equivalent standard” offer a different cost-sharing structure. Plans
labeled “basic alternative standard” may reduce the deductible, change cost-sharing,
and/or change the initial coverage limit. In 2007, 51% of enrollees were in plans
offering actuarially equivalent benefits.
Enhanced Coverage. Plans may offer enhanced coverage which exceeds the
value of defined standard coverage. This coverage includes both basic coverage and
supplemental benefits. Supplemental benefits may include some coverage in the
coverage gap (for example coverage of generic drugs) and/or reductions in cost-
sharing that increase the actuarial value of the package. In 2007, 35% of enrollees
were in plans offering enhanced coverage.
A PDP-sponsor cannot offer an enhanced plan unless it also offers a basic plan
in the service area. As noted above, MA organizations offering MA coordinated care
plans are required to offer at least one plan in the service area with drug coverage.
The drug coverage can be either basic coverage or enhanced coverage with no
premium for the supplemental benefits.2
Access to Negotiated Prices
All plans are required to provide beneficiaries with access to negotiated prices
for covered Part D drugs. This access must be provided even when no Part D
benefits are payable because the beneficiary has not met the deductible or the
beneficiary is in the coverage gap. Negotiated prices are to take into account
negotiated price concessions for covered drugs that are passed through to enrollees
at the point of sale. Such price concessions include discounts, direct or indirect
subsidies, rebates, and other direct or indirect remunerations.
Special Provisions for Low-Income Populations
A major focus of Part D is the enhanced coverage provided to low-income
individuals. Persons with incomes below 150% of poverty (and assets below
specified levels) have assistance with some portion of Part D premium and
cost-sharing charges. Persons with the lowest incomes have the highest level of
Eligibility for Low-Income Subsidy (LIS) Assistance
Definition of Eligible Groups. Special premium and cost-sharing subsidies
are available for low-income persons. This population is divided into two main
groups with the first group divided into subgroups for purposes of determining
cost-sharing requirements. The two main groups are defined as follows:

2 The only way that there could be no premium for supplemental benefits is if the plan
applied a credit of rebate dollars under the plan’s Part C bid against the otherwise applicable

“Full Subsidy Eligible Individuals”. This group includes all persons who
(1) are enrolled in a PDP plan or MA-PD plan; (2) have incomes below 135% of the
federal poverty level ($14,040 for an individual and $18,900 for a couple in 2008);
and (3) have resources in 2008 below $6,290 for an individual and $9,440 for a
couple (increased each year by the percentage increase in the consumer price index,
or CPI). The 2008 resource limits are generally publicized as $7,790 and $12,440
because $1,500 per person is excluded for burial expenses.
The following groups of persons are also defined as full subsidy eligible
!Dual Eligibles. These are persons entitled to the full range of
benefits under their state’s Medicaid program. Prior to January 1,

2006, these persons received their drug benefits under Medicaid.

Effective January 1, 2006, their drug benefits are provided through
Part D. All full benefit dual eligible individuals are deemed to be in
the full subsidy eligible group, regardless of whether they meet the
other eligibility requirements.
!Recipients of Supplemental Security Income (SSI) benefits; or
!Enrollees in a Medicare Savings Program (MSP). MMA permitted
the Secretary to extend full subsidy eligible coverage to enrollees in
MSP. (Implementing regulations extended coverage to this group).
There are three Medicare Savings programs that provide Medicaid
assistance for Medicare premiums and cost-sharing charges. The3
three groups are (1) qualified Medicare beneficiaries (QMBs), (2)
specified low-income Medicare beneficiaries (SLMBs),4 and (3)5

qualifying individuals (QIs).
3 QMBs are aged or disabled persons with incomes at or below the federal poverty level. In
2008, the monthly level is $887 for an individual and $1,187 for a couple (these levels
include a monthly $20 disregard for unearned income). Assets must be below $4,000 for an
individual and $6,000 for a couple. QMBs are entitled to have their Medicare cost-sharing
charges and the Medicare 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, such as long
term care) unless the individual is otherwise entitled to Medicaid.
4 SLMBs meet the QMB criteria, except that their income is between 100% and 120% of the
federal poverty level. In 2008, the monthly income limits are $1,060 for an individual and
$1,420 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.
5 These 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 2008, the
monthly income limit for QI for an individual is $1,190 and for a couple $1,595. Medicaid
protection for these persons is limited to payment of the monthly Medicare Part B premium.
Note that in 2010, the resource limits under the MSP programs are raised to the level
applicable for full subsidy eligible Part D enrollees.

“Other Subsidy Eligible Individuals”. This group includes all other
persons who (1) are enrolled in a PDP plan or MA-PD plan, (2) have incomes below
150% of poverty ($15,600 for an individual and $21,000 for a couple in 2008), and
(3) have resources in 2008 below $10,490 for an individual and $20,970 for a couple
(increased in future years by the percentage increase in the CPI). The publicized
resource limits of $11,990 and $23,970 include a $1,500 per person burial allowance.
Definition of Income and Assets. The definitions of income and assets
generally follows that used for determining eligibility under the QMB, SLMB, and
QI-1 programs (which in turn link back to the definitions used for purposes of the SSI
program). There are, however, a few items that should be noted:
!Family Size. Currently, the federal poverty level (FPL) used for
income determinations is that applicable for an individual or for a
couple. MMA specified that the FPL is to be that for the family of
the size involved. Therefore, the regulations define the family size
to include, in addition to the applicant and spouse, additional
persons related to the applicant who live in the same residence and
depend on the applicant or spouse for at least one-half of their
financial support. The income of these additional persons would
not, however, be used in the determination of eligibility.
!Resources. MMA provides for the development of a simplified
application in which applicants attest to their level of resources and
submit minimal documentation. Only liquid resources (or those that
could be converted to cash within 20 days) and real estate that is not
the applicant’s primary residence are considered. Liquid resources
include such things as checking and savings accounts, stocks, and
bonds. Vehicles are excluded because they are not considered liquid
!More Generous State Standards. The law (Section 1902(r)(2) of the
Social Security Act) allows states to use more generous income and
assets rules for determining eligibility for the QMB, SLMB, and
QI-1 programs. A few states have elected this option. As noted
above, MMA permitted the Secretary to include all persons meeting
QMB, SLMB, and QI-1 criteria in the full subsidy eligible group; the
Secretary elected to do so. However, only persons on QMB, SLMB,
or QI-1 rolls are actually included. States are not permitted to use
the less restrictive methodologies for other subsidy eligibility
determinations; the standards will be the same nationwide for these
!Exemptions from Income and Resources. Effective January 1, 2010,
support and maintenance furnished in kind will be excluded from the
definition of income. Further, any part of the value of any life
insurance policy will be excluded from the definition of resources.

LIS Benefits
Subsidies are provided for both premiums and cost-sharing charges.
Premium Subsidies. Premium subsidies are available for both full subsidy
eligible and other subsidy eligible persons. However, the amount of assistance is less
for the second group.
Full Subsidy Eligible Individuals. All full subsidy-eligible individuals
receive a premium subsidy equal to 100% of the low-income benchmark premium
amount (see following discussion), but in no case higher than the actual premium
amount for basic coverage under the plan selected by the enrollee.
In addition, the premium subsidy amount can not be less than the premium for
the lowest-cost PDP plan in the region. Thus, all full subsidy eligible individuals are
entitled to a full premium subsidy for at least one plan in their region. However, if
a beneficiary selects a plan with a premium higher than the benchmark, the
beneficiary is liable for the additional costs.
Full subsidy eligible individuals, but not other subsidy eligible individuals, also
have a premium subsidy for any Part D late enrollment penalty equal to 80% for the
first 60 months of delayed enrollment and 100% thereafter.
Other Subsidy Eligible Individuals. All other subsidy eligible individuals
have a sliding scale premium subsidy ranging from 100% of the premium subsidy
amount at 135% of poverty to 0% of such value at 150% of poverty. Specifically, the
subsidy is 75% for persons with incomes above 135% but at or below 140% of
poverty, 50% for persons with incomes above 140% but at or below 145% of
poverty; and 25% for persons with incomes above 145% but below 150% of poverty.
Calculation of Low-Income Benchmark Premium. The low-income
benchmark premium for a region is the weighted average of the monthly beneficiary
premiums for basic prescription drug coverage. The low-income benchmark is
defined as the weighted average premium, with the weight based on plan enrollment.
For 2006, the program’s first year, all PDPs were assigned an equal weight. (MAs
were enrollment weighted if they had 2005 enrollment.)
Beginning in 2007, the bid amounts were to be weighted by plan enrollment in
the previous year. However, since many beneficiaries selected low-cost plans in
2006, using a weighted average would have the effect of reducing the regional
low-income benchmark premium amounts. Instead, CMS decided to transition to the
weighting methodology using the Secretary’s demonstration authority (“Medicare
Demonstration to Transition Enrollment of Low-Income Subsidy Beneficiaries”).
For 2007, it used the same methodology used for 2006. Beginning for 2008, it is
implementing a transition from the 2006 methodology and the weighted average
method based on actual plan enrollments. In 2008, 50% of the regional benchmark
is based on the 2006 averaging methodology and 50% on the enrollment-weighted
average. For determining the enrollment-weighted average, Part D enrollees in PDPs
and MA-PDs in June 2007 are used. Table 2 shows the applicable 2008 amount by
PDP region.

Table 2. Low-Income Benchmark, by Region, 2008
Region State(s)SubsidyRegion State(s)Subsidy
1NH, ME$30.6418MO$26.71
2CT, MA, RI, VT29.1719AR27.69
3 NY 24.18 20 MS 31.35
4 NJ 31.23 21 LA 24.62
5DE, DC, MD30.7822TX25.01
6PA, WV26.5923OK28.04
7 V A 31.03 24 K S 30.62
8NC33.4325IA, MN, MT,30.61
9 SC 31.12 26 NM 19.28
10 GA 30.04 27 CO 24.59
11 FL 19.16 28 AZ 15.92
12AL, TN28.2929NV16.64
13MI30.4930OR, WA30.19
14OH26.8231ID, UT33.53
15IN, KY33.5032CA19.80
16 WI 31.03 33 HI 24.32
17 IL 30.26 34 AK 36.42
Source: CMS, at [].
Cost-Sharing Subsidies. Cost-sharing subsides are linked to “standard
prescription drug coverage.” Full subsidy eligibles have no deductible, no coverage
gap (i.e., no “doughnut hole”), and no cost-sharing over the catastrophic threshold.
Full benefit dual eligibles who are residents of a medical institution or nursing
facility have no cost-sharing. Other full benefit dual eligible individuals with
incomes up to 100% of poverty have cost-sharing, for all costs up to the
out-of-pocket threshold, of $1.05 in 2008 for a generic drug prescription or preferred
multiple source drug prescription and $3.10 in 2008 for any other drug prescription.
All other full subsidy eligible individuals have cost-sharing, for all costs up to the
out-of-pocket threshold, of $2.25 in 2008 for a generic drug or preferred multiple
source drug and $5.60 in 2008 for any other drug. (See Table 1.)
Other subsidy eligible individuals have a $56 deductible in 2008, 15%
coinsurance for all costs up to the catastrophic trigger level, and cost-sharing for
costs above this level of $2.25 in 2008 for a generic drug prescription or preferred

multiple source drug prescription and $5.60 in 2008 for any other drug prescription.
(See Table 1.)
Each year, the cost-sharing amounts for full benefit dual eligibles below 100%
of poverty are increased by the increase in the CPI. The cost-sharing amounts for all
other persons, and the deductible amount for other subsidy eligible individuals, are
increased by the annual percentage increase in per capita beneficiary expenditures for
Part D covered drugs.
Generally there is a two-step process for low-income persons to gain Part D
coverage. First, a determination must be made that they qualify for the assistance;
and, second, they must enroll, or be enrolled, in a specific Part D plan. Special
procedures were established to make the process easier. The procedures are different
for different categories of low-income enrollees.
Dual Eligibles. There were more than 6 million dual eligibles who needed to
be enrolled in a Part D plan, effective January 1, 2006. CMS established an auto-
enrollment process which was intended to assure there was no gap in coverage,
though the program did encounter some problems in the early stages.
The auto-enrollment process was random among plans with premiums at or
below the low-income benchmark premium. Persons becoming dually eligible after
January 2006 are also auto-enrolled into a Part D plan.
There are a number of differences among available plans. Key differences are
drugs included in plan formularies and pharmacies participating in the plan as
network pharmacies. Some dual eligibles may find that they are auto-enrolled in a
plan which may not best meet their needs. For this reason, they are able to change
enrollment at any time with the new coverage effective the following month. It
should be noted that if an enrollee selects a plan with a premium above the low-
income benchmark, he or she is required to pay the difference.
Enrollees in Medicare Savings Programs. CMS established a process,
labeled “facilitated enrollment” for enrollees in Medicare Savings programs (MSPs),
SSI enrollees, and persons who applied for and were approved for low-income
subsidy assistance. The basic features applicable to auto-enrollment for dual
eligibles (i.e., random assignment to plans with premiums below the low-income
benchmark and assignment of MA enrollees to the lowest-cost MA-PD plan offered
by the MA organization) were extended to facilitate enrollment.
Beneficiaries eligible for facilitated enrollment in 2006 were sent notices
informing them of the plans they would be enrolled in if they took no action. If the
beneficiary failed to select another plan (and did not decline Part D enrollment), he
or she was considered to have enrolled in the assigned plan, effective May 1, 2006.
Facilitated enrollment also applies for persons becoming eligible for MSP after that
date. As is the case for a dual eligible, an MSP enrollee can change plan enrollment
throughout the year.

