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The Medicare Drug Benefit: Part D of Medicare

A Medicare prescription drug program was introduced in the Medicare Modernization Act (MMA) of 2003. While 90 percent of Medicare enrollees have some source of prescription drug coverage, 60 percent are enrolled in either a Medicare stand-alone prescription drug plan (PDP) or a Medicare Advantage drug plan.

How the Drug Benefit Works

Medicare drug benefits are available only through private health plans:

  • 8.3 million (18%) enrollees get prescription drug coverage through a retiree health plan sponsored by a previous employer. Under the MMA, certain employers are eligible for a subsidy equal to 28 percent of covered drug costs of their employees.
  • 9.9 million (21%) enrollees obtain drug coverage through a Medicare Advantage drug plan.
  • 17.7 million (38%) have coverage through a stand-alone prescription drug plan (PDP). The average monthly premium in 2010 was $31.
  • 5.9 million (13%) have some kind of other drug coverage (such as the Department of Veterans Affairs, the Indian Health Service, or a current employer) and 4.7 million (10%) have no drug coverage at all.

Prescription Drug Plans (PDPs)

The standard prescription drug plan has a $310 annual deductible in 2010. For the next $2,520 in drug costs, the individual pays 25% ($630), and Medicare pays 75% ($1,890). For spending above $2,830, the beneficiary pays the full charges until spending reaches $6,440. (This means the individual has spent $4,550 in out of pocket costs, a figure that includes the $310 deductible, the $630 co-payment, and $3,610 in full payments). Costs in excess of $6,440 are considered catastrophic, and Medicare will pay for 95% of these additional expenses.

The gap in coverage between $2,830 and $6,440, with all financial responsibility falling on the consumer, is referred to as the “doughnut hole”. The Affordable Care Act phases in coverage in the gap so that the gap is entirely eliminated by 2020. By 2020, enrollees will only pay 25 percent of their costs until they reach catastrophic coverage (as opposed to the 100 percent they currently pay).

Low-Income Subsidies

Medicare enrollees with low incomes are eligible for subsidies for prescription drug coverage through the Part D low-income subsidy (LIS) program. In 2009, 9.6 million Part D enrollees received low-income subsidies. Dual eligibles and those enrolled in the Medicare Savings Program automatically receive the subsidy; these two groups together account for 8.1 million enrollees, or 65 percent of Part D LIS enrollees. Another 1.5 million applied for the subsidy and qualified based on an income and asset test, and 2.3 million were eligible, but did not receive a subsidy.  

“Full-subsidy eligible individuals” pay no premium, no deductible, and reduced co-payments. Medicare enrollees  receiving full Medicaid benefits (dual eligibles), participants in the Medicare Savings Programs, and Supplemental Security Income (SSI) beneficiaries fall in this category, regardless of their income or assets. This category also includes people with incomes below 135 percent of the federal poverty line. Full-subsidy eligible individuals pay no more than $2.50 for generic and $6.30 for brand-name drugs.

People with incomes between 135 percent and  150 percent of the federal poverty level are eligible for a partial subsidy. Enrollees who belong to this group have a sliding scale monthly premium pegged to their income, a $60 annual deductible, and a 15 percent co-payment for drugs up to $6,440. When their out of pocket expenses reach $4,550 a year, their payments are limited to a co-payment of $2.50 for generic drugs and $6.30 for brand-name prescriptions.

The official Medicare website is www.Medicare.gov