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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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