Other Low-Income Persons. MMA extended low-income subsidies to all
persons with incomes below 150% of poverty and assets below specified levels.
Persons not identified as dual eligibles, MSP enrollees, or SSI recipients may qualify,
but they need to submit an application. The Social Security Administration (SSA)
generally makes eligibility determinations for those who fill out the applications,
though an individual may request the state Medicaid agency to make the
CMS facilitates enrollment in Part D plans for persons identified as qualifying
for extra help. However, unless they are dual eligibles or MSP enrollees, they are
only able to switch plans once during the year, with the new coverage effective the
following month.
2008 Enrollment. There are several circumstances under which a low-income
subsidy-eligible person experienced a change from 2007 to 2008. These include
cases in which an individual (1) was enrolled in a plan in 2007 whose 2008 premium
would no longer fall below the low-income benchmark premium, (2) was enrolled
in a plan that terminated its participation in Part D, (3) lost automatic eligibility for
the low-income subsidy in 2008, or (4) fell into a different subsidy category.
Individuals Enrolled in Plans in 2007 that no Longer Have
Premiums Below the Benchmark or in Plans that Terminate. CMS
established a process for reassigning these beneficiaries to a different Part D plan.
Beneficiaries that were reassigned had to meet all of the following criteria:
!They were deemed eligible for a subsidy in 2007 because they were
dual eligibles, participants in MSP, SSI recipients, or because they
applied and were found eligible for the full subsidy.
!They would continue to be eligible for a subsidy in 2008.
!They were originally auto-enrolled or had their enrollment facilitated
into a PDP.
!They did not elect to enroll in a different plan.
!Their 2007 plan had a 2008 premium that was above the “de
minimus amount” (which is the benchmark plus $1) or terminated
at the end of 2007.
Beneficiaries meeting all of these criteria were reassigned to a different PDP in
the region as follows. The beneficiaries were assigned to another plan in the same
region offered by the same PDP sponsor, if the sponsor had a plan with a premium
at or below the benchmark (or, if there was none available, a plan below the de
minimus amount). If no such plan existed, CMS randomly assigned beneficiaries
among PDP sponsors with at least one plan with a premium at or below the
benchmark. CMS notified beneficiaries in early November 2007 of their plan
assignment; they were reassigned to a new plan effective January 1, 2008. However,
beneficiaries could voluntarily elect to stay in their existing plan (if it was still
offered) or select a different plan from the one assigned by CMS.

Beneficiaries who changed plans after they were either auto-assigned to a plan
or had their enrollment facilitated into a plan did not have their selection changed by
CMS. However, they were informed that their plan’s premium was rising above the
regional low-income subsidy amount by more than the de minimus $1 in 2008 and
would therefore be liable for any excess if they stayed with their current plan. The
beneficiary was free to change his or her selection.
On October 29, 2007, CMS announced that it was sending reassignment notices
to 1.6 million persons who would be reassigned to a new plan outside of their current
organization and an additional 965,000 persons who were to be reassigned to a new
plan within their current organization. It also announced that it was sending “chooser
notices” to the 442,000 persons who qualified for a full premium subsidy but the
2007 plan they had selected would have a premium in 2008 above the de minimus
Individuals Losing Automatic Eligibility for Low-Income Subsidy.
Persons automatically qualifying for a low-income subsidy are dual eligibles, persons
enrolled in MSP, and SSI recipients. In September 2007, CMS sent letters to those
beneficiaries losing their automatic eligibility for a low-income subsidy in 2008
because they no longer fell into one of these categories. At the same time, these
beneficiaries were told they still might qualify for assistance and were encouraged
to file a low-income subsidy application with SSA. The application and a postage-
paid envelope were enclosed with each notice.
Individuals Falling Into a Different Subsidy Category. Beneficiaries
who would experience a change in their low-income subsidy level in 2008 received
a notice in October 2007 informing them of the change. These beneficiaries are
subject to different cost-sharing requirements.
Interaction with State Pharmacy Assistance Programs
A number of states have had state pharmaceutical assistance programs (SPAPs)
in place for a number of years. These programs were set up to offer prescription drug
benefits to low-income individuals who did not have Medicaid drug coverage.
Many, but not all, persons enrolled in SPAPs are eligible for low-income subsidies
under Part D. SPAP payments made on their behalf to cover Part D cost-sharing
charges count toward the individual’s true out-of-pocket (TROOP) costs trigger.
MMA defines an SPAP as one that provides assistance to persons in all Part D
plans and does not discriminate based on the Part D plan in which the individual is
enrolled. CMS interpreted the Part D language to mean that if an SPAP offers Part
D premium assistance or supplemental Part D cost-sharing assistance, it must offer
equal assistance for all PDP and MA-PD plans available in the region, and may not
steer beneficiaries to one plan or another through benefit design or otherwise.
Violation of this nondiscrimination rule would violate the SPAP’s status with respect
to counting TROOP. The inability to steer beneficiaries to a selected plan or plans
effectively meant that an SPAP could not auto-enroll its participants in preferred Part
D plans. This proved to be a concern for some states who argued they should be able
to enroll their beneficiaries in preferred plans if they gave individuals the option to
switch to other plans if they wanted to.

CMS established policies intended to balance the need to adhere to the
nondiscrimination requirement with state concerns. It generally required SPAPs to
provide wrap-around benefits (namely fill in the gaps) for their Part D beneficiaries
regardless of the plan the beneficiary chose to enroll in and permitted SPAPS (when
acting as authorized representatives) to enroll their beneficiaries in Part D plans using
only beneficiary-specific criteria to limit the selection of part D plans. In its 2008
call letter to plans, CMS refined the policy to explicitly permit states to adopt
reasonable coordinating criteria. SPAPs with authorized representative status are
allowed to facilitate enrollment of their beneficiaries into plans that agree to the state-
specific coordination criteria (such as offering similar formularies and pharmacy
network structures). Such criteria must be of the kind that any Part D plan could
meet if it chose. SPAPs must continue to permit beneficiaries who wish to enroll in
a plan not meeting the coordinating criteria to do so; they must provide the same
wrap-around benefits or assistance.
Part D Plans
PDP Regions
MMA required the Secretary to designate PDP regions. The service area for a
PDP plan must include the entire PDP region. A plan can be offered in more than
one PDP region, including all PDP regions.
The Secretary designated 34 PDP regions. No region is smaller than a state.
Twenty-five states are individual regions. Twelve states are part of two state regions.
There is one region with two states and the District of Columbia, one region with
four states, and one region with seven states. (See Table 2 for states in each region.)
Approval of PDP Plans
Each year, CMS issues a call letter to contractors planning to offer PDP and/or
MA plans in the coming year. The 2008 call letter issued in April 2007, combined
contracting guidance for both programs. Potential PDP and MA sponsors are
required to submit bids by the first Monday in June of the previous year. Each
potential PDP sponsor is required to submit a bid and supplemental information for
each Part D plan it intends to offer. The following information is to be included with
the bid: (1) the coverage to be provided; (2) actuarial value of qualified prescription
drug coverage in the region for a beneficiary with a national average risk profile; (3)
information on the bid including the basis for the actuarial value, the portion of the
bid attributable to basic coverage and, if applicable, the portion attributable to
enhanced coverage, and assumptions regarding the reinsurance subsidy (see
discussion on financing, below); and (4) service area.
CMS reviews the information to conduct negotiations regarding the terms and
conditions of the proposed bid and benefit plan. Private fee-for-service plans under
Medicare Part C are exempt from the negotiation requirements.

MMA specified that the negotiating authority is similar to the authority the
Director of the Office of Personnel Management has with respect to Federal
Employees Health Benefits (FEHB) plans. However, the law specifically states that
the Secretary may not interfere with the negotiations between drug manufacturers and
pharmacies and PDP sponsors. Further, the Secretary may not require a particular
formulary or institute a price structure for the reimbursement of covered Part D
drugs. This is know as the “non-interference provision.”
CMS can only approve a plan if certain requirements are met. The plan must
comply with Part D requirements, including those relating to beneficiary protections.
CMS must determine that the plan and the sponsor meet requirements relating to
actuarial determinations. Further, the Secretary may not find that the design of the
plan and its benefits (including any formulary and tiered formulary structure) are
likely to discourage enrollment by certain beneficiaries.
For both 2007 and 2008, CMS negotiated with plan sponsors to ensure that each
bid submitted represented a meaningful variation based on plan characteristics that
would provide beneficiaries with substantially different options. CMS has stated that
it would not expect that more than two bids from a sponsoring organization would
provide meaningful variation unless one of the bids is an enhanced alternative plan
with coverage in the gap.
The law and regulations establish requirements for PDP plan sponsors. In
general, a PDP sponsor must be licensed under state law as a risk bearing entity
eligible to offer health insurance or health benefits coverage in each state in which
it is offering a drug plan. (Alternatively, it could meet solvency standards established
by CMS for entities not licensed by the state.) The entity must assume its financial
risk on a prospective basis for covered benefits; it may obtain insurance (i.e.,
reinsure) or make other arrangements for the costs of coverage.
PDP sponsors enter into contracts with CMS. The contract may cover more
than one Part D plan. Under terms of the contract, the sponsor agrees to comply with
Part D requirements and have satisfactory administrative and management
CMS cannot enter a contract with an organization unless it meets minimum
enrollment requirements of 5,000 individuals (or 1,500 individuals if the organization
primarily serves individuals residing outside of urbanized areas). CMS may waive
the minimum enrollment requirement during the first contract year for a sponsor in
a region.
Each contract is for a period of 12 months. An entity is determined qualified to
renew its contract annually only if CMS informs the entity that it is qualified to
renew the contract and the plan sponsor has not provided CMS of a notice of its
intent not to renew. However, renewal of a contract is contingent on reaching
agreement on the bid. If the sponsor and CMS cannot reach agreement, no renewal
takes place.

