HHS Releases Draft Version of Rules for New Medicare Prescription Drug Benefit

HHS Secretary Tommy Thompson on Monday released a draft version of regulations for the new Medicare drug benefit, calling the 1,956 pages of rules "another giant step forward" toward implementing the Medicare law enacted in December, the Los Angeles Times reports. The proposed regulations, which are open to public comment for 60 days, primarily are aimed at helping potential participants in the drug benefit -- including insurers, pharmacy benefit managers and large employers -- shape the final regulations and better understand how the program will work and how to obtain government contracts, according to the Los Angeles Times.

All Medicare beneficiaries without existing drug coverage could sign up for the drug benefit beginning Nov. 1, 2005, and coverage would begin Jan. 1, 2006, the rules state (Kemper, Los Angeles Times, 7/27). Beneficiaries would sign up for an individual Medicare drug coverage plan for one year at a time. Those without existing drug coverage and with annual incomes above $13,965 would pay monthly premiums of about $35. To create "an incentive for immediate, widespread enrollment," premiums would increase 1% for each month beneficiaries delay enrollment, Bush administration officials said (Pear, New York Times, 7/27). Beneficiaries would pay an annual deductible of $250. After that point, Medicare would cover 75% of drug costs up to $2,250 per year. Beneficiaries would then be responsible for 100% of drug spending between $2,250 and $5,100, after which point Medicare would cover 95% of drug costs. After beneficiaries pay the $420 in out-of-pocket costs, they would save an average of 53%, or $1,274 off their annual drug expenses in the first year of the program, according to the Bush administration.

About 11 million low-income beneficiaries would qualify for more generous drug coverage under the rules. To determine which beneficiaries are eligible for the additional assistance, the administration will employ an asset test for 4.5 million low-income beneficiaries who have incomes too high to qualify for Medicaid. The asset test will count cash accounts and real estate holdings other than a primary residence, but not the value of family heirlooms, "wedding rings, microwaves and cars," according to CMS Administrator Mark McClellan (Los Angeles Times, 7/27). He said, "Nonliquid assets are not going to be counted" (Sherman, AP/Bergen Record, 7/27). Beneficiaries with limited assets and annual incomes lower than $12,568 per individual or $16,681 per couple would have 95% of their prescription drug costs covered under Medicare. For beneficiaries with assets up to $10,000 per individual or $20,000 per couple and annual incomes up to $13,965 per individual and $17,735 per couple, Medicare would cover an average of 85% of their prescription drug costs. Medicare would waive premiums and deductibles for 6.4 million beneficiaries who are dually eligible for Medicare and Medicaid and would require copayments of $1 to $3 per prescription (Los Angeles Times, 7/27).

The Bush administration also sought to address concerns that the new drug benefit would "hasten an already steady trend of employers dropping retiree health benefits," USA Today reports. The Congressional Budget Office has estimated that up to 2.7 million beneficiaries could lose employer-sponsored retiree drug coverage when the Medicare drug benefit begins. McClellan did not provide an estimate of how many beneficiaries would lose employer-sponsored coverage, but he said the new rules would create "a big increase in support for retiree coverage" (Appleby, USA Today, 7/27). "We're only going to provide [subsidies] to employers that pass it along to retirees. No windfalls," he added (Lueck, Wall Street Journal, 7/27). According to USA Today, the "biggest carrot" for employers to retain retiree drug coverage is an option under which the federal government would provide annual subsidies equal to 28% of eligible drug coverage costs -- ranging from $611 to $940 per covered retiree (USA Today, 7/27). To qualify for the subsidy, employers would have to demonstrate that their drug benefits are equal or superior to the Medicare drug benefit (Wall Street Journal, 7/27). Other options would allow employers to provide benefits to retirees for the gap in coverage and to provide supplemental coverage to retirees for their share of drug expenses (USA Today, 7/27). The Bush administration also "raised the possibility of granting waivers to provide employers with additional flexibility" in administering retiree drug coverage, according to the Wall Street Journal (Wall Street Journal, 7/27).

Companies administering the drug benefit would be allowed to change their formularies and copays at any time, although they must give 30 days' notice to directly affected beneficiaries, according to the rules. Drug benefit sponsors and pharmacists would be subject to federal laws prohibiting kickbacks for referring Medicare beneficiaries. Private insurers that pool Medicare beneficiaries to negotiate greater discounts from pharmaceutical companies would be required to inform the federal government about the prices and how much of the discounts were being passed on to beneficiaries and the Medicare program. In addition, the rules state that doctors would be able to prescribe prescription drugs for off-label purposes, although they are "strongly encourage[d] ... to clearly document and justify off-label use" in patient records (New York Times, 7/27).

"Providing flexibility in the marketplace is the best way to cover more retirees," Janet Boyd, director of government relations for the Employers' Coalition on Medicare, said (Wall Street Journal, 7/27). Ed Kaleta, a member of the coalition and government affairs manager for Caterpillar, said that the options "will absolutely help keep employers in the game." However, Paul Fronstin of the Employee Benefit Research Institute said, "It's hard to believe this is going to have a major impact in changing the trend" (USA Today, 7/27). He said that even with the federal subsidies, "It's still cheaper [for employers] to discontinue [their] program." Ron Pollack, executive director of Families USA, added, "The new regulations fail to provide real protection" for retirees. He said, "This will cost the taxpayers tens of billions of dollars, but will do very little to protect retirees" (Wall Street Journal, 7/27).

According to Sen. Max Baucus (D-Mont.), the regulations seem to "defer many decisions until the final rules are published later this year." The draft rules do not address such issues as how many drugs or therapeutic classes the drug benefit will cover or how the Bush administration plans to maximize the number of private plans in each geographic region that offer the Medicare drug benefit. The administration also said that it plans to create 10 to 50 such geographic regions but did not specify how it would configure them (New York Times, 7/27).