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All About the New Medicare Drug Benefit

Whether you are ready for it or not, the new Medicare prescription drug benefit (Medicare Part D) is nearly here. The first-ever federally subsidized drug program for seniors, in which private health insurers will offer limited insurance coverage of prescription drugs to elderly and disabled Medicare recipients, takes effect January 1, 2006. (The new drug benefit is different from the discount drug card program, which began in 2004; that program provided some discounts on drugs, while the new benefit offers actual insurance coverage.)

The new drug benefit will be available only through insurers that contract with Medicare to market drug plans. In October, the federal government will distribute information about the specific drug plan choices to be offered in different regions. Also in October, Medicare beneficiaries will begin to be bombarded with advertisements and unsolicited phone calls urging them to join one of an array of plans. Beneficiaries who wish to enroll in the drug benefit program have between November 15, 2005, and May 15, 2006, to choose a plan without paying a penalty.

Robert Hayes of the Medicare Rights Center has called the new prescription drug benefit "the single most convoluted benefit program in American history." Another commentator fears that trying to understand it "could leave many seniors reaching for an aspirin." (Stouffer, Pittsburgh Tribune-Review).

We hope that the following summary of the program's basic rules and features will save you a trip to the medicine cabinet. There are several reasons to become knowledgeable about the program so you can make an informed choice about whether this benefit is right for you. First, although enrollment in the program is purely voluntary, there is an escalating financial penalty for many Medicare recipients who don't sign up for it during the initial enrollment period. Second, Medicare beneficiaries with low-incomes stand to gain a lot from the program because they will receive help in bridging its coverage gaps. Third, if you do decide to enroll, choosing the right drug plan is crucial because most beneficiaries will have to wait a year to switch plans.

What will the new drug benefit cost and what will you get?

Medicare recipients who elect to be covered by the new drug benefit will pay premiums averaging $32.20 a month in 2006. This is an average; some plans will charge more, some less. Some plans will reportedly charge premiums of $20 a month or even less.

After meeting a $250 deductible, you will pay 25 percent of drug costs up to $2,250 in a year, with Medicare footing the bill for the other 75 percent. The plan will pay $1,500 and you will pay $500. Coverage will then stop completely until your payments for covered drugs reach $5,100. (This is sometimes called the "doughnut hole".) In other words, after you reach the $2,250 limit noted above, you will be responsible for covering the next $2,850 in drug costs yourself. If your costs for covered drugs exceed $5,100, coverage will kick back in, with Medicare paying about 95 percent of costs above $5,100 (called "catastrophic coverage").

This means that beneficiaries must have $3,600 in out-of-pocket costs in 2006 to reach the $5,100 threshold, at which point the program's catastrophic coverage takes effect. This $3,600 figure is the sum of the $250 deductible plus 25 percent of costs up to $2,250 ($500) plus the $2,850 that must be spent before you can climb out of the doughnut hole. An article in the journal Health Affairs concludes that this doughnut hole could be deadly for some: those with high out-of-pocket drug costs are likely to cut back even on essential medications while in this coverage gap. (One way to avoid the coverage gap is to pick a plan with low drug prices, since it is accumulating drug costs that brings you closer to the gap – not low premiums, co-payments or deductibles.)

We are describing Medicare's basic prescription drug coverage, which all insurers must offer. Insurers may also offer more generous coverage and charge a higher premium for it. For example, reportedly all beneficiaries in traditional, fee-for-service Medicare will have access to a plan that fills the "doughnut hole" coverage gap. These plans will charge a higher premium and may include additional out-of-pocket costs. Some Medicare Advantage (managed care) plans will cover the doughnut hole and will charge no premium.

Bear in mind that only payments for drugs that are covered by your plan (see below) count towards the out-of-pocket threshold. Also, any help with paying for Medicare Part D costs that you receive from an employer health plan or other insurance does not count toward this limit. Drugs purchased abroad (such as from Canada) will not be covered by the Medicare benefit and will not count toward the out-of-pocket limit.

What will you save?

Fortunately, you don't need an advanced degree in statistics to determine what the drug benefit will mean to you. AARP, which used its considerable political might to assure passage of the new drug benefit, has created a calculator for beneficiaries to determine their potential savings under Medicare Part D. (Note that the calculations apply only to individuals who pay 100 percent of their prescription drug costs. Results will not be accurate for low-income Medicare beneficiaries or those who currently have some form of prescription drug coverage.)

