Changes to Prescription Drug Benefits Under New Medicare Act

By Marissa A. Olsen
[January 2004]

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 contains the most extensive changes to Medicare since the program was enacted in 1965. Historically, Medicare has provided only a limited outpatient prescription drug benefit under Medicare Part B. Under the new law, eligible beneficiaries will be able to purchase drug discount cards starting in June 2004 and enjoy comprehensive prescription drug coverage under a new Medicare Part D beginning in January 2006.

The concepts sound easy enough, but this legislation is far from simple. This article first summarizes the drug discount card program and the prescription drug benefit and then addresses some of the thorny implementation issues.

Prescription Drug Discount Card

Starting June 2004, Medicare beneficiaries may purchase a prescription drug discount card to be offered by private sponsors. The Secretary of Health and Human Services must ensure that each eligible beneficiary has access to at least two different discount card programs. For beneficiaries, the program is entirely voluntary. Medicare beneficiaries who elect to participate will have access to all discounts negotiated by the program sponsor, for which they must pay an annual enrollment fee of up to $30. The drug discount card program winds down on Dec. 31, 2005 with a transition period for drug discount card enrollees to coordinate enrollment in the new Part D prescription drug plan.

The discount card program offers “transitional assistance” for certain low income beneficiaries. Transitional assistance includes waiver of the enrollment fee and a $600 annual credit to be applied to pay eligible costs incurred in 2004 and 2005. Each sponsor of a discount card program must provide point of sale information either electronically or by telephone on the benefit for covered drugs. Discount card sponsors can be insurers, pharmacy delivery systems, or pharmacy benefit managers, but they must have a network that is large enough to provide convenient access to beneficiaries and cannot be limited to mail order service. The sponsors must also have one million covered lives already in a pharmacy benefit program, three years experience in operating a discount card program, and meet the business stability and integrity requirements established by the Centers for Medicare & Medicaid Services (CMS). CMS is currently working on the operational issues and details of the discount card program should be available soon.

Impact on hospital pharmacies serving outpatients

In order to provide beneficiaries with the discounts associated with the drug discount card, pharmacies must be part of an endorsed sponsor’s network. The discount card will entitle an enrolled beneficiary to a discount only at network retail pharmacies or through a mail order pharmacy. If a hospital pharmacy is not part of an endorsed sponsor network, then no discount would be available to hospital pharmacy customers. Hence, retail pharmacies may be asked (or may ask) to participate in new contractual arrangements with plan sponsors.

Impact on institutional pharmacies

Generally, institutional pharmacies provide prescription drugs to residents of long-term care facilities through an arrangement between the pharmacy and the facility. The vast majority of Medicare beneficiaries who are residents of long-term care nursing facilities are enrolled in both Medicare and Medicaid. Because the discount card program is only available to beneficiaries who do not have Medicaid drug benefits, these “dual eligible” beneficiaries will not qualify for a discount card. However, some of the Medicare residents in long-term care facilities who do not have Medicaid coverage may be eligible for transitional assistance under the drug discount card program.

CMS has acknowledged that institutional pharmacies have a unique delivery system and are often not well integrated into private pharmacy networks. The Act provides that the Secretary shall establish procedures and may waive requirements of the drug discount card program for sponsors that ensure access to transitional assistance for long-term care residents. According to the final interim regulations, there will be an opportunity for institutional pharmacies to provide prescriptions to residents of long-term care facilities through usual distribution channels while offsetting the cost borne by such residents who are eligible for transitional assistance. The regulations provide that sponsors are being strongly encouraged to include institutional pharmacies in their networks. A “special endorsement” waiving certain requirements will be available for sponsors who agree to contract with any willing institutional pharmacy provider in the service area.

Under the regulations, institutional pharmacies will be permitted to provide discount card drugs only to transitional assistance enrollees of the sponsor’s program who reside in long-term care facilities served by the pharmacy. Further, the regulations require special endorsed sponsors to process claims from out-of-network long-term care pharmacies that supply covered discount card drugs to long-term care facility residents enrolled in the drug discount card program when the beneficiary has remaining transitional assistance. Because residents of long-term care facilities generally use the pharmacy selected by the facility, this provision will accommodate institutional pharmacies in the event they do not join a “special endorsed” sponsor’s network.

