January 13,2004

Information About the Medicare Prescription Drug Program

Information For Iowans About The
Medicare Prescription Drug, Improvement
And Modernization Act Of 2003
From U.S. Senator Chuck Grassley, of Iowa

The new law is the most significant improvement in Medicare in two generations, and the AARP offered its strongendorsement. The AARP stated that the Medicare Prescription Drug, Improvement, and Modernization Act of 2003is “. . . an important milestone in the nation’s commitment to strengthen and expand health security for its citizens . .. .” The President signed the legislation into law on December 8, 2003. The measure greatly improves the Medicare program by providing access to voluntary, affordable prescription drug coverage for all Medicare beneficiaries. In sodoing, it fills a major gap in health coverage for older Americans that has existed since the Medicare program wasestablished in 1965, despite numerous efforts over the years since then to create such a benefit.


Iowa Medicare beneficiaries will realize in 2004 an early benefit through the prescription drug card that willalso have $600 for those with lower incomes to use to buy prescription drugs.

The program will begin in 2004 with the availability for all beneficiaries of a Medicare prescription drug discount card. Seniors who can afford it will pay an annual enrollment fee of no more than $35, and lower income seniors can receivethe card for free. This discount card puts the purchasing power of 40 million seniors to work, which will enable beneficiariesto purchase drugs at a savings of 10 to 25 percent. Information will be available about the drug card program in April. Beneficiaries will be able to start signing up for the cards in May. Purchase of pharmaceuticals using the cards will beginin June.

In addition, in 2004 and 2005, between 10-12 million Medicare beneficiaries will receive a discount card thatincludes $600 that can be used to pay for the prescription drugs they need. Those who are eligible for this additionalassistance will have 2003 incomes of less than $12,123 for individuals and $16,362 for couples. Altogether, that willprovide an additional $100 million over the next two years for about 84,000 Iowans, according to the Centers forMedicare and Medicaid Services.


Starting in 2006, beneficiaries will have three basic choices for their Medicare benefits and voluntary prescription drug coverage, including the guaranteed right to remain in the current Medicare program.

The full-scale drug benefit program will begin in 2006. It is not possible to implement the drug benefit sooner becausethe Department of Health and Human Services (HHS) needs time to develop and obtain public comment on theimplementing regulations for the new drug benefit. In 2006, both the new voluntary prescription drug benefit and theMedicare Advantage program will be up and running. When those programs begin, beneficiaries will have three basic choices.The first choice is to remain enrolled in the traditional Medicare program and decline coverage for prescription drug benefit. Enrollment in the drug benefit is completely voluntary so that means that no senior who does not wantor need this prescription drug coverage will be forced to buy it. Beneficiaries who do not enroll in the Medicare drugbenefit also may keep any supplemental Medigap insurance in which they are currently enrolled. The plan assuresbeneficiaries that if they already have good coverage available to them that they can keep it, and if they need theadditional coverage they can get it.

The second choice is to remain in the traditional Medicare program and enroll in a free-standing prescription drug plan. The free-standing drug plans will be offered by private health insurance carriers. The free-standing drug plans areestablished in the new law to provide access to drug coverage for those who remain in traditional Medicare. The kindof private health insurance carriers that will likely participate in this stand-alone Medicare prescription drug programcurrently administer prescription drug benefits to millions of Americans with private health insurance, including thosein rural areas of the country, and, it is likely that there will be several options for such coverage for beneficiaries. Thesefree-standing drug plans will compete to offer the best drug benefit and the lowest drug prices at the best premium. Ifprivate plans are unable to offer coverage in any part of the country, however, then the federal government will step into provide the prescription drug benefit through a fallback plan. In this way, all beneficiaries are guaranteed to haveaccess to the new Medicare drug benefit.

The third choice for beneficiaries is to enroll in the Medicare Advantage program. In the Medicare Advantage program, complete Medicare coverage, including coverage of prescription drugs, will be offered by Preferred Provider Organizations (PPO) or through Health Maintenance Organizations (HMOs). PPOs are networks of health careproviders set up by private health insurance companies. Millions of working Americans are currently enrolled in PPOsthrough their employers. PPOs, unlike most HMOs, offer those who enroll a wide choice of doctors and hospitalsthrough which they may obtain their health care services. These new options in Medicare provide older Americans morechoice and more control over their health care.