Plan Monitoring
CMS monitors plan operations with particular emphasis on the following five
performance measures: telephone customer service wait times; frequency and types
of complaints; timeliness and resolution of appeals; completeness of enrollment
information available to pharmacists; and the percent of drug pricing changes
available on the drug plan finder on the WEB and the percent of drugs on the finder
with price increases.
Drug Payments
Part D plan sponsors (or the pharmaceutical benefit managers (PBMs) they have
contracted with) negotiate prices with drug manufacturers, wholesalers and
pharmacies. The negotiated price (i.e., the price that is available to the beneficiary)
is net of some or all of rebates, discounts and other price concessions. The plan’s
negotiated price may reflect the same prices that a health plan or PBM would get for
its commercially insured members or it may be different.
Part D plans are expected to negotiate on behalf of enrollees for price discounts.
These discounts may be passed on to beneficiaries and the program in many ways
including lower copayment and coinsurance, lower prices (compared with retail
prices), and lower premiums. A portion of the manufacturers price concessions may
be retained by the plan.
Plan sponsors negotiate with pharmacies in order to include a sufficient number
and geographic distribution of pharmacies in their networks. The plan reimburses
the pharmacy for the cost of the drug, plus a dispensing fee. Pharmacies set their
own rates for dispensing drugs but may give the plan a discount on their usual rate.
A plan’s negotiated prices may be found on the website.
Beneficiaries can also compare negotiated prices for different plans in their area. By
law, the net prices charged to Part D plans are not made public. The amount of price
concessions is reported to CMS.
The 2008 Medicare trustees report estimated the average rebate at 9% for 2008;
it was expected to remain at that level through 2017. As noted above, some but not
necessarily all, of these savings may be passed on to beneficiaries.
Plan Characteristics/Beneficiary Protections
The law and regulations establish requirements that plans must meet.
Marketing/Beneficiary Communications
Plan sponsors are required to assure timely and accurate information in their
marketing materials. Such materials must be approved by CMS. In its 2008 call
letter to plans, CMS emphasized that organizations are responsible for the actions of

sales agents/brokers whether they are employed or contracted. It stated that
organizations must assure that these individuals are properly trained in both Medicare
and the details of the products being offered. Plan sponsors must provide strong
oversight of marketing activities.
Employees of an organization or independent agents or brokers acting on behalf
of the organization may not solicit Medicare beneficiaries door-to-door. They must
first ask permission before providing assistance in a beneficiary’s home, prior to
conducting any sales representations or accepting an enrollment form in person.
Plan sponsors are required to provide enrollees with an evidence of coverage
(EOC) document upon enrollment and annually thereafter. The EOC gives the
details about how the plan works, covered benefits and related cost-sharing
responsibilities. Plans are also required to provide current enrollees with an annual
notice of change (ANOC) document, showing changes for the forthcoming year, prior
to the annual open enrollment period. The ANOC does not provide a list of drugs
added or deleted from the formulary or drugs whose tier has changed. It does
however note if such changes have been made.
For the 2008 plan year, plan sponsors were encouraged to use a combined model
ANOC/EOC document to be forwarded to beneficiaries by October 31, 2007; in
addition they were required to mail information on plan formularies. Alternatively,
plans could use a separate ANOC and statement of benefits, with the EOC to follow
by January 31, 2008.
In its draft 2008 call letter, CMS had considered allowing plan comparisons of
MA and PDPs in a specific service area. However, CMS stated that based on
negative response to the proposal, it was persuaded that it was not practical or
meaningful to develop a comparison that was not beneficiary specific.
As noted earlier, beneficiaries can obtain targeted information about plans by
using the Medicare prescription drug plan finder tool on the
website. Information for 2008, was posted October 11, 2007.
Covered Drugs
In order for a drug to be paid under Part D, it must be a drug that can be
included under Part D. Further, it must be included in the formulary of the
individual’s Part D plan.
Covered Drugs. The law defines covered Part D drugs as (1) outpatient
prescription drugs approved by the Food and Drug Administration (FDA), and used
for a medically accepted indication; (2) biological products which may only be
dispensed upon a prescription and which are licensed under the Public Health Service
(PHS) Act and produced at a licensed establishment; (3) insulin (including medical
supplies associated with the injection of insulin); and (4) vaccines licensed under the
PHS Act. Also included are drugs treated as being included in a plan’s formulary as
a result of a coverage determination or appeal.

Excluded Drugs. The law specifically excludes drugs which may be
excluded from coverage under Medicaid, except for drugs used for smoking67
cessation. This exclusion applies to (1) benzodiazepines; (2) barbiturates; (3) drugs
used for anorexia, weight loss, or weight gain; (4) fertility drugs; (5) drugs used for
cosmetic purposes or hair growth; (6) drugs for symptomatic relief for coughs and
colds; (7) prescription vitamins and minerals; and (8) covered drugs when the
manufacturer requires, as a condition of sale, that associated tests be purchased
exclusively from the manufacturer. In addition, drugs which are used for the
treatment of sexual or erectile dysfunction are excluded, unless they are used to treat
another condition for which the drug has been approved by the FDA (off label uses
for these drugs are not covered).
It should be noted that a Part D sponsor may elect to include one or more of
these drugs in an enhanced Part D plan. However, no federal subsidy is available for
the associated costs.
Part B Versus Part D. Part D will not pay for drugs which are covered under
Part B (even if the individual is not actually enrolled in Part B). Some drugs and
vaccines can potentially be covered under both Part B or Part D. In this case a
determination must be made as to whether or not the drug can be covered under Part
B in the particular case. Part B covered drugs include drugs which are not usually
self-administered and provided incident to a physicians’s professional services;
immunosuppressive drugs for persons who have had a Medicare-covered transplant;
erythropoietin for persons with end stage renal disease; oral anti-cancer drugs; drugs
requiring administration via a nebulizer or infusion pump in the home; and certain
vaccines (influenza, pneumococcal, and hepatitis B for intermediate or high risk
Vaccine Administration. Beginning in 2008, Part D plans (not Part B) are
required to cover the costs for the administration of Part D covered vaccines.
Physicians will need to bill the patients for these services; the patient will then need
to bill the Part D plan.
Part D formularies are required to meet a number of specific requirements.
Pharmacy and Therapeutic (P&T) Committee. A P&T committee must
develop and review the formulary. A majority of the members must be practicing
physicians, practicing pharmacists or both. Further, they must come from clinical
specialties that adequately represent the needs of beneficiaries.
The committee, when developing and reviewing the formulary, is to base
clinical decisions on the strength of scientific evidence and standards of practice. It

6 Effective January 1, 2013, plans will be required to include benzodiazepines in their
7 Effective January 1, 2013, plans will be required to include barbiturates in their
formularies for the indications of epilepsy, cancer, or chronic mental health disorder.

should also take into account whether including a particular drug in the formulary (or
in a particular tier in the formulary) has therapeutic value in terms of safety and
Minimum Requirements. The formulary must include drug categories and
classes that cover all disease states. MMA required CMS to request the United States
Pharmacopeia (USP) to develop a list of categories and classes which may be used
by plans and to periodically revise such classification as appropriate. Part D plans
that use a classification system that is consistent with the USP classification system
are deemed to satisfy a safe harbor and will be approved by CMS. CMS will review
systems of plans proposing to adopt an alternative classification to determine if it is
similar to the USP or other commonly used system.
A plan’s formulary must include at least two drugs in each category or class
(unless only one drug is available in the category or class, or two drugs are available
but one drug is clinically superior). The two drug requirement must be met through
the provision of two chemically distinct drugs. Plans cannot meet the requirement
by including only two dosage forms or strengths of the same drug or a brand name
and its generic equivalent. However, CMS does expect plans to include multiple
strengths and dosage forms where available.
Six Classes of Clinical Concern. CMS has required Part D to cover all,
or substantially all of the drugs in the following six drug categories:
immunosuppressant, antidepressant, antipsychotic, anticonvulsant, antiretroviral, and
antineoplastic. CMS instituted this policy to mitigate the risks and complications
associated with an interruption of therapy for vulnerable populations. For 2008, the
requirement applies to drugs available on April 16, 2007. New drugs or newly
approved drugs within these six classes that come into the market at a later date will
be subject to expedited P&T committee review.
Plan sponsors cannot implement prior authorization or step therapy
requirements that are intended to steer beneficiaries to preferred alternatives within
these classes for beneficiaries currently taking a drug. For beneficiaries beginning
treatment in these categories, such management techniques may be used for
categories other than HIV/AIDS drugs.
Beginning with plan year 2010, the Secretary will be required to identify
categories and classes of drugs (which may be different from the six classes required
by CMS) for which (1) restricted access to the category or class will have major or
life-threatening clinical consequences for individuals who have a disease or disorder
treated by the drugs in such category or class, and (2) there is significant clinical need
for such individuals to have access to multiple drugs within a category or class due
to unique chemical actions and pharmacological effects of the drugs within the
category or class, such as drugs used in the treatment of cancer. Prescription drug
plan (PDP) sponsors will be required to include all covered Part D drugs in the
categories and classes identified by the Secretary. However, the Secretary may
establish a formal exceptions process that ensures that any exception is based on
scientific evidence and medical standards of practice (which for antiretroviral
medications must be consistent with HHS Guidelines for the Use of Antiretroviral

Agents in HIV-1-Infected Adults and Adolescents), and includes a public notice and
comment period.
CMS Review. CMS reviews and approves drug lists that are consistent with
best practice formularies currently in widespread use. It reviews formularies for at
least one drug in each of the USP Formulary Key Drug Types. It reviews tier
placement to provide assurance that the formulary does not substantially discourage
enrollment of certain beneficiaries. It analyzes formularies to determine whether
appropriate access is afforded to drugs or drug classes addressed in widely accepted
treatment guidelines which are indicative of general best practice. It also analyzes
the availability and tier position of the most commonly prescribed drug classes for
the general Medicare population and the dually eligible population. CMS also looks
to existing best practices to check plans’ use of utilization management tools such as
prior authorization, quantity limits and step therapy (where a lower cost drug is first
tried before a higher cost drug may be used).
For the 2008 contract year, CMS stated that it was expanding its review of drugs
commonly used by the dual eligible population to 200 and incorporating the top 100
drugs used in the Medicare drug discount card program (the temporary program for
the low-income persons in place in 2004-2005). It was also expanding the number
of treatment guidelines to ensure best practice drugs are included in the formulary.
Finally, it would use the presence of USP Formulary Key Drug Types as an outlier
test to ensure these drugs are strongly represented on all Part D formularies.
Specialty Tier. A Part D plan is allowed to exempt a formulary tier in which
it places very high cost and unique items from tiered cost-sharing exceptions. In
order to ensure that the plan does not substantially discourage enrollment by specific
patient populations, CMS will only approve specialty tiers under the following
!There is only one specialty tier exempt from cost-sharing exceptions.
!Cost-sharing is limited to 25% in the initial coverage range (or
actuarially equivalent for plans with decreased or no deductible basic
alternative design).
!Only plans with negotiated prices exceeding a threshold may be
placed in the tier. The level is $500 a month in 2007 and $600 a
month in 2008.
Formulary Changes During Plan Year. MMA provided that if plans
removed drugs from their formularies during the year (or changed their preferred or
tiered status), they were required to provide notice, on a timely basis, to CMS,
affected enrollees, physicians, pharmacies and pharmacists. Observers expressed
concerns about the implications of formulary changes on plan enrollees. In response,
CMS emphasized that best practices call for limited changes during the plan year and
outlined the following circumstances under which such changes can be made:

