Benefit Description

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) gives Medicare beneficiaries access to prescription drug coverage beginning January 1, 2006.

This prescription drug benefit is commonly referred to as Medicare Part D. All Medicare beneficiaries—no matter how they get their health care today or whether they have existing drug coverage—will be eligible for drug coverage under a Medicare prescription drug plan.*

Medicare Part D Plan Design

The Medicare Part D program provides a prescription drug benefit primarily through one of two sources: (1) a fee-for-service option known as a prescription drug plan (PDP) or (2) a managed care plan with a drug benefit (i.e., Medicare Advantage (MA)). These are referred to as "Part D plans."

In order to provide a choice of plans in all areas of the United States, the Center for Medicare and Medicaid Services (CMS) divided the country into 34 regions. In each region, beneficiaries must have at least two Part D plans to choose from and at least one plan must be a "stand alone" (PDP) plan.

As outlined by CMS, all plans are expected to create a formulary that makes available medically necessary drugs for seniors.

Medicare Part D Prescription Drug Benefit

The MMA defines a standard benefit design for Medicare Part D, which is subject to variation by Part D plans. For this defined standard coverage, most beneficiaries will pay a monthly premium, estimated to be $35 per month in 2006, an annual deductible of $250, and 25% co-insurance for costs above the deductible up to the initial limit, which is $2,250 in 2006.

Once the initial coverage limit is reached, the enrollee must pay all drug costs until the enrollee has $3,600 in out-of-pocket expenses for covered drugs, which equates to $5,100 in total expenditures. This gap between $2,250 and $5,100 is being called the "coverage gap" or "doughnut hole." After a beneficiary has spent $3,600 in out-of-pocket expenses, catastrophic coverage begins and the Medicare Part D plan will pick up approximately 95% of future costs.

Plans can offer a different benefit that is equal to or "actuarially equivalent" to this standard coverage, and plans can also offer an enhanced benefit design (that might include coverage in the doughnut hole or no deductible) for an additional premium. This means that some PDPs may offer plans that look like the benefits outlined above, but others could offer plans with:

• Different premiums
• Different co-payment amounts
• Different drug formularies
• Different deductibles
• Different out-of-pocket maximums
• Supplemental benefits

* Drug coverage for residents on Medicare Part A covered days will not be affected by Medicare Part D.