Will drugs you take be covered?

All Part D enrollees will have at least two Medicare private drug plans to choose from, and in most areas a number of plans. At last report, between 11 and 23 health insurers will offer Medicare prescription drug plans in each region nationwide. The insurers may choose the medicines – both brand-name and generic – that they will include in a plan's "formulary," the roster of drugs the plan covers and will pay for. However, each plan formulary must include at least two drugs in each drug class, and must cover a majority of the drugs in certain classes, such as antidepressants and anti-cancer agents.

Since each drug plan will offer a different formulary, and the same drug may vary in price from plan to plan, the most important job for a Medicare beneficiary signing up for Part D is to determine whether the prescription drugs they need – or anticipate needing – will be covered under a particular plan and how much they will cost. In most regions, there will be no shortage of choices. California, for example, is projected to have 40 plans competing for business.

Starting in mid-October 2005, a comparison tool will be available on Medicare's Web site www.medicare.gov that will allow you to search for Medicare private drug plans in your region and compare their costs, covered drugs and pharmacy networks. The information will also be available by calling 800-MEDICARE. In addition, the Medicare & You 2006 handbook, which beneficiaries should receive in fall 2005, will provide information about the Medicare private drug plans in your area.

But it's possible that all your diligent research could come to nothing because after you have enrolled in what seems to be the best plan, the plan may discontinue coverage or increase the cost of any particular drug! Can you then switch plans? Only those eligible for both Medicare and Medicaid (see below) may switch plans whenever they want. Other beneficiaries will be locked into their choice for a full year.

There is a process by which a plan may grant you an "exception" to its formulary if you are using a drug that is removed from the plan's formulary for reasons other than safety, or your doctor believes the drugs on the plan's formulary will not work for you. In the case of nursing home residents, Medicare requires that all Part D plans give beneficiaries a "temporary supply" of non-formulary drugs while an exception is being considered.

Medicare Part D does not cover certain drugs, including barbiturates and benzodiazepines, which are prescribed for older people to treat insomnia, seizure disorders, anxiety, panic attacks, and muscle spasms. States have the option of providing Medicaid coverage for the excluded drugs.

Each Medicare drug plan will likely give you a list of local pharmacies where you can obtain their covered drugs.

The monthly premium, formulary and pharmacy network are not the only factors to consider in selecting a plan. Other factors include the plan's prior authorization requirements, co-payments for different types of drugs, limits on the number of prescriptions ordered, and the availability of mail order. For the Center for Medicare Advocacy's tips on choosing a drug plan, click here.

Who may enroll?

Anyone who has either Medicare Part A or Medicare Part B (or both) can get Medicare Part D, Medicare's prescription drug coverage. Bear in mind, however, that Medicare Part D will not pay for drugs that could have been paid for under Medicare Part A or Medicare Part B. These drugs will not be covered even if the beneficiary does not have either Part A or Part B.

When should you enroll?

It depends on your status as a Medicare beneficiary. The following explanation is from the Medicare Rights Center's Medicare Drug Coverage 101, an excellent resource:

"You can enroll in the Medicare drug benefit (Part D) during your Initial Enrollment Period (IEP).

  • If you currently have Medicare or will be eligible for Medicare in January 2006, your IEP will be between November 15, 2005, and May 15, 2006.
  • If you will become eligible for Medicare during February 2006, your IEP will be between November 15, 2005, and May 31, 2006.
  • If you will become eligible for Medicare during or after March 2006, your IEP for Part D will be the same as for Part B. It will be a seven-month period that includes the three months before the month you become eligible, the month you are eligible and three months after the month you become eligible."

If you want your coverage to start in January 2006, you should enroll in a plan by the end of 2005.

How do you enroll?

Once you have chosen the Medicare private drug plan you want to enroll in, you can contact the company offering the plan and ask for a paper application, or complete an online application on the plan's Web site, if the plan allows online applications. The online application also may be available on Medicare's Web site www.medicare.gov.