!Plans can expand formularies by adding drugs, lowering the tier of
a drug (thereby reducing copayments or coinsurance), or deleting
utilization management requirements.
!Plans can not change therapeutic categories and classes during a year
except to account for new therapeutic uses and newly approved Part
D drugs.
!Plans can make formulary maintenace changes after March 1, such
as replacing a brand name drug with a new generic drug or
modifying formularies as a result of new information on safety or
effectiveness. These changes require approval and 60 days notice to
appropriate parties.
!Plans can only remove drugs from a formulary, move covered drugs
to a less preferred tier status, or add utilization management
requirements in accordance with approved procedures and after 60
days notice to appropriate parties. Plans can make such changes only
if enrollees currently taking the affected drugs are exempt from the
formulary change for the remainder of the plan year.
Plans are not required to obtain CMS approval or give 60 days notice when removing
formulary drugs that have been withdrawn from the market by either the FDA or a
product manufacturer.
Transition Policies. CMS has established transition standards intended to
assure that new plan enrollees do not abruptly lose coverage for their drugs.
Specifically, plans are required to provide a temporary supply fill anytime within the
first 90 days of a beneficiary’s enrollment in a plan. The supply must be for 30 days
(unless the prescription is written for less than 30 days) for any nonformulary drug.
The requirement also applies to drugs that are on a plan’s formulary, but that require
prior authorization or step therapy. In long-term care facilities, the transition policy
provides for a 31-day fill, with multiple fills as necessary, during the first 90 days of
a beneficiary’s enrollment in a plan. After the 90-day period, the plan must provide
a 31-day emergency supply while an exception is being processed. (CMS has
specified 31 days because many long-term care pharmacies dispense medications in
31-day increments.) For contract year 2008, sponsors are required to ensure that the
transition process information is prominently posted on their website.
CMS has noted that the purpose of the process is not just to provide a temporary
fill of non-formulary drugs but rather to provide enrollees with sufficient time to
work with their health care providers to switch to a therapeutically appropriate
formulary alternative or to request an exception based on grounds of medical
Formulary Change Notice in Advance of Upcoming Year. As noted
earlier, enrollees must receive an annual notice of change (ANOC) by October 31
prior to the next contract year. The upcoming year’s formulary is viewed as a new
formulary; therefore CMS does not require plans to identify specific drug changes

impacting enrollees or require 60 days notice of change. However, enrollees have at
least 60 days to review the new formulary and identify any changes.
CMS has outlined two options for providing a transition for enrollees whose
drugs are no longer on the formulary. They may provide a transition process for
current enrollees consistent with the transition process for new enrollees beginning
January 1 of the new contract year. Alternatively, they can effectuate a transition for
current enrollees prior to January 1. However, if plans have not successfully
transitioned the affected enrollees to a therapeutically equivalent formulary
alternative or processed an exceptions request by January 1, they are expected to
provide a transition supply beginning January 1 until such time as they have effected
a meaningful transition.
Pharmacy Access
PDP sponsors are required to establish a pharmacy network sufficient to ensure
access to covered Part D drugs for all enrollees. They must demonstrate that they
provide (1) convenient access to retail pharmacies for all enrollees, (2) adequate
access to home infusion pharmacies for all enrollees, (3) convenient access to long-
term care (LTC) pharmacies for residents of LTC facilities, and (4) access to Indian
Health Service, Tribes, or Urban Indian Programs (I/T/U) pharmacies operating in
the sponsor’s service area.
CMS can waive the standards in the case of (1) MA-PD plans that operate their
own pharmacies, provided they can demonstrate convenient access, and (2) private-
fee-for-service plans offering Part D coverage for drugs purchased from all
pharmacies, provided they do not charge additional cost-sharing for drugs obtained
from non-network pharmacies.
Retail Pharmacy Access. MMA defined convenient access to retail
pharmacies as being no less favorable than those standards specified for the
Department of Defense TRICARE regional pharmacy program as of March 13, 2003.
The applicable Part D standards are as follows:
!In urban areas, at least 90% of Medicare beneficiaries in the plan’s
service area, on average, live within 2 miles of a retail pharmacy
participating in the plan’s network.
!In suburban areas, at least 90% of Medicare beneficiaries in the
plan’s service area, on average, live within 5 miles of a retail
pharmacy participating in the plan’s network.
!In rural areas, at least 70% of Medicare beneficiaries in the plan’s
service area, on average, live within 15 miles of a retail pharmacy
participating in the plan’s network.
The inclusion of mail order pharmacies in Part D plan networks is optional.
However, such plans do not count toward meeting the retail pharmacy access
requirements. Plans that include mail order pharmacies in their networks must allow
enrollees to receive benefits, such as extended (e.g., 90-day) supply of covered drugs

through a network retail pharmacy. However, beneficiaries making this choice could
be subject to higher cost sharing charges.
Part D sponsors may not restrict access to Part D drugs by limiting distribution
through a subset of network pharmacies (“specialty pharmacies”), except when
necessary to meet FDA limited distribution requirements or to ensure the appropriate
dispensing of drugs that require extraordinary special handling, provider
coordination, or patient education when such requirements cannot be met by a
network pharmacy.
Long-Term Care (LTC) Pharmacy Access. Part D sponsors must offer
standard LTC pharmacy network contracts to all LTC pharmacies operating in their
service area that request such contracts. The pharmacy must be able to meet
performance and service criteria specified by CMS as well as any standard terms and
conditions established by the Part D sponsor for its network LTC pharmacies. Part
D sponsors may not rely on out-of-network pharmacies to meet the LTC convenient
access standards.
“Any Willing Pharmacy”. Part D sponsors are required to permit any
pharmacy willing to accept the sponsor’s standard contracting terms and conditions
to participate in the plan’s network. CMS notes that the sponsors standard terms and
conditions may vary to accommodate geographic areas and types of pharmacies.
However, all similarly situated pharmacies are to be offered the same standard terms
and conditions.
A Part D pharmacy may not require a network pharmacy to accept insurance risk
as a condition of participation in its pharmacy network.
Payments to Pharmacies
MIPPA included provisions directed at prompt payments and related issues. For
plan years beginning on or after January 1, 2010, the negotiated contracts between
pharmacies and PDP sponsors or MA-PD plans will be required to provide that
payment will be issued, mailed, or otherwise transmitted with respect to all “clean
claims” submitted by pharmacies within the “applicable number of calendar days”
after the date on which the claim is received. This requirement will not apply to
pharmacies that dispense drugs by mail order only or are located in, or contract with,
a long-term care facility. “Clean claims” are defined as those claims that have no
defect or impropriety such as the lack of any required substantiating documentation,
or any circumstances requiring special treatment that prevents timely payment from
being made. Claims submitted electronically will be considered to have been
received on the date on which the claim is transferred. Claims not submitted
electronically will be considered to have been received on the fifth day after the
postmark date of the claim or the date specified in the time stamp of the transmission.
The term “applicable number of calendar days” will be defined as 14 days for claims
submitted electronically and 30 days for claims submitted otherwise. If payment is
not issued, mailed, or otherwise transmitted within the applicable number of calendar
days after a clean claim is received, the PDP sponsor or MA-PD plan will be required
to pay interest to the pharmacy that submitted the claim.

MIPPA also provided that for plan years beginning on or after January 1, 2010,
contracts between PDP sponsors and pharmacies located in or contracting with
long-term care facilities will be required to provide that the pharmacy has between

30 and 90 days to submit claims for reimbursement.

For plan years beginning on or after January 1, 2009, contracts between
pharmacies and PDP sponsors or MA-PD plans that use the cost of a drug as the
standard for reimbursement of pharmacies will be required to provide that the
sponsor update the standard at least every seven days, to accurately reflect the market
price of acquiring the drug.
Public Disclosure of Prices
Part D sponsors are required to ensure that their network pharmacies inform
enrollees of any price differential between a covered drug and the lowest price
generic version of the drug that is therapeutically equivalent, bioequivalent, on the
plan’s formulary, and available at that pharmacy.
Privacy, Confidentiality, and Accuracy of Enrollee Records
Plans must abide by all applicable federal and state laws regarding
confidentiality and disclosure of any medical records that it maintains. Further, it
must maintain the records in an accurate and timely manner and ensure timely access
by enrollees to records and information pertaining to them.
Grievances, Coverage Determinations, and Appeals
Part D plans are required to have procedures in place for handling grievances,
for making timely coverage determinations, and for handling appeals of coverage
determinations. They must ensure that all enrollees receive written information about
these procedures.
Grievances. Grievances are complaints or disputes, other than those
involving coverage determinations, expressing dissatisfaction with any aspect of the
operations, activities, or behavior of a Part D plan, regardless of whether remedial
action is requested. Grievances may include such things as complaints about the
plan’s customer service hours of operation, time to obtain a prescription, or pharmacy
charges. A grievance may also include a complaint that the Part D plan refused to
expedite a coverage determination or redetermination. A beneficiary with a
grievance should file the complaint within 60 days of the event. The plan sponsor
must respond on a timely basis.
Coverage Determinations. A coverage determination is any determination
(either an approval or denial) made by the plan sponsor with regard to covered
benefits. The following actions are considered coverage determinations:
!A decision about whether to provide or pay for a part D drug that the
enrollee believes may be covered. This includes a decision not to
pay because the drug is not on the plan’s formulary, the drug is

determined not medically necessary, or the drug is furnished by an
out-of-network pharmacy.
!Failure to provide a coverage determination in a timely manner when
a delay would adversely affect the health of the enrollee.
!A decision concerning a tiering exceptions request. MMA provided
that if a Part D plan includes a tiered cost-sharing structure, a plan
enrollee can request an exception to the structure. Under an
exception, a nonpreferred drug could be covered as a preferred drug
if the prescribing physician determined that the preferred drug for
treatment of the same condition would not be as effective for the
individual, would have adverse effects for the individual, or both.
!A decision concerning a formulary exceptions request. MMA
provided that a beneficiary enrolled in a Part D plan can appeal a
determination not to provide coverage for a drug not on the plan’s
formulary. The appeal can only be made if the prescribing physician
determines that all covered Part D drugs on any tier of the formulary
for treatment of the same condition would not be as effective for the
individual as the nonformulary drug, would have adverse effects for
the individual, or both.
!A decision on the amount of cost-sharing.
!A decision whether the individual has, or has not, satisfied a prior
authorization or other utilization management requirement.
A request for a coverage determination may be filed by the enrollee, the
enrollee’s appointed representative, or the enrollee’s physician. The sponsor must
notify the enrollee of its determinations within 72 hours of receipt of the request (or,
in the case of an exceptions request, receipt of the physician’s supporting statement).
An enrollee can request an expedited decision; if the plan approves the request, it
must make the determination within 24 hours.
Appeals. If the plan’s coverage determination is unfavorable to the enrollee,
it must provide the enrollee with a written denial notice that includes information on
appeals rights. There are five levels of appeals.
Redetermination. The first level of appeal is a redetermination by the plan.
An enrollee, or the appointed representative, may request a standard redetermination
with respect to covered drug benefits or payments. An enrollee, the appointed
representative or the enrollee’s prescribing physician may request an expedited
redetermination for covered drug benefits. The request should generally be filed
within 60 days of the unfavorable coverage determination. The sponsor must provide
the enrollee or prescribing physician with a reasonable opportunity to present
evidence. Enrollees must be notified of the results within seven days in the case of
standard redetermination. Enrollees requesting expedited redeterminations of a
request for covered drugs must be notified of the results within 72 hours, if the plan
accepts the expedited request.

The redetermination must be made by a person not involved in the original
coverage determination. If the issue is the denial of coverage based on medical
necessity, the redetermination must be made by a physician.
Reconsideration by an Independent Review Entity. An enrollee
dissatisfied with a redetermination has a right to reconsideration by an independent
review entity (IRE) that contracts with CMS for this purpose. Currently, MAXIMUS
Federal Services is the Part D IRE.
An enrollee or an enrollee’s appointed representative may request a standard or
expedited reconsideration. The request must be made within 60 days of the
redetermination. An enrollee’s prescribing physician may not request a
reconsideration on an enrollee’s behalf unless the enrollee’s physician is also the
enrollee’s appointed representative. The IRE must solicit the views of the
prescribing physician. It is required to make a decision within seven days for a
standard reconsideration and 72 hours for an expedited reconsideration.
Administrative Law Judge. The third level of appeal is an administrative
law judge (ALJ). An enrollee or the appointed representative may request a hearing
with an administrative law judge. An enrollee’s prescribing physician may not
request a hearing by an ALJ on an enrollee’s behalf unless the enrollee’s physician
is also the enrollee’s appointed representative. The request must be made within 60
days of the IRE decision letter. To get an ALJ hearing, the projected value of denied
coverage must meet a minimum dollar amount ($120 in 2008). No time frames are
specified for ALJ action.
Medicare Appeals Council. The fourth level of appeal is the Medicare
Appeals Council (MAC). A beneficiary or the appointed representative may request
a review by the MAC within 60 days of the ALJ decision. The MAC may grant or
deny the request for review. If it grants the request, it may issue a final decision or
dismissal, or remand the case to the ALJ with instructions on how to proceed with
the case. No times frames are specified for a MAC review.
Federal District Court. The final appeal level is a Federal district court. A
beneficiary or the appointed representative may request a review by a federal court
within 60 days of the MAC decision notice. To receive a review by the court, the
projected value of denied coverage must meet a minimum dollar amount ($1,180 in


Cost Control and Quality Improvement
Part D sponsors are required to have a drug utilization management program,
quality assurance measures and systems, and a medication therapy management
Drug Utilization Management. Sponsors must establish a reasonable and
appropriate drug utilization management program that (1) includes incentives to
reduce costs when medically appropriate and (2) maintains policies and systems to
assist in preventing over-utilization and under-utilization of prescribed medications.