The Standard Prescription Drug Benefit

The prescription drug benefit is voluntary and available to all Medicare beneficiaries. The drug benefits offeredwill have the same value whether a beneficiary stays in traditional Medicare and enrolls in a voluntary, stand-alone prescription drug benefit, or enrolls in a Medicare Advantage program. This means that beneficiaries are free to remainin traditional Medicare if they choose while still having access to prescription drug coverage through Medicare.According to CMS, the new law will give about 145,000 Medicare beneficiaries in Iowa access to drug coverage theywould not otherwise have and will improve coverage for many more.

The standard benefit specified in law has a $250 deductible, and then Medicare pays 75 percent of prescription drug costs between $250 and $2,250 in annual drug spending. If a beneficiary incurs $3,600 in out-of-pocket costs forprescription drugs in a given year, the stop-loss benefit protects all enrollees from catastrophically high annual drug costs.After reaching the stop-loss limit, beneficiaries will pay only about 5 per cent of incurred expenses.

Under the standard benefit, Medicare beneficiaries who would otherwise have spent $2,000 on their prescriptiondrugs will save $1,313. That is a 66 percent reduction in out-of pocket costs all for the cost of the affordable monthlypremium of about $35. Those with above average spending of $7,000 would save $3,305. That is a 47 percent reductionin out-of-pocket costs.

The private health plans-both the Medicare Advantage plans and the free-standing drug plans-have flexibility todesign the drug benefit so that it is attractive and affordable for beneficiaries. The new law describes a standard benefit,which the plans are free to offer if they wish. It is expected, however, that the private plans will improve upon the standardbenefit described in the law using the flexibility given to them by Congress. The plans must design a benefit package thatis equal in value to the standard benefit and it must meet consumer protection standards specified in the law. The federaladministrator of the program may terminate plan contracts or refuse to approve plans if the benefits are not actuariallyequivalent or if they are designed to game the system. With this flexibility, the private plans will be able to design betterbenefit packages that will be attractive to beneficiaries. In turn, beneficiaries can select the benefit package that best suitstheir needs. The prescription drug benefit will be available to all Medicare beneficiaries for about $35 monthly, or about$1 per day.

Targeted Assistance For Those Who Need It Most

The program signed into law by President Bush provides more generous prescription drug coverage targeted tothose in greatest need. Up to 14 million lower income Medicare eligible individuals and couples will receive this targetedassistance from the federal government, which will provide additional benefits and lower or no monthly premium. Forthese older Americans and individuals with disabilities, the plan will cover almost all their drug costs.

There are four main categories of eligibility for the low-income assistance. First, those with incomes below 135percent of the federal poverty level and limited savings qualify for some of the most generous coverage. Those eligiblefor this assistance will have an annual income of $13,054 or less and below $6,000 in assets if they are single, and $17,618in annual income or less and below $9,000 in assets for couples. These beneficiaries will pay no premium, incur nodeductible, and will have cost sharing of just $2 for generic medications and $5 for brand name drugs. In addition, theywill have no cost sharing at all for any expenditures above $5,100 in total drug costs or $3,600 in true-out-of-pocketspending. As a result, for these individuals, the Medicare benefit will cover more than 94 percent of the prescriptiondrug costs. For example, those spending $6,000 (in 2006) would realize a 95 percent reduction in out-of-pocket costs.Altogether, about 133,000 Iowans will qualify for this comprehensive level of coverage.

The second category of lower income benefits is for those with incomes below 150 percent of the federal povertylevel and minimal savings. Those eligible for this category of benefits will have annual incomes of $14,505 or less andbelow $10,000 in assets if they are single, and annual incomes of $19,577 or less and less than $20,000 in assets forcouples. These individuals will pay a reduced monthly premium on a sliding scale from $0 to $35 and incur a $50deductible. After meeting the deductible, Medicare will cover 85 percent of prescription drug costs between $50 and$5,100, or $3,600 in true out-of-pocket spending. For spending above $5,100, this group would pay minimal costsharing of just $2 for generics and $5 for brand name medications. As a result, for these individuals, the Medicare benefitwill cover 84 to 94 percent of their annual prescription drug costs. For example, those with above average out-of-pocketspending of $6,000 (in 2006) would realize an 86 percent reduction in out-of-pocket drug spending. Altogether, about41,000 Iowans will qualify for this level of drug benefit.