If you cannot enroll yourself, a representative who is authorized under state law can enroll for you. This could include a health care proxy, an agent acting under a power of attorney, or another surrogate decision maker as defined by state law.

If you are in a Medicare HMO or PPO, you can enroll in a plan offered by the company that sponsors your Medicare health plan.

Late enrollment penalties

Medicare beneficiaries may be subject to significant financial penalties for late enrollment. For every month you delay enrollment past the Initial Enrollment Period (between November 15, 2005, and May 15, 2006), the Medicare Part D premium will increase at least 1 percent. For example, if the average national premium in 2007 is $40 a month, and you delay enrollment for 15 months, your premium penalty would be $6 (1 percent x 15 x $40 = $6), meaning that you would pay $46 a month, not $40, for coverage that year and an extra $6 a month each succeeding year.

Beneficiaries are exempt from these penalties if they did not enroll because they had drug coverage from a private insurer, such as through a retirement plan, at least as good as Medicare's. This is called "creditable coverage." By November 15, private insurers are required to notify beneficiaries if their coverage will be considered creditable.

Subsidies for low-income beneficiaries

Assistance for low-income Medicare beneficiaries is available to help them pay the premiums, deductibles, co-payments and coverage gap of the new drug benefit. In fact, the new program offers the greatest benefit to those with the lowest incomes, who could pay next-to-nothing for their drugs.

What if you're enrolled in both Medicare and Medicaid?

Many low-income individuals have coverage under both Medicare and Medicaid. Medicaid has been covering prescription drugs for these "dual eligibles," but the new law will change that. Beginning January 1, 2006, Medicaid will stop covering prescription drugs. Therefore, unlike other Medicare recipients who have until May 15, 2006, to enroll in a prescription drug plan, individuals covered by both Medicare and Medicaid must enroll by January 1, 2006. If dual eligibles do not enroll themselves, the Department of Health and Human Services will automatically enroll them in a plan.

Dual eligibles, along with everyone else, will begin to get information about the various prescription drug plans in mid-October. Around the same time, letters will be mailed to dual eligibles letting them know which plan they will be enrolled in if they don't choose one. If you have original Medicare, you will be enrolled in a stand-alone drug plan whose premium is at or below the standard plan premium in your area. If you have an HMO or PPO, you will be enrolled in the lowest premium prescription drug plan offered by that company.

If you are a dual eligible, you should make sure the plan you are assigned covers the drugs you need and the pharmacies you visit. If it doesn't, you will need to choose a different plan. Call 1-800-MEDICARE or go to www.medicare.gov in October to compare plans. Everyone can begin signing up for plans on November 15, 2005.

If you are a dual eligible enrolled in a drug plan that stops covering a drug you need, you can change your drug plan once a month. As noted above, other beneficiaries are locked into their choice for a full year.

The new program's impact on Medigap drug coverage

Three Medigap plans cover prescription drugs (Plans H, I, and J). If you have one of these plans, you have several options when the new Medicare prescription drug benefit begins in January 1, 2006. You can do one of the following:

  • Keep your Medigap policy and not enroll in the Medicare prescription drug benefit.
  • Keep your Medigap policy and enroll in the Medicare prescription drug benefit.
  • Switch your Medigap policy and enroll in the Medicare prescription drug benefit.

The three Medigap plans offering drug coverage cannot be sold after January 1, 2006, to anyone eligible for Medicare Part D. However, existing Medigap policies may be renewed. But be aware that if you keep your Medigap policy and later decide you want to enroll in Medicare, you may have to pay a premium penalty. You won't have to pay a penalty if your Medigap plan is considered as good as the Medicare prescription drug plan. Medigap issuers must send notice between September 15, 2005, and November 15, 2005, to let you know if your Medigap plan is as good as Medicare prescription coverage.

If you decide to enroll in the Medicare prescription drug benefit, you can either choose a different Medigap policy or you can keep your current Medigap policy and drop the drug benefit. If you keep your current policy, your Medigap premium will be adjusted to reflect the elimination of the drug benefit.

If you want to enroll in the Medicare prescription drug plan and switch Medigap plans, you can enroll in Medigap Plans A, B, C, F, or two new Medigap Plans, K or L. You won't have to wait for coverage of pre-existing conditions as long as you enroll in a Medicare drug plan before May 1, 2006, and enroll in the new Medigap policy within 63 days after the new drug benefit begins.