Quality Assurance. The sponsor must have established quality assurance
measures and systems to reduce medication errors and adverse drug interactions and
improve medication use. Such measures and systems must provide that network
providers are required to comply with state standards for pharmacy practice. They
must also provide both for concurrent drug utilization review systems and
retrospective review systems.
Medication Therapy Management. Each Part D Sponsor is required to
incorporate a Medication Therapy Management Program (MTMP) into their plans’
benefit structure. Each year, sponsors are required to submit a MTMP description
to CMS for review and approval. A CMS-approved MTMP is one of several
required elements in the development of sponsor’ bids for the upcoming contract
An approved MTMP must (1) ensure optimum therapeutic outcomes for
targeted beneficiaries through improved medication use; (2) reduce the risk of
adverse events for targeted beneficiaries; (3) be developed in cooperation with
licensed and practicing pharmacists and physicians; (4) be coordinated with any care
management plan established for a targeted individual under a chronic care
improvement program; (5) describe the resources and time required to implement the
program if using outside personnel and establish the fees for pharmacists or others.
The MTMP may be furnished by pharmacists or other qualified providers and may
distinguish between services in ambulatory and institutional settings.
Targeted beneficiaries under a MTMP are enrollees who have chronic diseases,
are taking multiple Part D drugs, and are likely to incur annual costs for covered
drugs that exceed a level specified by the Secretary ($4,000 in 2008).
CMS has outlined additional expectations for MTMPs. Beneficiaries enrolled
in a MTMP cannot be disenrolled later in the year, even if they no longer meet one
of the eligibility criteria. Plans will provide interventions for beneficiaries meeting
all of the criteria regardless of the setting. The plan will not include discriminatory
exclusion criteria.
MMA required the development of electronic prescribing (e-prescribing)
standards for the Part D program. The first (or “foundation”) e-prescribing standards,
which became effective in 2006, created uniform system requirements for several
e-prescribing functions, such as eligibility and benefits queries between prescribers
and Part D sponsors. In accordance with the MMA, CMS also conducted a pilot
study to assess the feasibility of creating additional e-prescribing standards. On April
7, 2008, CMS issued final rule-making to adopt standards for transactions related to
formulary and benefit information and medication history.
Providers and pharmacies are not required to use e-prescribing; however, a
provider or pharmacy that does e-prescribe for Part D beneficiaries is required to
comply with any applicable final standards that are in effect. Further, all Part D plans
are required to maintain e-prescribing systems that conform to the final standards.

MIPPA included incentives for E-prescribing. For 2009 through 2013,
Medicare professionals providing covered services to Medicare beneficiaries and
who are successful electronic prescribers will receive an incentive payment of 2.0%
for 2009 and 2010, 1.0% for 2011 and 2012, and 0.5% for 2013.
Payments to Plans
CMS makes four types of payments to Part D plans: (1) direct subsidy
payments, (2) reinsurance payments, (3) low-income subsidy payments, and (4) risk-
sharing payments.
Direct Subsidies
Medicare makes per capita monthly payments to plans for each Part D enrollee.
The payment is equal to the plan’s approved standardized bid amount, adjusted by
the plan beneficiaries’ health status and risk, and reduced by the base beneficiary
premium for the plan.
Plan Bid. As noted earlier, plans are required to submit, not later than the first
Monday in June, a bid for the following year. The bid is to include an estimate of its
average monthly revenue requirements to provide qualified prescription drug benefits
(including any supplemental coverage) for a Part D eligible individual with a national
average risk profile. The bid includes costs (including administrative costs and
return on investment/profit) for which the plan is responsible. The bid is to exclude
costs paid by enrollees, payments expected to be made by CMS for reinsurance and
any other costs for which the sponsor is not responsible. CMS reviews the bids,
negotiates with plans, and approves the bids.
National Average Monthly Bid Amount. CMS then computes a national
average monthly bid amount from approved bids. This is to be a weighted average
of the standardized bid amount for each prescription drug plan. For PDPs, the
standardized bid amount is that portion of a plan’s bid attributable to basic
prescription drug coverage; for MA-PDs, it is the portion of the accepted bid that is
attributable to basic prescription drug coverage.
In calculating the nationwide average, CMS is to weight each plan’s bid by its
share of total enrollment. In 2006, the first year of Part D, there was no prior PDP
enrollment information; therefore each PDP plan was weighted equally (though MA-
PD bids were enrollment weighted if they had 2005 MA enrollment). Rather than
immediately moving to full enrollment weighting in 2007, CMS provided for a
phase-in under its demonstration authority (“Medicare Demonstration to Limit
Annual Changes in Part D Premiums Due to Beneficiary Choice of Low-Cost
Plans”). In 2007, 80% of the national monthly bid amount was based on the 2006
averaging methodology and 20% on the enrollment weighted average. In 2008, 40%
is based on the 2006 averaging methodology and 60% on the enrollment weighted
average. CMS chose this phase-in approach because with 2006 enrollment heavily
weighted toward lower cost plans, immediate use of the enrollment weighting

methodology would have resulted in lower direct subsidies, and by extension higher
beneficiary premiums.
The calculation of the national average monthly bid amount does not include
bids submitted by MSA plans, MA private fee-for-service plans, specialized MA
plans for special needs populations, PACE programs and plans established through
reasonable cost contracts.
The national average monthly bid amount for 2007 was $80.43; it is $80.52 in


Payment to Plans. Individual plan bids are adjusted for expected case mix.
This adjustment takes into account variation in costs among plans for basic coverage
based on the differences in actuarial risk of different enrollees being served. Per
capita monthly direct subsidy payments equal this adjusted amount minus the base
beneficiary premium. (See discussion below for how beneficiary premiums are
Reinsurance Subsidies
As noted in the discussion of prescription drug benefits, Part D plans pay all
drug costs above the catastrophic threshold ($5,726.25 in 2008) except for nominal
beneficiary cost-sharing.
Medicare subsidizes 80% of the plans’ costs for catastrophic coverage. CMS
makes reinsurance subsidy payments to plans in behalf of those individuals who have
actually incurred such costs. Payments are made on a monthly basis during the year
based on either estimated or incurred costs, with final reconciliation made after the
close of the year.
In the case of private fee-for-service plans offering drug coverage, CMS
determines reinsurance payments by basing the amount on CMS’ estimate of the
amount that would be paid if it were a coordinated care plan and takes into account
average payments for populations of similar risk in such plans.
Risk Corridor Payments
MMA established risk corridors which were intended to limit a plan’s overall
risks or profits under the new program. By using risk corridors, Medicare is able to
limit a plan’s potential losses by financing some of the higher than expected costs.
Similarly, Medicare is able to limit a plan’s potential gains by recouping excessive
costs. Over time, as more experience is gained with the program, the risk corridors
are widened, thereby increasing the insurance risk borne by the plans. The risk
corridor provisions do not apply to private fee-for-service plans.
Risk corridors are defined as specified percentages above and below a target
amount. The target amount is defined as total payments paid to the plan, taking into
account the amount paid by the CMS and enrollees, based on the standardized bid
amount, risk adjusted, and reduced by total administrative expenses assumed in the

bid. No payment adjustments are made if adjusted allowable costs for the plan are at
least equal to the first threshold lower limit of the first risk corridor but not greater
than the first threshold upper limit of the risk corridor for the year (i.e., if the plans
are within the first risk corridor). A portion of any plan spending above or below
these levels is subject to risk adjustment. If adjusted allowable costs exceed the first
threshold upper limit, then payments are increased. If adjusted allowable costs are
below the first threshold lower limit, then payments are reduced. Adjusted allowable
costs are reduced by reinsurance and subsidy payments. (See Table 3.)
During 2006 and 2007, plans were at full risk for adjusted allowable risk
corridor costs between 2.5% below and 2.5% above the target. Plans with adjusted
allowable costs above this level received increased payments. If their costs were
between 2.5% of the target (first threshold upper limit) and 5% of the target (second
threshold upper limit), they were at risk for 25% of the increased amount; that is,
their payments equal 75% of adjusted allowable costs for spending in this range. If
their costs were above 5% of the target they were at risk for 25% of the costs between
the first and second threshold upper limits and 20% of the costs above that amount.
That is, their payments equal 80% of the adjusted allowable costs over the second
threshold upper limit. Conversely, if plans fell below the target, they shared the
savings with the government. They have to refund 75% of the savings if costs fell
between 2.5% and 5% below the target level, and 80% of any amounts below 5% of
the target.
For 2008-2011, the risk corridors are modified. Plans are at full risk for drug
spending between 5.0% below and 5% above the target level. Plans are at risk for

50% of spending exceeding 5.0% but below 10.0% of the target level. Additionally,

they are at risk for 20% of any spending exceeding 10% of the target level.
Conversely, if plans fall below the target, they have to refund 50% of the savings if
costs fall between 5% and 10% below the target level and 80% of any amounts below
10% of the target. Beginning in 2012, CMS may increase the target levels above the

5% and 10% levels.

Table 3. Plan Liability Under Risk Corridor Provisions
Plan Liability for Costs Above
Risk Corridorand Below Target
Costs below 95% of the target80% refund
Costs between 95% and 97.5% of the target75% refund
Costs between 97.5% and 102.5% of the targetFull risk
Costs between 102.5% and 105% of the targetRisk for 25% of amount
Costs over 105% of the target Risk for 20% of amount
Costs below 90% of the target80% refund
Costs between 90% and 95% of the target50% refund
Costs between 95% and 105 % of the targetFull risk
Costs between 105 % and 110 % of the targetRisk for 50% of amount
Costs over 110% of the target Risk for 20% of amount

Low-Income Subsidy (LIS) Payments
CMS makes additional payments to plans on behalf of persons entitled to low
income subsidies. These payments are for premium and cost-sharing charges which
would otherwise be paid by the beneficiary except for the fact that they are entitled
to subsidies. (See “Low-Income Individuals” section below).
CMS makes prospective payments to plans based on their bids. Following the
close of the calendar year, CMS makes retroactive adjustments to reflect actual plan
experience. Prospective payments for reinsurance and low income subsidy payments
are compared to actual incurred costs and other related data, and appropriate
adjustments are made to the plan payments. The calculation is based on costs actually
incurred and must be net of any direct or indirect remuneration (including discounts,
chargebacks or rebates). Direct subsidy payments to the plans are adjusted to reflect
updated data about beneficiary health status and enrollment. In addition, any
necessary adjustments are made to reflect risk sharing under the risk corridor
In October 2007, CMS announced that it would collect $4 billion from Part D
drug plan sponsors due to lower-than-expected drug costs in 2006. It stated that it
would be collecting these funds from plans due to the fact that actual drug costs for
almost all Part D plans were below expected levels in their 2006 bids. It cited several
factors leading to lower spending, including the fact that 2006 marked the first time
that plans were bidding on the new Part D program and the fact there were higher
levels of generic drug utilization in Part D than had been anticipated. It further noted
that plans submitted their bids for the 2006 contracting year in June 2005. The 2006
bids were therefore somewhat uncertain predictions of what would actually happen
when the drug benefit began in 2006. CMS expects that as experience with Part D
grows, plan bid submissions will more closely reflect actual costs. It stated that the
2007 bid submissions were significantly lower than those submitted in 2006 and were
a reflection of the actual 2006 Part D drug program experience. Therefore, CMS
anticipates that amounts collected from or paid to plans in future years as a result of
final reconciliation and risk adjustment will be lower than that for the 2006 plan8
Beneficiary Premiums
Beneficiaries pay monthly premiums for Part D coverage. Payments vary by the
plan selected. On average, beneficiary premiums are to represent roughly 25.5% of
the cost of basic coverage.