Medicare Part D

Under the new Medicare Part D, in 2006 Medicare beneficiaries will be able to sign up for a stand-alone drug plan offering drug coverage in addition to other health coverage. The premium for drug coverage will be approximately $420 per year and the deductible will be $275 annually. After the deductible is met, insurance will pay 75 percent of the drug costs up to $2250. The beneficiary will pay the remaining 25 percent. If the out-of-pocket expenses exceed $3600, insurance will pay 95 percent of drug costs exceeding that limit or will require a small copayment. There is no coverage for drug costs between $2251 and $3600. This is commonly referred to as the “donut hole” in coverage.

Low income individuals receive a subsidy under Part D. Eligible beneficiaries will receive a sliding-scale or full premium subsidy and will pay either a reduced annual deductible or no annual deductible, depending on income level. There is no “donut hole” or gap in coverage for this group.

The Part D Access will require sponsors to allow the participation of any willing pharmacy that meets the terms and conditions under the plan. Discounts will be allowed for in-network pharmacies through the reduction of coinsurance or copayments. The sponsor must have a sufficient number of pharmacies participating to ensure convenient access and mail order only is not an option.

Much is still unknown about how the Part D benefit will work. CMS is charged with promulgating rules to fill in many of the gaps.

Impact on hospital pharmacies serving outpatients

Part D requires sponsors to allow participation of any willing pharmacy and there can be additional discounts for in-network pharmacy purchases. The discount card regulations specifically require point-of-service information relating to the remaining transitional assistance benefit. Therefore, it would seem likely that some sort of point-of service information will also be required for Part D benefits so that beneficiaries know if they have entered the “donut hole” and will be required to pay the full cost of their prescriptions.

Impact on institutional pharmacies

The discount card regulations recognized the unique nature of pharmacies serving long-term care facilities. Therefore, an optimistic view is that the Part D regulations will provide flexibility to permit institutional pharmacies to operate in a reasonable manner without undue administrative burdens. For patients that are eligible under both Medicare and Medicaid, the Medicare drug benefit will be the primary insurer. Governors, state Medicaid plans, beneficiaries and others will be forming a State Pharmaceutical Assistance Transition Commission to identify administrative problems and report recommendations to Congress before the benefit is available in 2006.

Medicare Part B Prescription Drug Changes

The current Part B drug coverage provided will continue to be Part B coverage even once Part D is in effect. However, the Act changes the payments for certain Part B drugs.

For covered outpatient drugs, beginning in 2004, reimbursement is reduced from 95 percent of the average wholesale price (AWP) to 85 percent of AWP, with infusion drugs excluded from the reduction. Beginning in 2005, non-self administered drugs furnished in connection with other Medicare covered services will be paid at 106 percent of the average sales price (ASP). ASP will be determined quarterly and based on average sales prices for each drug, taking into account discounts, rebates, free goods, and chargebacks. In addition, in 2006 a competitive bidding process will be established.

For drugs that are included within the hospital outpatient prospective payment system (PPS), the Act initially ties payment rates to AWP. For 2004-2006, PPS drugs will be paid anywhere from 46 to 95 percent of AWP depending on whether the drug is a sole-source, multi-source, or innovator drug. Starting in 2006, payment rates will be tied to the ASP. The Act also reduces the threshold for a separate payment from $150 to $50 to allow for the unbundling of more drugs. This lowered threshold will remain in place for 2005 and 2006. Although these changes are expected to negatively affect hospitals, no one has a true measure of their impact.

Analysis

The changes to Medicare drug benefits will involve significant efforts by all concerned. Assuming that enough insurers elect to participate, pharmacies will be faced with decisions about whether to participate in new discount drug programs. Beneficiaries will be faced initially with a choice of whether to participate in a drug discount program, and later with a choice of whether to budget for annual trips through the “donut hole” in coverage or seek haven in an HMO that offers more comprehensive drug coverage. Federal and state regulators will face the daunting task of trying to fill in all of the gaps in policy and administration that Congress left open. All this will take place against a background that may see Congress revisit the Act it just passed.

FOR FURTHER INFORMATION, PLEASE CONTACT:

Robert G. Homchick, Seattle, (206) 628-7676, roberthomchick@dwt.com
Edwin D. Rauzi, Seattle, (206) 628-7761, edrauzi@dwt.com
Clark Stanton, San Francisco, (415) 276-6538, clarkstanton@dwt.com
Marissa A. Olsen, Seattle, (206) 628-7714, marissaolsen@dwt.com

This Health Law Advisory is a publication of the Health Law Group of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of developments in health care law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

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