What about those drug discount cards?

If you purchased a Medicare-approved drug discount card, you can use the card until your Medicare drug coverage begins or, if you decide not to enroll in the Medicare drug benefit, until May 15, 2006.

What if you already get retiree drug coverage from your former employer?

Be careful. Be very, very careful. If you sign up for Medicare Part D, you will lose your company's retiree drug coverage, and reportedly about half the companies will cancel your medical insurance as well. If your retiree drug coverage is "creditable" – that is, if it is equal to or better than what Medicare is offering, then you won't have to pay a late-enrollment penalty if you decide to switch to Medicare Part D later. In other words, there's no rush and don't let a salesperson steamroll you into signing up for Medicare's benefit. Retirees in company plans should get a letter by November 15, 2005, stating whether or not their plan's coverage is "creditable."

Should you sign up?

Administration officials, including President Bush, have been traveling the country to encourage Medicare beneficiaries to sign up for the new drug benefit. The administration is reportedly spending $300 million in this effort. The drug plans want you to sign up as well. They could get up to $48 billion in premium revenue a year, depending on how many of Medicare's 43 million beneficiaries enroll.

For those who have high drug costs and no drug coverage now, or who qualify for a low-income subsidy (see above), Medicare Part D may be a huge help. The poorest among the elderly and disabled will pay virtually nothing for their drugs.

For those who may not be able to afford the premium and who don't have high drug costs, it's a tougher call. Those who can afford it may decide to buy into the program even if they don't have high drug costs as insurance protection against runaway costs later. But those who already have drug coverage through a private plan that they believe will continue need to closely compare the benefits (see section above). The benefit they have now may well be richer than what Medicare is offering. Those who continue with a drug plan that is equal to or better than Medicare's will not be assessed a late enrollment penalty. Those who sign up with Medicare Part D will lose their current drug coverage and risk losing all their health benefits under the private plan.

Bear in mind that except for low-income beneficiaries, the drug benefit will not, and never was intended to, pay for all prescription drug costs. Beneficiaries will still shoulder a large share of those expenses. A recent study published in Health Affairs concluded that the average potential enrollee is expected to pay 44 percent of her drug costs with her own money. The researchers found that 38 percent of beneficiaries will have prescription expenses high enough to reach the $2,250 benefit cutoff, and that they will end up covering 67 percent of their total drug costs with their own money.

Restrictions on drug plan marketing

As noted, billions of dollars are at stake in convincing Medicare recipients to sign up for this new benefit. The Centers for Medicare & Medicaid Services (CMS) has issued marketing guidelines for companies offering prescription drug plans. Approved drug plans can't market until October 2005, and the plans are prohibited from making door-to-door sales calls or sending unsolicited e-mails. Plans also must comply with the National Do-Not-Call Registry rules, honor "do not call again" requests, and abide by federal and state calling hours and any other relevant requirements. (Federal rules do not allow telemarketers to call before 8 a.m. or after 9 p.m. State rules may differ.)

Plan marketing representatives are not allowed to request personal information such as Social Security Numbers, bank account numbers, or credit card numbers.

Beware of scams

Con artists are already using the new drug benefit as a wedge to convince unsuspecting Medicare recipients to part with personal information like bank account numbers. Residents of at least 13 states have reported a scam in which criminals attempt to sell fake Medicare prescription drug cards for the Part D benefit. Since plans can't market until October, any contacts before that time are suspect. Anyone who is unsure about a contact should call Medicare at 1-800-MEDICARE.

Social Security will be contacting low-income Medicare recipients who have incomplete applications or who haven't sent one in. Social Security representatives generally will not ask for Social Security numbers, bank account numbers, credit card numbers or life insurance policy numbers. If beneficiaries are unsure a caller is really from Social Security, they can verify the call by contacting the agency at 1-800-772-1213.

For more information . . .

The new Medicare drug benefit is a complicated program (the program's rules and explanatory materials run to 1,172 pages). No single article can address all the questions or issues that beneficiaries may have. Following are some sources for more detailed information:

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Attorney practicing elder law and dedicated to protecting your family's assets from the cost of nursing home care.