8 CMS, Medicare Expects to Recover $4 Billion from Part D Plans Following 2006 Plan
Reconciliation, Press Release, October 5, 2007.

The monthly premium is uniform for all persons enrolled in the plan (except for
those receiving low-income subsidies or those subject to a late enrollment penalty).
It equals the base beneficiary premium, as adjusted to reflect the difference between
the plan’s standardized bid amount and the nationwide average bid.
Base Beneficiary Premium. The base beneficiary premium for a Part D
plan equals the product of the beneficiary premium percentage and the national
average monthly bid amount (see calculation under “Direct Subsidies,” above). The
beneficiary premium percentage is equal to 25.5%, divided by 100% minus a
percentage equal to total reinsurance payments divided by the sum of such
reinsurance payments and total payments the Secretary estimates will be paid to
prescription drug plans in a year that are attributable to the standardized bid amount
(taking into account amounts paid by CMS and enrollees).
The base beneficiary monthly premium was $27.35 in 2007 and is $27.93 in


Adjustments. Once the base beneficiary premium is calculated, it is adjusted
up or down, as appropriate, to reflect any difference between the plan’s standardized
bid amount and the nationwide average bid amount. Thus, beneficiaries in plans with
higher costs for standard coverage face higher than average premiums for such
coverage, while enrollees in lower cost plans pay lower than average premiums for
such coverage.
Premiums are further increased to reflect any supplemental benefits or any late
enrollment penalty and decreased if the individual is entitled to a low-income
subsidy. Additionally, enrollees in MA-PD plans may see a decrease if plans use
rebates, based on Parts A and B benefit costs, to buy down the Part D premium.
Program Financing
Medicare Part D is financed through a combination of Federal general revenues,
beneficiary premiums, and state contributions. Revenues are credited to a separate
account, the Medicare Prescription Drug Account, in the Medicare Part B trust fund.
General Revenues and Beneficiary Premiums
General Revenues. General revenues are transferred from the Treasury to
the Part D Account on an as-needed basis to support the portion of program
expenditures funded by federal subsidies.
Beneficiary Premiums. Beneficiaries may have their premiums deducted
from their social security or other federal benefit payments; these are then forwarded
to Part D plans on their behalf. Alternatively, they can pay their premiums directly
to the Part D plan. Both types of payments are shown in the statement of the Part D
account in the annual Medicare trustees report.

State Contributions
Effective January 1, 2006, states are no longer providing coverage for Part D
drugs for their dual eligible population under Medicaid. They could be expected to
see a reduction in their Medicaid spending as a result of this transfer. However,
MMA contained a provision (labeled by some as the “clawback provision”) that
requires states to continue to assume a portion of these costs. The formula specified
in law is based on a proxy for what states would otherwise be spending on drugs for
the dual eligibles in the absence of MMA. In 2006, states assumed 90% of these
costs; over the next nine years the states’ contribution phases-down to 75% in 2015.
Formula for State Contribution Amount. States are required to pay the
Secretary each month an amount equal to the product of the following three factors:
!The projected monthly per capita drug payment which is product of:
base year (2003) state Medicaid per capita expenditures for covered
Part D drugs for full benefit dual eligible persons (reduced by any
rebates received) and the current state matching rate. This amount is
increased each year (beginning in 2004) by the applicable growth
factor; beginning in 2007 this is the per capita percentage increase
in Part D expenditures.
!Total number of full benefit dual eligibles for the state for the
!The applicable percentage factor (90% in 2006, 88 1/3% in 2007,
86 2/3 % in 2008, decreased each year by 1 2/3 percentage points
until 2015 and later when it is 75%).
Impact on States. A review for the National Association of State Medicaid
Directors found that most states report that the combination of the transition of dual
eligibles to Part D coupled with state clawback payments have not resulted in
significant state savings. Only 10 states reported paying less in 2007 for dual eligibles
than when the state provided drugs directly to this population. Further, most states
have not implemented wrap-around coverage for Part D cost-sharing amounts for9
low-income subsidy beneficiaries.
Part D Account Data
MMA created a separate Part D account within the Medicare Part B trust fund.
The 2007 Medicare Trustees Report stated that in calendar year 2006, total Part D
revenues were $48.1 billion. This included $3.5 billion in beneficiary premiums,
$39.1 billion in government contributions, $5.5 billion in state contributions and $13
million interest on investments. Total Part D benefits (including employer subsidy
payments) were $47.3 billion with an additional $0.3 billion for federal
administrative expenses. (See Table 4.)

9 National Association of State Medicaid Directors, 2007 State Perspectives - Medicaid
Pharmacy Policies and Practices, November 2007.

The trustees reported that the 2006 expenditures were less than had been
predicted in the 2005 and 2006 trustees report. They attributed this change to several
factors including a slowdown in the growth in prescription drug spending; the fact
that savings from retail discounts, manufacturer rebates, and utilization management
were achieved in 2006 rather than over several years as had been previously assumed;
and the fact that significantly fewer beneficiaries joined the program than initially
anticipated and that some who joined enrolled after the beginning of the year.
Table 4. Statement of Operations of Part D Account,
Calendar Year 2007
(in millions)
Total Assets at Beginning of Year$687.0
Revenues $52,118.3
Premiums from Enrollees3,775.1
Premiums deducted from social security checks1,628.1
Premiums paid directly to plans2,147.0
Government Contributions41,349.4
Prescription drug benefits40,332.6
Administrative expenses1,016.8
Payments from States6,977.5
Interest on Investments16.4
Expenditures $52,213.3
Benefit Payments51,208.8
Federal Administrative Expenses1,004.5
Assets of fund at End of Year$592.1
Source: Table V.F3., 2008 Annual Report of the Boards of Trustees of the Federal Hospital Insurance
and Federal Supplementary Insurance Trust Funds.
Note: Totals may not add due to rounding.
Employer Subsidies
MMA included provisions designed to encourage employers to continue to offer
drug benefits to their Medicare-eligible retirees. It provided a subsidy for a portion
of retiree drug costs and exempted these subsidy payments from federal taxes.
Qualified Plans. CMS makes the subsidy payments to employers or unions
offering qualified retiree prescription drug coverage. Qualified plans are defined as
those offering drug benefits at least actuarially equivalent to “standard coverage.”

Qualifying Covered Retiree. Subsidy payments are made on behalf of an
individual covered under the retiree health plan who is entitled to enroll under a PDP
or MA-PD plan but elects not to. Subsidies are linked to an individual’s status as a
retired participant in the qualified group health plan or as the Medicare-enrolled
spouse or dependent of the retired participant. Thus, a sponsor offering qualified
coverage for dependants will be able to claim coverage for a Part D eligible
dependent of a retired participant, even if the retiree is under age 65 and not Part D
eligible. However, the sponsor will not be able to claim coverage for a Part D eligible
dependent of an active employee.
An individual retiree can elect to enroll in Part D, even if the former employer
has elected to take the subsidy. However, this decision may have consequences. It is
possible the individual could lose employer-sponsored drug coverage or both
employer-sponsored medical and drug coverage. Further, any payments made by the
employer plan would not count toward meeting the true out-of-pocket (TROOP)
requirements (See earlier discussion of Part D benefits.)
Subsidy Benefits
Subsidy payments equal 28% of a retiree’s gross drug costs between specified
levels ($275-$5,600 in 2008). The dollar amounts are adjusted annually by the
percentage increase in Medicare per capita prescription drug costs.) Subsidy
payments to employers and unions are not subject to federal tax.
Employers or unions may select an alternative option (instead of taking the
subsidy) with respect to Part D. They may elect to pay a portion of the Part D
premiums. They may also elect to provide enhanced coverage that may be provided
through supplementary or “wrap around” benefits. This approach may have some
financial consequences for the employer or union since third party payments do not
count toward TROOP. Thus, if an employer chooses to pay some of the Part D
cost-sharing on behalf of its retirees, this would have the effect of delaying the point
at which the Part D catastrophic coverage would begin. The employer could therefore
end up paying some costs which would otherwise be covered under the catastrophic
portion of the Part D benefit.
Employers or unions may also contract with a PDP or MA-PD to offer the
coverage. Finally, they may become a Part D plan sponsor themselves for their
Subsidy Data
Employer Actions. A December 2006 survey by Kaiser Family Foundation
and Hewitt10 noted that its survey of 302 large private-sector firms with 1,000 or
more employees showed that the majority of plan sponsors (78%) would seek the

10 The Henry J. Kaiser Family Foundation and Hewitt, Retiree Health Benefits Examined -
Findings from the Kaiser/Hewitt 2006 Survey on Retiree Health Benefits, December 2006.

subsidy in 2007 (compared with 82% in 2006). Six percent said they were likely to
supplement the benefit; another 6% said they intended to contract with a PDP or MA-
PD to offer additional coverage, and 2% said they intended to become a PDP. Eight
percent said they were likely to discontinue prescription drug coverage.
Retirees Covered. In January 2008, the Secretary of HHS announced that
6.7 million persons were in retiree plans receiving a subsidy. An estimated 1.5
million were in plans with coverage at least as good as Medicare’s but without a
subsidy. Further, an estimated 2.0 million beneficiaries were in TRICARE and the
Federal Employees Health Benefits program (FEHB); the federal government elected
not to take the employer subsidy for these individuals on the grounds that it would
be merely subsidizing itself.
In January 2008, Part D began its third year of operation. While early start-up
issues have generally been resolved, some issues remain. The following highlights
a few of these.
Low-Income Individuals
A major focus of Part D is the enhanced coverage provided to low-income
individuals through the low-income subsidy (LIS) program. Despite extensive
federal, state, and local outreach efforts, not all persons potentially eligible have
enrolled in the program. As of January 2008, CMS estimated that 2.6 million
persons eligible for LIS had neither signed up for Part D nor had coverage through
another source. It is not immediately clear why some individuals have failed to
enroll, though several factors, including a lack of program awareness and the nature
of the application process itself play a role. The assets limitations are viewed by
some as being too low, thereby precluding otherwise eligible persons from gaining
A second issue of concern to the low-income population is the large number of
persons required to change plans each year because the premium for their current
plan no longer falls below the low-income subsidy level. Some observers have
suggested that when making the low-income subsidy calculation (see earlier
discussion) the MA-PD enrollment should be removed from the calculation. Their
inclusion in the calculation has the effect of lowering the benchmark, thereby forcing
a higher number of persons enrolled in PDPs to change plans if they are to remain in
zero premium plans.
High-Income Enrollees
On average, beneficiary premiums account for 25.5% of expected total Part D
costs for basic coverage; federal general revenues account for most of the remaining
costs. Some persons have suggested that higher income persons should pay a higher
percentage of their costs. Except for persons entitled to low-income subsidies, all
persons selecting a particular Part D plan pay the same monthly premium amount.

