Photograph by CORBIS
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The Rx Law, Demystified
By Robert Rosenblatt, March-April 2004
You've got questions about the Medicare drug benefit. We've got answers
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Big, awkward, and misunderstood, the prescription drug bill that President
Bush signed in December is the Baby Huey of legislation. Public reaction is
still marked by uncertainty, due largely to the 678-page law's sheer
scope—plus the fact that important details will be determined by the way
its regulations are written and that it will be phased in over several years.
The debate has centered on the law's long-term effects: Will it lead to the
privatization of Medicare? Will gaps in coverage be rectified? And how will
Medicare deal with the ever-rising cost of drugs?
But in the short term, what matters are the nuts and bolts of the new law
and what they mean to you. To find out, we went to more than a dozen experts in
industry, on Capitol Hill, and at AARP. Here are their answers to your most
pressing questions:
When do I have to decide whether to sign up for the new drug
benefit?
For people who are already in Medicare, there will be a six-month open
enrollment period starting in November 2005. If you are not yet eligible for
Medicare, you will decide when you turn 65 or become eligible through a
disability. The earliest you can use the benefit is January 1, 2006.
Do I have to sign up if I am not taking any medications now? Can I wait
until I need drugs and then enroll?
You can wait. Enrollment in the drug plan
is voluntary. But, as with Part B of Medicare, which helps cover doctor bills,
there is usually a penalty for waiting to sign up. That penalty would increase
your premium by about 1 percent for each month of delay. So if you delay five
years (60 months) after you are first eligible, you could pay 60 percent more
for your monthly premium.
The reason: if everyone waited to enroll until they had large drug costs,
the risk would be spread over a smaller, sicker pool of people; the premiums
would have to rise; more people would drop their coverage; and the system would
undergo a spiral of increasing premiums and decreasing enrollment.
I'm banking on having retiree health insurance that pays for drugs.
What happens to this coverage?
Hopefully, nothing. The new law offers big financial incentives to employers
that continue offering health insurance to their retirees: $71 billion in
direct subsidies toward the cost of drug coverage for former workers, plus $17
billion in tax savings because the subsidies are tax-free.
Employers have been dropping retiree health benefits for years. Some people
fear the new law will accelerate this trend. The subsidies are designed to
discourage that. But your employer has the right to change or drop retiree
health and drug benefits at any time.
Can I sign up for the new drug coverage and keep the same doctor?
Yes. Anyone eligible for Medicare can join a private plan for drug coverage
only. You would need to switch doctors only if you chose to get drug coverage
by joining a health maintenance organization (HMO) or a preferred provider
organization (PPO) that does not include your doctor in its network, or if your
doctor stops accepting Medicare.
My state has a pharmacy program that provides drug coverage to state
residents. Will it continue?
Probably. The new Medicare law could help states stretch dollars for their
drug programs. Instead of bearing the whole cost of medications for residents
in need, states could pay only the premiums, deductibles, and copayments for
the Medicare drug benefit.
Why that's significant: you don't have to pay the so-called
out-of-pocket costs yourself. Your state can pay them for you until you reach
the $3,600 threshold for catastrophic coverage. Then (yes, even though you paid
little or none of your own money) Medicare will start paying as much as 95
percent of the cost of drugs. Your out-of-pocket costs can also be picked up by
family members, a pharmacy assistance program, or a charity.
One big catch: the law forbids insurers to sell gap insurance to cover these
out-of-pocket expenses. Some policymakers think people who are insulated from
the cost of their drugs might overuse the benefit.
Some pharmaceutical companies currently offer discounts to people with
moderate and low incomes. Will these keep operating after 2006?
It's not yet clear. Some of the discounts were designed as a temporary
"bridge" to the Medicare drug benefit, so they may be
discontinued.
From June through 2005, Medicare beneficiaries can get a Medicare-approved
card good for discounts at participating pharmacies. But no one knows how large
the discounts will be.
Will the Medicare-approved discount cards to be sold for use during 2004
and 2005 work at any drugstore?
No, because there is no single discount card. Health plans, insurance
companies, and other vendors each may offer their own cards, after assembling a
network of drugstores where the card can be used. Before you buy one (for a
charge of up to $30), check that your drugstore accepts it. Discounts will
differ, so compare prices, card to card, for the prescriptions you take
frequently. You are allowed to buy only one of the Medicare-endorsed cards.
Be careful: just because a card is endorsed by Medicare does not mean that
it offers the best price. Savings programs at your local pharmacy might save
you more than the card would. [For help in investigating the options, see What to Do Until the Law Takes
Effect in 2006.] Buying drugs from Canada or Mexico might be your cheapest
option, but, unlike an earlier version of the bill, the law as passed does not
legalize this practice.
Who qualifies for the $600 credit for buying drugs in 2004 and 2005? Do I
need to apply?
If you are enrolled in Medicare and your income is low, you may qualify for
a discount card already loaded with $600 to spend on prescription drugs. (At
press time, the income limits for 2004 had not been set, but in 2003 you were
considered low-income if you received less than $12,123 as an individual or
$16,362 as a couple.)
Drug Benefit Calculator
Current and future Medicare beneficiaries with no supplemental drug coverage can use our exclusive drug benefit calculator to compare their current out-of-pocket prescription drug spending—or a hypothetical future amount of out-of-pocket drug spending—with projected out-of-pocket spending under the Medicare drug benefit.
If you qualify, you will pay only 5 to 10 percent of the cost of each
prescription you buy with the $600, and you will get another $600 to spend in
2005. In addition, you will not have to pay the card enrollment fee of about
$30. If you use up the credit, you will still be able to use the card for
discounts on drugs. People who have drug coverage through Medicaid, a former
employer or other group health plan, or the military are not eligible. To
apply, just ask whoever is offering you the card.
