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Medicare's New Adventure: The Part D Drug Benefit


The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) became law in December 2003. Among other provisions, the MMA created the Part D drug benefit, which became available to Medicare beneficiaries on January 1, 2006. Passage of the MMA came after extended debate in which policymakers were sharply divided over the design of the drug benefit and its structure—particularly whether it could be restricted to the $400 billion, 10-year budget established by the Bush Administration.

The Part D benefit involves approaches that are entirely new to Medicare. This is the first time that the program has offered coverage for outpatient prescription drugs. Instead of offering the benefit itself, Medicare relies on private, standalone drug plans that compete among themselves and are at risk for the costs of the benefit. Such plans have few, if any, precedents in public or private sector offerings. As a result, implementing Medicare Part D poses many new challenges for beneficiaries, health plans, and the federal government.

Medicare beneficiaries, especially those who previously had no drug coverage, have much to gain from the new benefit. Low-income beneficiaries, in particular, will be helped by subsidies that should keep their out-of-pocket costs to a minimum. But beneficiaries have much to learn about the new benefit and face a series of decisions: whether to enroll for the Part D benefit, which plan to select, how to work with the formularies and cost-sharing structures, and how to finance the remaining out-of-pocket costs.

The drug benefit is offered by private prescription drug plans and Medicare Advantage (MA) organizations, or private health plans available under Medicare. These organizations will be at risk for the cost of the benefit, although the MMA's risk adjustment, risk-sharing, and reinsurance provisions limit the degree of risk borne by the plans. The general outlines of the standard benefit are established in the law, though plans have the option of modifying the benefit design. Plans are likely to use cost management tools (e.g., formularies and prior authorization) similar to those currently used in the employer-based market. With these tools, they are expected to leverage their buying power to negotiate price discounts and thus manage drug costs and encourage appropriate utilization.

Potential plan sponsors—a mix of health plans, pharmacy benefit managers, and other entities—faced fundamental decisions. Those that chose to enter this market had to decide how to position themselves: what premiums to charge, whether to modify the benefit from the basic design, and how to structure a formulary and cost-sharing tiers. Plans had to determine what design features would allow them to capture and retain an adequate share of the market while maintaining financial stability.

In addition to outlining the basic benefit design, the MMA lays out the competitive market structure, the types of information that should be provided to beneficiaries, quality and access standards that plans must meet, limitations on plans' use of cost-management tools, and a variety of other standards. Despite these details, many operational details were left to regulations. The Secretary of Health and Human Services published a final rule on January 28, 2005, translating provisions of law into regulatory language and elaborating on most of the provisions. However, some issues were left to sub-regulatory guidance. In September, the Secretary entered into formal contracts with the organizations that chose to offer Part D plans, and information on these plans became available to the public in October 2005. Beneficiaries could enroll as of November 15, with open enrollment for the first year available through May 15, 2006. For those enrolling before the end of 2005, the benefit began on January 1, 2006.

The government has thus had to implement a major new program in only two years, including the design of features for which there are few precedents and oversight of the private plans. The government has some experience with private organizations from Medicare Advantage and its predecessor, Medicare+Choice, but these programs never enrolled more than about one of six beneficiaries. In addition, Medicare must now administer subsidies to employers that provide retirees with drug benefits that meet certain criteria.

The success of the Medicare drug benefit ultimately will be judged by a number of factors, only a few of which will be known within the next year. Furthermore, this program is likely to undergo administrative and potentially legislative changes in its early years and thus will remain a moving target. This issue brief considers the types of plans that initially entered the market; the shape the market and the benefit are taking; the drugs initially available through the plans offering the benefit; the success in enrolling beneficiaries; whether beneficiaries will have improved access to needed drugs; and the impact on the larger marketplace for prescription drugs.

Publication Details



J. Hoadley, Medicare's New Adventure: The Part D Drug Benefit, The Commonwealth Fund, March 2006