The President’s FY2009 Budget proposal (together with the subsequent
legislative proposal submitted in response to the Medicare trigger requirement)11
would establish income-related premiums for Part D. The percentage increases
would be tied to the benchmark premium amount for basic coverage. The add-on
amount (also referred to as the subsidy reduction) would be the same regardless of
the particular plan selected by the beneficiary. The total amount that a beneficiary
would pay in Part D premiums would be the add-on amount (which would be the
same nationwide) plus the premium for the particular plan selected (which would
vary by plan).
Under the proposal, the income thresholds would be the same as those currently
established for income-relating Part B premiums and therefore affect the same
people. Further, as proposed for Part B (in the FY2009 Budget, but not included in
the proposed trigger legislation), the income thresholds would not be updated in
future years. Consequently, each year the number of beneficiaries subject to the
higher premium would increase.
The Administration estimated that this provision would save $350 million in
FY2009 and $3.18 billion over the five-year budget period. An estimate of the
number of beneficiaries who would be affected by higher premiums was not
provided. At the time the 2008 Part B premiums were announced in October 2007,
CMS estimated that about 5% of beneficiaries would be affected by the income-
related premium increase in 2008. It is thought that a slightly lower percentage
would be affected by the Part D proposal; this is because some high-income
Medicare beneficiaries have alternative sources of prescription drug coverage (such
as through a former employer) and therefore do not enroll in Part D.
Some observers (who had also opposed income-relating the Part B premium)
suggest that this approach would further move Medicare from its entitlement nature.
Beneficiary Experience
When MMA was enacted, few observers expected beneficiaries to have a choice
among so many drug plans. Some argue that the large number of plans available to
beneficiaries may complicate their choices. Given that enrollment tends to be heavily
concentrated in plans offered by a limited number of sponsors, it is likely that the
number of available options will decline over time.
Beneficiaries have tended to enroll in plans with low premiums, and zero or low
deductibles. However, in the absence of concrete data, it is not clear whether this is
always the best choice for the beneficiary.
Most Part D enrollees did not change plan enrollment from 2006 to 2007. As
noted in the “key facts section” below, premiums for the most popular plans rose in

2008; plan sponsors may also have made other changes including changing

11 See CRS Report RL34407, The President’s Proposed Legislative Response to the
Medicare Funding Warning, by Hinda Chaikind, Jim Hahn, Jennifer O’Sullivan, and Henry

copayments or utilization controls for particular drugs. Despite the fact that plans are
required to notify beneficiaries of changes, it is not clear how many are aware of the
year-to-year modifications. CMS reports 3.1 million Part D enrollees or about 12%
of the total changed plans from 2007 to 2008. Of those, 2.1 million were LIS
beneficiaries who were reassigned so they would not have to pay a premium. About

6% of non-LIS beneficiaries made a change.

At this point, information is not available to assess the impact of Part D over
time on changes in drug utilization patterns and out-of-pocket costs.
Drug Prices
Noninterference Clause. Some observers have recommended striking the
noninterference provision in the law. They claim that permitting CMS to be involved
in negotiating drug prices would result in additional savings. Other observers state
that plans are already achieving price reductions. The Congressional Budget Office
has stated that removal of the noninterference clause would be unlikely to achieve
significant additional savings, particularly if CMS were not allowed to establish a
formulary or use other tools to reduce prices.12
Data. A considerable amount of plan-specific data is available on the WEB.
However, certain information (for example, information dealing with price trends or
price concessions such as rebates) is proprietary. The gaps in data have made it
difficult to provide a complete picture of the program’s impact.
This issue has been addressed by both CMS and MIPPA. On May 27, 2008, the
CMS issued a final rule that would allow the Secretary to use the claims information
that is now being collected for Part D payment purposes for other research, analysis,
reporting, and public health functions. Some organizations that submitted comments
on the rule questioned the CMS’s authority to use the Part D data for other than
payment purposes. MIPPA grants CMS authority to use and share data from Part D.
As a result of this modification, information provided to the Secretary in the
administration of Part D may be used for the purposes of improving public health
through research on the utilization, safety, effectiveness, quality, and efficiency of
health care services (as the Secretary determines appropriate), and shall be made
available to congressional support agencies (in accordance with their obligations to
support Congress as set out in their authorizing statutes) for the purposes of
conducting congressional oversight, monitoring, making recommendations, and
analysis of the Medicare program.
Plans have not been not required to process claims within a specified time
period. Thirty days has been considered the standard, though some pharmacies,
particularly those located in rural areas allege that some claims have taken up to 45
days. They stated that claims should be paid within 14 days. Some observers stated

12 Congressional Budget Office, S. 3, Medicare Prescription Drug Price Negotiation Act of

2007, cost estimate, April 16, 2007.

that some pharmacies, particularly small pharmacies, are unable to handle the lag and
are being driven out of business. As noted earlier, MIPPA addresses these concerns
by requiring prompt payment of pharmacy claims. Beginning in 2010, clean claims
submitted electronically must be paid within 14 days and other clean claims paid
within 30 days.
Key Part D Facts
Enrollment by State. The annual open enrollment period for 2008 closed
December 31, 2007. As of January 2008, approximately 25.4 million Medicare
beneficiaries were enrolled in PDP and MA-PD plans. An additional 6.7 million
beneficiaries had prescription drug coverage through a former employer that is
receiving a federal subsidy for a portion of such coverage. Approximately 7.5
million beneficiaries had drug coverage through another source including persons
with Federal Employees Health Benefits (FEHB) coverage and TRICARE coverage.
An estimated 4.6 million or 10% of Medicare beneficiaries had no drug coverage.
Table 5 shows the nationwide distribution of Medicare enrollees by the source of
drug coverage.
Table 5. Total Number of Medicare Beneficiaries with Drug
Coverage, as of January 2008
(in millions)
Medicare Beneficiaries Eligible for Part D44.20
Medicare Part D25.40
Stand Alone PDP17.39
MA with Drug Coverage7.63
Other Plan Types0.38
Medicare Retiree Drug Subsidy (RDS)6.66
Other Drug Coverage7.53
FEHB Retiree Coverage1.05
Veterans Affairs Coverage1.59
Active Workers with Medicare Secondary Payer1.20
Multiple Sources of Creditable Coverage0.69
Retiree Coverage (not RDS)a1.54
Medigap and Other Individual Insurancea0.21
State Pharmaceutical Assistance Programsa0.02
Indian Health Service Coveragea0.03
Other Sourcesa0.30
Total Beneficiaries with Drug Coverage39.59
Source: CMS, January 2008. [
Note: An estimated 4.6 million persons or 10% of beneficiaries had no drug coverage.

a. Information only available at the national level.
Table 6 shows the January 2008 state-by-state distribution of the 37.5 million
persons (shown in Table 5) with drug coverage through Part D, a former employer
receiving the employer subsidy, or other coverage through FEHB, TRICARE, VA or
as an active worker. State-by-state breakdowns are not available for 2.1 million
persons receiving certain other types of coverage (as noted in Table 5).

Table 6. State Enrollment in Prescription Drug Plans
(as of January 2008)
St and- Al one Medicare Medicare
Prescription DrugaAdvantage withbRetiree DrugOther Prescriptionc
StatePart D EligiblePlanPrescription DrugsSubsidyDrug CoverageTotal with Coverage
a 794,170 329,711 116,564 126,876 118,076 691,227
a 57,827 22,914 254 14,421 9,740 47,329
ona 848,034 217,315 290,550 100,910 119,399 728,174
a nsas 499,571 255,092 43,026 50,213 78,021 426,352
4,407,441 1,585,286 1,420,472 427,935 411,197 3,844,890
564,253 165,071 161,290 75,569 83,833 485,763
iki/CRS-RL34280 540,170 225,473 63,980 111,588 58,386 459,427
g/w 137,191 64,772 2,717 33,301 16,959 117,749
leakbia 74,239 27,858 5,927 3,952 21,506 59,243
3,151,715 1,022,527 796,646 450,681 442,241 2,712,095
://wikii a 1,123,763 554,151 102,623 125,930 166,875 949,579
190,515 62,693 60,579 7,739 31,409 162,420
208,283 85,041 31,700 23,232 32,629 172,602
1,752,798 853,431 110,729 337,611 175,214 1,476,985
947,458 444,989 49,484 194,281 105,444 794,198
501,508 291,116 37,513 40,178 63,040 431,847
nsas 412,783 220,467 27,639 32,346 64,387 344,839
ntucky 715,037 343,395 52,482 127,600 82,469 605,946
644,114 277,145 109,435 87,347 72,691 546,618
248,248 135,976 6,972 21,977 34,305 199,230
land 730,525 270,136 43,944 142,301 146,730 603,111

1,003,321 391,598 168,292 185,272 103,268 848,430

St and- Al one Medicare Medicare
Prescription DrugaAdvantage withbRetiree DrugOther Prescriptionc
StatePart D EligiblePlanPrescription DrugsSubsidyDrug CoverageTotal with Coverage
an 1,551,570 505,869 252,875 441,554 112,230 1,312,528
735,812 299,812 188,510 76,182 81,211 645,715
471,110 283,253 18,408 29,390 71,045 402,096
952,110 423,524 150,867 118,545 122,205 815,141
157,265 74,953 14,013 14,805 26,288 130,059
a 268,451 151,994 20,601 24,212 39,949 236,756
a da 321,668 82,341 95,315 40,447 52,437 270,540
pshire 200,348 84,879 4,279 35,655 30,782 155,595
e rsey 1,266,002 542,470 105,541 280,248 131,319 1,059,578
g/w 287,395 115,172 60,113 23,907 44,874 244,066
s.or 2,860,851 988,173 620,818 544,471 249,742 2,403,204
leak 1,368,169 635,716 161,955 212,726 166,444 1,176,841
://wikiota 105,405 69,800 4,142 4,707 15,419 94,068
http 1,812,939 589,569 300,878 508,943 167,722 1,567,112
lahoma 568,388 271,304 59,212 51,753 93,456 475,725
on 571,135 185,639 173,284 46,409 75,393 480,725
l va nia 2,195,478 701,874 618,352 310,740 242,701 1,873,667
s land 175,877 58,471 57,165 12,372 23,717 151,725
702,584 309,484 64,168 118,745 108,935 601,332
ota 129,969 75,633 9,904 6,565 23,221 115,323
980,209 449,574 164,442 112,748 120,593 847,357
2,735,037 1,136,370 386,680 423,741 389,432 2,336,223
256,511 90,721 46,262 31,345 46,172 214,500
rmont 102,652 55,151 678 18,251 13,408 87,488

St and- Al one Medicare Medicare
Prescription DrugaAdvantage withbRetiree DrugOther Prescriptionc
StatePart D EligiblePlanPrescription DrugsSubsidyDrug CoverageTotal with Coverage
inia 1,055,919 453,431 78,413 119,199 222,513 873,556
ton 881,153 339,831 114,449 117,497 133,373 705,150
i rginia 368,891 165,538 54,021 55,886 43,931 319,376
860,935 315,760 114,550 135,683 92,867 658,860
oming 74,689 38,090 2,370 7,735 13,600 61,795
d 627,358 51,825 365,161 15,211 59,109 491,306
44,198,844 17,392,378 8,010,244 6,660,930 5,451,907 37,515,459
iki/CRS-RL34280 CMS Management Information Integrated Repository (MIIR) as of January 18, 2008, at [].
s.orcludes 5.3 million beneficiaries who were auto-enrolled and 2.6 million additional beneficiaries receiving the low-income subsidy.
leakcludes 1.3 million beneficiaries who were auto-enrolled and .15 million additional beneficiaries receiving the low-income subsidy.
cludes FEHB, TRICARE, VA, and Active Workers.
://wikier includes beneficiaries in the territories and whose address information is being updated.


Table 7 shows the distribution, as of January 2008, of the approximately 12.5
million enrollees who are eligible for the low-income subsidy (LIS). An estimated
9.38 million persons are receiving the assistance. Another 0.5 million have coverage
through another source. An estimated 2.6 million persons are thought to be eligible
for LIS, but were not enrolled. Table 8 shows the state-by-state distribution of the
approximately 9.4 million enrollees receiving LIS.
Table 7. LIS-Eligible Medicare Beneficiaries With Drug Coverage
(as of January 2008)
Total LIS-Eligible
Description ( millio ns)
Total Beneficiaries Eligible for Low-Income Subsidy12.50
Less: Drug Coverage from Medicare9.38
CMS-Deemed-Full Dual Eligibles6.18
CMS Deemed-MSP and SSI Recipients1.67
LIS Approved and Not Deemed1.53
Less: Drug Coverage from Former Employer (RDS)0.04
Less: Additional Sources of Creditable Drug Coverage0.42
Veterans Affairs (VA) Coverage 0.39
Indian Health Service Coverage0.03
Less: Anticipated Facilitated Enrollments0.06
TOTAL Remaining LIS-Eligible Beneficiaries2.60
Source: []
(CMS Office of the Actuary (eligible estimate based on updated SIPP survey data); CMS Management
Information Integrated Repository (MIIR) (as of Janaury 18, 2008); Department of Veterans Affairs;
Indian Health Service)
Notes: Remaining LIS-eligible category may include some LIS-eligible beneficiaries who have not
yet regained their deemed status or who have been approved for the LIS, but are still receiving drug
coverage through Medicare Part D. This category may also include some LIS-eligible beneficiaries
who have not yet applied for the LIS.