The last two categories of beneficiaries receive the most generous targeted coverage. These last two categoriesinclude those who are eligible for both Medicare and Medicaid with incomes below 100 percent of the federal povertylevel or $9,670 for individuals and $13,051 for couples and who have minimal assets as determined by the state Medicaidprogram. The last group includes these individuals who also reside in a nursing home. For those not residing in nursinghomes, the program provides coverage with no monthly premium, no deductible, and $1 and $3 in cost sharing for thepurchase of generic and brand name medications respectively. In addition, for this group, there is no cost sharing forany drug expenses over $5,100, or $3,600 in true out-of-pocket spending. Those in this group with average drugspending would realize a 97 percent reduction in out-of-pocket costs.

For those in this income group residing in nursing homes, there will be no premium, no deductible and no costsharing.This represents a 100 percent reduction in out-of-pocket costs for any Medicare-eligible nursing home residentwho also qualifies for Medicaid coverage and annual income below 100 percent of the poverty level.


The Medicare Advantage program will provide expanded options for beneficiaries to enroll in a private Medicare plan to receive the complete Medicare benefit which will provide high quality, coordinated care and anarray of preventive services.

If they so choose, beginning in 2006 beneficiaries may enroll in the Medicare Advantage program. MedicareAdvantage will cover the full package of Medicare benefits and will offer a complete array of health care services,including prescription drug benefits, disease prevention services, and a range of other preventive services such asvaccinations, mammograms cancer screening, diabetes screening self-management tools, and glaucoma andcardiovascular screening will be offered by private health insurance companies through Preferred ProviderOrganizations. The country will be divided into at least 10 large regions and health insurance plans will submit bids tooffer health care services in each region to the federal agency which will oversee the Medicare Advantage program. Therequirement that plans serve entire regions will assure that those who reside in frontier and rural areas of the country willbe able to participate in the program.

Medicare Advantage will also include Health Maintenance Organizations, which will primarily operate in urbanareas. These plans will also cover the full Medicare package of benefits and will provide coordinated care and benefits.These new options are purely voluntary. Those who wish to stay enrolled in traditional Medicare can do so.


The prescription drug program will realize cost savings for Medicare beneficiaries by obtaining substantial price reductions from drug makers and by speeding up the delivery of generic drugs to the marketplace.

The new program will lead to substantial price reductions from the drug manufacturers for the prescription drugsneeded by today’s beneficiaries. These price reductions will be realized because the participating private sector drugplans will be negotiating with manufacturers, much as such private health insurance plans now do for the non-Medicarepopulation. Today, seniors who have no drug coverage pay the highest prices for prescription drugs. The new Medicarebill puts the power of the marketplace to work to achieve lower drug prices because the private plans which will providethe drug benefit will be competing with each other to enroll Medicare beneficiaries, they will be highly motivated todrive hard bargains with drug makers so they can offer a drug benefit with a lower premium that will be attractive toprospective Medicare enrollees. The Congressional Budget Office concluded that the use of competing private planswas the most effective method to reduce drug costs among the options available and will result in cost reductions of upto 25 percent.

Furthermore, Medicare enrollees will benefit from lower drug prices not only for that spending which is coveredby the benefit, but also for the spending that is not covered. This means that for the small percentage of beneficiarieswho will have drug spending that exceeds the benefit limit of $2,250, they will still have access to the lower negotiatedprices for prescription drugs.

The new law will also speed up entry of generic drugs to the marketplace, which will significantly reduceprescription drug prices. This legislation revises the drug approval process so that brand name drug companies cannotgame the system by obtaining multiple delays in the approval of a new generic drug competitor. Now, the brand namecompanies will only have one 30-month stay on the approval of a competitor generic drug. Generic drug companies arealso forced to give up a 180-day market exclusivity for a newly approved generic drug if they fail to bring the drug tomarket within a specified time period. These reforms are the most aggressive changes in the Hatch-Waxman Act sinceits enactment in 1984 , which largely created today’s generic drug industry. The Generic Pharmaceutical Associationand dozens of advocates for greater generic drug availability and lower drug costs endorsed these important reforms.