My Medigap policy includes drug coverage. What will happen to it?
You can continue your drug coverage through your Medigap policy, or you can
drop that part of your plan and enroll in the Medicare drug benefit. You
can't have both kinds of drug coverage.
After January 1, 2006, no new Medigap policies will cover prescription
drugs, but people who already have them will be allowed to continue them
indefinitely. If you decide to keep drug coverage through your current policy
now but want to switch to the Medicare drug benefit later, you may have to pay
higher premiums for enrolling late.
I am 65 but my wife is only 62. Will she be eligible for the drug
coverage under my plan?
No, unless she is eligible for early enrollment in Medicare under one of the
two exceptions: a serious disability or end-stage renal disease. The Medicare
drug benefit is only for Medicare beneficiaries.
Will all drugs be covered by the benefit, or will there be
restrictions?
All kinds of drugs will be covered, but not every drug of every kind.
Drug-plan sponsors are required to cover drugs in each therapeutic class, but
the choices in any given class may be limited to a list of preferred drugs
(also known as a formulary). Formularies aren't as restrictive as they
sound. If a doctor says a drug is medically necessary, you have the right to
appeal for it, even if it's not on the list. Once approved, the plan must
provide it, though at a greater out-of-pocket cost.
This setup is nothing new. Most prescription plans today use a tiered system
to help control costs. In a typical plan, the lowest copayment—for
example, $10—would apply to generic drugs. Then, for the brand-name drugs
that appear on the approved list, the copayment might be $20. For drugs that
are not on the formulary but are deemed medically necessary, the copayment
might be $40 or more.
I belong to an HMO that covers only generic drugs. Will it now be
required to cover brand-name drugs for Medicare participants?
Yes, but not every brand-name drug will be covered. As in the tiered systems
just described, each HMO that elects to offer the drug benefit in 2006 will be
required to carry some (but not all) brand-name drugs in each therapeutic
class—and offer an appeal process for those who need access to drugs that
aren't in the formulary. Before joining an HMO or any other private
Medicare option, you should ask what brand-name and generic products are
covered and what the copayments are.
The HMOs' drug plans will vary widely depending on the market.
California, where Medicare HMOs cover about 35 percent of the over-65
population, used to have a very competitive market, with multiple plans and a
rich array of benefits. But the drug offerings eroded over the years as HMOs
complained about the slow rate of increase in government reimbursements. Most
plans in the state now offer generic coverage only. The new law provides a big
infusion of money into the HMOs. The law's framers hope that HMOs will
enrich their benefits and return to the days when they offered extensive
coverage of brand-name medications.
I live in a rural area, and there are no HMOs for people on Medicare.
Will the law encourage them to come here?
It may, because of the financial incentives mentioned above. In addition,
the law allows a new type of PPO, called a regional PPO. These plans cover a
much larger service area, and they are eligible for federal subsidies to
encourage them to take and keep Medicare beneficiaries. In general, a PPO is
not as restrictive as an HMO: with a PPO, you can see a doctor who is not in
the network, though it will cost you more.
I heard there would be an experiment where people on Medicare would be
forced to pay higher premiums. What's that all about?
The experiment, called premium support, would test whether competition
between insurance companies and the traditional Medicare program can keep total
Medicare costs down. Some think Congress will step in to stop the experiment,
as it has done in the past. But if the experiment goes through, starting in
2010, the government will choose six metropolitan areas for the six-year trial.
Medicare beneficiaries in plans that cost more to run—for example, the
traditional Medicare fee-for-service program that lets you choose any
doctor—will probably have to pay extra for their coverage. But no one
will pay more than 5 percent extra for their annual premiums. People who get
Medicare coverage through an HMO probably will not have to pay extra. People
with low incomes will be able to get Medicare coverage without participating in
the experiment. The idea is to encourage more people to get coverage through a
private plan. This was the most controversial part of the legislation, with
critics saying it represents a radical transformation of Medicare.
I've been hearing about a new, tax-free health savings account
created by the law. Can I sign up for one?
Yes, but only if you are under 65. The catch is that in order to qualify,
your health plan has to have a high deductible—over $1,000 for
individuals or over $2,000 for families. Each year, you can deposit only as
much as your deductible—up to $2,600 for individuals or $5,150 for
families. (People 55 through 64 can add more over time—up to $1,000 a
year by 2009. No one can deposit money after age 65.)
You can withdraw money from this account for a range of medical
expenses—not just to pay the deductible. Allowable costs include
long-term care insurance and even health insurance if you are unemployed. In
contrast to the pretax flexible spending accounts with which you may be
familiar, money left in a health savings account at the end of the year remains
in the account. If you qualify, you can sign up now.
The intent is to place more of the discretion for medical spending in the
consumer's hands and to encourage frugal use of the health care system. The
law's authors hope that this will slow the pace of health care
inflation.
I am over 80 and take several medications. Can I be turned down for the
Medicare drug benefit? Will I be charged more than other people?
You can't be turned down or charged extra because of your health. Any
insurer that offers the benefit must accept any Medicare beneficiary who
applies. If you currently get medical care through a health maintenance
organization (HMO) or a preferred provider organization (PPO), you may be able
to sign up for Medicare drug coverage through the same company. Otherwise, you
can get the drug benefit by signing up for a separate, drugs-only policy or by
joining an HMO or PPO that offers it.
Robert Rosenblatt is a senior fellow at the National Academy of Social
Insurance in Washington, D.C.
Find out how the Medicare law will affect your Rx
spending with AARP Bulletin Online's drug benefit
calculator.
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