Table 8. LIS-Eligible Medicare Beneficiaries with Medicare Part
D Coverage, by State
(as of January 2008)
CMS-DeemedLIS Approved
Full DualCMS-Deemed MSPand Not
State Eligiblesand SSI RecipientsDeemedTOTAL LIS
Alabama 88,887 95,505 39,481 223,873
Alaska 12,115 393 1,615 14,123
Arizona 104,190 28,410 18,459 151,059
Arkansas 63,857 40,854 27,519 132,230
California 1 ,045,340 20,612 85,650 1,151,602
Co lo rado 52,714 18,342 20,249 91,305
Co nnecticut 67,189 21,265 11,369 99,823
Delaware 10,109 10,427 3,596 24,132
District Of
Co lumb ia 15,664 2,427 2,457 20,548
Florid a 298,101 199,111 91,344 588,556
Georgia 138,611 93,760 58,015 290,386
Hawaii 25,738 2,701 6,642 35,081
Idaho 19,510 7,807 7,587 34,904
Illinois 242,841 34,485 60,531 337,857
Indiana 86,108 45,372 38,321 169,801
Iowa 57,227 11,125 14,077 82,429
Kansas 38,704 13,569 15,195 67,468
Kentucky 146,711 5,202 40,845 192,758
Lo uisiana 95,327 61,170 30,720 187,217
Maine 47,817 30,967 2,728 81,512
Maryland 61,931 30,240 29,533 121,704
Massachusetts 207,019 14,517 21,739 243,275
Michigan 195,288 24,847 48,672 268,807
Minneso ta 97,753 12,525 15,370 125,648
Mississippi 74,379 60,703 24,917 159,999
Misso uri 134,988 22,725 37,210 194,923
Montana 13,200 5,575 6,435 25,210
Nebraska 32,528 3,330 7,890 43,748
Nevada 20,407 15,398 11,053 46,858
New Hampshire18,4636,2166,82231,501
New Jersey152,02625,35645,516222,898
New Mexico34,82120,55611,74567,122
New York558,05872,98790,680721,725
North Carolina219,95549,39769,914339,266
North Dakota9,9013,3924,20217,495
Ohio 184,301 71,410 58,494 314,205
Oklaho ma 80,796 17,003 24,383 122,182
Oregon 54,126 24,704 16,477 95,307
Pennsylvania 277,684 47,558 69,214 394,456

CMS-DeemedLIS Approved
Full DualCMS-Deemed MSPand Not
State Eligiblesand SSI RecipientsDeemedTOTAL LIS
Rhode Island30,0364,5336,51241,081
South Carolina114,14916,58039,249169,978
South Dakota11,9265,7934,21621,935
T ennessee 186,085 60,311 38,273 284,669
T exas 340,961 187,090 152,521 680,572
Utah 23,722 3,184 6,766 33,672
Vermont 17,403 6,668 1,639 25,710
Virginia 104,805 46,348 48,567 199,720
Washington 101,462 26,578 21,095 149,135
West Virginia42,37225,62319,10987,104
Wisconsin 111,919 11,921 14,463 138,303
Wyoming 5 ,825 2,702 2,354 10,881
Othe r a 5,004 2,638 1,771 9,413
To tal 6 ,180,053 1,671,912 1,533,201 9,385,166
Source: []
(CMS Management Information Integrated Repository (MIIR), as of January 18, 2008).
a. Includes information from the territories and for beneficiaries whose address information is being
Plan Enrollment.13 Part D enrollment is highly concentrated. In 2007, two
organizations, UHC-PacifiCare and Humana, captured more than 40% of all Part D
enrollees. These two organizations had the largest number and share of Part D
enrollees in both stand-alone PDPs and MA-PDs. The top four organizations
(including Wellpoint, Inc. and Member Health Inc.) captured 54% of enrollment.
The top 10 organizations captured 72%. All of the top 10 organizations offered
multiple plans, and all but Kaiser Permanente offered both stand alone PDP and MA-
PD plans.
In 2007, 13% of Part D enrollees were in AARP’s Medicare Rx Plan (offered
by UHC-PacifiCare). This figure actually represented a decline from 2006, possibly
because some persons shifted to a lower premium AARP offering, the AARP
Medicare Savers Plan, which was also one of the top 10 plans, in terms of
Humana sponsored three of the top 10 plans in 2007. The two PDP offerings,
in second and third place, captured 9% and 5% of the market. Enrollment in its
private fee-for-service plan increased significantly from 2006, because of a dramatic
increase in market offerings.

13 The Henry J.Kaiser Family Foundation, Overview of Medicare Part D Organizations,
Plans and Benefits by Enrollment in 2006 and 2007. November 2007.

Plan Features.14 In 2007, only 14% of enrollees were in plans offering the
defined standard Part D benefit. Half (51%) were enrolled in plans that offered
actuarially equivalent benefits, while 35% were in plans that provided an enhanced
benefit. Over three-quarters (79%) of enrollees in MA-PD plans had enhanced
benefits, while only 21% of PDP enrollees had such coverage. Over half of PDP
enrollees were in plans with no deductible, while almost all of MA-PD enrollees had
no deductible.
In 2007, 85% of enrollees were in plans with no gap coverage; 12% had
coverage for some generics in the gap, and 3% had coverage for both brand name and
generic drugs in the gap. Eight of the top 10 plans offering both generic and brand
coverage in the gap were MA-PD plans. One PDP (SierraRxPlus PDP) offering full
gap coverage in 2007 is not offering such coverage in 2008.
It should be noted that low-income enrollees receiving LIS assistance have
partial or full subsidized coverage in the gap. This group represents close to 40% of
enrollees. When both those with LIS assistance and some gap coverage are taken
into account, approximately half of enrollees (49%) had no gap coverage in 2007.
2008 Plan Overview
Table 9 provides an overview of PDP plan offerings for 2008. The number of
plan offerings ranges from 47 in Alaska to 63 in West Virginia and Pennsylvania.
The number of plans with premiums below the low income benchmark or with gap
coverage is significantly lower.
Table 9 shows a wide range in premiums for PDP plans. Plans with higher
premiums typically offer broader coverage. It should be noted that while essentially
the same plan may be offered in a number of PDP regions (or nationwide) the
premiums for the plan are not likely to be the same in all PDP regions.
When comparing plans, it is important to review a number of factors including
the breadth of the formulary, the tier particular drugs are placed on, the cost sharing
amounts applicable by tier, utilization tools, and the extent of gap coverage.
Premiums for 2008 plans with gap coverage generally are twice that for plans without
gap coverage.

14 Ibid.

Table 9. Stand-Alone PDPs: Characteristics, by State, 2008
NumberMonthly Premium
Below Low-
Number ofIncomeSome Gapa
St a t e Plans B e nchma r k Coverage Lo w H ig h
Alabama 5 3 1 5 1 5 $18.00 $98.00
Alaska 47 15 14 $14.70 $99.50
Arizona 5 1 7 15 $9.80 $99.50
Arkansas 55 18 16. $13.00 $98.00
California 5 6 9 15 $14.30 $102.70
Co lo rado 55 12 16 $15.60 $99.50
Co nnecticut 51 14 15 $14.60 $99.50
Delaware 52 18 15 $16.10 $97.50
District of
Co lumb ia 52 18 15 $16.10 $97.50
Florid a 5 8 8 18 $12.10 $97.50
Georgia 5 4 1 8 1 5 $16.60 $97.50
Hawaii 49 10 15 $13.70 $99.50
Idaho 5 4 1 4 1 5 $17.10 $99.50
Illinois 5 3 1 9 1 5 $17.70 $97.50
Indiana 5 2 1 7 1 5 $17.30 $98.00
Iowa 52 16 16 $13.90 $99.00
Kansas 52 17 15 $14.90 $99.50
Kentucky 52 17 15 $17.30 $98.00
Lo uisiana 5 0 1 0 1 4 $14.30 $97.50
Maine 5 3 1 8 1 6 $14.80 $99.50
Maryland 52 18 15 $16.10 $97.50
Massachusetts 51 14 15 $14.60 $99.50
Michigan 55 17 16 $17.90 $97.50
Minneso ta 52 16 16 $13.90 $99.00
Mississippi 49 15 14 $17.50 $97.50
Misso uri 5 2 1 3 1 5 $17.20 $97.50
Montana 5 2 1 6 1 6 $13.90 $99.00
Nebraska 52 16 16 $13.90 $99.00
Nevada 53 5 1 5 $12.10 $99.50
New Hampshire531816$14.80$99.50
New Jersey571818$14.80$98.50
New Mexico551116$10.40$97.50
New York551515$16.70$107.50

NumberMonthly Premium
Below Low-
Number ofIncomeSome Gapa
St a t e Plans B e nchma r k Coverage Lo w H ig h
North Carolina521716$14.50$98.00
North Dakota521616$13.90$99.00
Ohio 58 15 17 $16.60 $98.00
Oklaho ma 52 13 15 $16.40 $98.50
Oregon 55 15 17 $14.80 $101.60
Pennsylvania 6 3 1 8 1 7 $15.40 $99.00
Rhode Island511415$14.60$99.50
South Carolina562015$15.40$99.00
South Dakota521616$13.90$99.00
T ennessee 5 3 1 5 1 5 $18.00 $98.00
T exas 5 6 1 5 1 6 $12.10 97.50
Utah 54 14 15 $17.10 $99.50
Vermont 5 1 1 4 1 5 $14.60 $99.50
Virginia 52 17 15 $15.10 $98.00
Washington 55 15 17 $14.80 $101.60
West Virginia631817$15.40$99.00
Wisconsin 5 7 1 6 1 7 $14.10 $99.50
Wyoming 5 2 1 6 1 6 $13.90 $99.00
a. One PDP in Florida covers all generics and some brand name drugs. In other statessome gap
coverage” includes plans covering all generics, all preferred generics, or some generics.
Sources: CMS, State Data Fact Sheet Source, 2008; The Henry J.Kaiser Family Foundation.
Medicare: Part D Plan Characteristics by State, 2008, October 2007.
The average monthly PDP premium, weighted by enrollment, was $25.93 in

2006, $27.39 in 2007, and was projected to rise to $31.99 in 2008 (presuming15

beneficiaries did not switch plans).
Part D enrollees typically do not switch plans from year to year. Preliminary
analyses suggest that PDP enrollees who did not switch plans between 2007 and 2008
would likely see a premium increase. One analysis noted that if beneficiaries did not
switch plans, three-quarters of those not receiving a low-income subsidy would see
a premium increase. Nearly one in five (19%) would see a monthly increase of more
than $10. Further, one-fourth of enrollees who did not switch from 2006-2008 would16

face a premium increase of at least 50% over the period.
15 The Henry J. Kaiser Family Foundation. Medicare Part D 2008 Data Spotlight:
Premiums. November 2007.
16 Ibid.

High premium increases are recorded for the two PDPs with the highest
enrollment. The average annual premium for AARP’s Medicare Rx Plan (offered by
UHC-PacifiCare) increased from $316 in 2006 to $388 in 2008. The average annual
premium for Humana PDP Standard increased from $114 to $310 in 2008.17 The
increase in United’s premium means that it lost its autoenrollment of the low-income
subsidy population in 18 out of 34 regions.18
Cost Estimates
The CBO March 2008 baseline estimates total Part D benefit payments at $45.5
billion in FY2008, $54.3billion in FY2009, rising to $138.4 billion in FY2018. (See
Table 10.)
Table 10. Part D Benefit Payments, Selected Years
(estimate in billions of dollars)
P ayments F Y 2008 F Y 2009 F Y 2018
Payments to Plans25.132.282.7
Retiree Drug Subsidy3.23.37.4
Low-Income Subsidy17.118.848.3
Total Benefit Payments$45.5$54.3$138.4
Source: CBO, Fact Sheet for CBOs March 2008 Baseline: Medicare.
Note: Totals may not add due to rounding.

17 Ibid.
18 Avalere Health LLC. CMS Release of Part D Plan “Landscape” for 2008, September 28,