This legislation will also save Medicare beneficiaries on prescription drug that are already covered by Part B ofMedicare. Before this legislation, Medicare paid for drug covered under Part B by using an Average Wholesale Price(AWP), which was a fictitious number reported by the manufacturers themselves. The HHS Inspector General and theGeneral Accounting Office repeatedly concluded that Medicare was being overcharged for these drugs and thatbeneficiaries were forced to pay a higher coinsurance amount as a result. This new law eliminates AWP and installs anew system under which Medicare will pay for Part B drugs based on the actual prices paid by physicians.

Finally, Congress also authorized the Secretary of HHS to create a system for the reimportation of drugs fromCanada by pharmacists, wholesalers and individuals. Before the reimportation system can be implemented, however,the Secretary must certify that the system is safe. The agreement also directs the Secretary of HHS, in consultation withappropriate government agencies, to conduct a comprehensive study that identifies the problems in current law that mayinhibit the Secretary’s ability to certify the safety of pharmaceutical products imported into the United States. ThisHHS study will ensure that there is an appropriate focus placed on why this law is not currently being implemented.Finally, the new law also directs the Secretary of Commerce, in consultation with the International TradeCommission, the Secretary of Health and Human Services and the United States Trade Representative, to conduct adetailed study and report on drug pricing practices of foreign countries with respect to barriers in the trade ofpharmaceuticals. These steps are all intended to make prescription drug more affordable for the American consumer.


The prescription drug program creates incentives for employers to continue offering retiree coverage.

About 30 percent of all Medicare beneficiaries have coverage through their former employers, according to theEmployee Benefits Research Institute. It is well known that retiree health care coverage provided by businesses has beendeclining rapidly. Hewitt Associates have shown that the share of large firms offering retiree health coverage declinedfrom 80 percent in 1991 to 61 percent in 2003. The authors of a Commonwealth Fund study released this yearconcluded that: “Worse still, there is nothing to suggest that the pullback in employer offers of retiree health benefitshas reached bottom.”

The Medicare legislation signed by the President provides substantial support to employers which will make thecost of offering health insurance coverage far lower that it is today, and will make it more likely, rather than less likely,that they will continue to offer retiree health coverage. The legislation provides employers a tax-free subsidy of 28percent of the combined employer and employee prescription drug costs between $250 and $5,000 per employee. Thetotal value of this support to employers will be $89 billion over ten years.

Under terms of the legislation, qualified retiree plans would have maximum flexibility of plan design, formulariesand networks. Employers will be able to continue offering to their retirees the coverage they have today. Employers willalso be able to provide premium subsidies and cost-sharing assistance for retirees who enroll in a Medicare drug plan andintegrated plans.


Iowa stands to gain with improved access to health care due to payment increases for Iowa’s health care delivery system.

In addition to adding a prescription drug benefit and making other improvements to Medicare, the new programalso increases Medicare funding for doctors, hospitals and other health care providers, especially in rural areas, wherereimbursement levels are far below what is paid in other regions of the country.

The rural health package that is part of the Act is the most dramatic improvement in rural health care any Congresshas ever considered. It is a $25 billion commitment over 10 years. The provisions are offset by other program changes,not by seniors’ prescription drug money. Iowa hospitals and health care providers will receive an additional $438 millionover the next 10 years from Medicare, and Iowa hospitals will receive an additional $141 million over the next 10 yearsfrom Medicaid. According to the Iowa Hospital Association, this legislation provided Iowa hospitals with the secondlargest percentage increase per Medicare beneficiary of any state. The Association said that this amounts to a perbeneficiaryincrease of $583, which is the 13th highest increase of any state in the Union.

The Medicare prescription drug legislation also makes certain chiropractic services for joint and neck painavailable through the Medicare program for the first time. This component of the new law is a big step forward inMedicare recognizing the comprehensive value of chiropractic services.

U.S. Senator Chuck Grassley, of Iowa, is chairman of the Senate Finance Committee,which has jurisdiction over Medicare legislation.