Order Code RL31525
Report for Congress
Received through the CRS Web
Medicare: Beneficiary Cost-Sharing Under
Proposed Prescription Drug Benefits
Updated August 8, 2002
Christopher J. Sroka
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Medicare: Beneficiary Cost-Sharing Under
Proposed Prescription Drug Benefits
Summary
The 107th Congress considered several proposals for providing a prescription
drug benefit for the Medicare population. One bill, the Medicare Modernization and
Prescription Drug Act of 2002 (H.R. 4954, sponsored by House Republicans) was
passed by the House on June 28, 2002. Other bills considered by Congress did not
receive enough support to pass. These bills are the Medicare Outpatient Prescription
Drug Act of 2002 (S.Amdt. 4309, sponsored by Senators Graham, Miller, Kennedy,
and Corzine); the 21st Century Medicare Act (S. 2729, also referred to as the
Tripartisan bill); and the Medicare Rx Drug Benefit and Discount Act of 2002 (H.R.
5019, sponsored by House Democrats).
Each proposal would have a different form of cost-sharing (i.e., the share of an
enrollee’s drug costs that are paid by the enrollee out-of-pocket). The prescription
drug benefit proposed by Senators Graham, et al. (S.Amdt. 4309) would consist of
tiered copayments. Enrollees would pay $10 for each generic prescription filled and
$40 for each brand name prescription filled. The Tripartisan proposal (S. 2729)
would use coinsurance rates rather than flat copayments. Under this plan, enrollees
would pay 50% of drug costs after paying a $250 deductible. The House Republican
proposal (H.R. 4954) is similar to the Tripartisan proposal, except that the House
Republican proposal would use tiered coinsurance rates. The enrollee would be
required to pay 20% of expenditures beyond the $250 deductible so long as
cumulative expenditures for the year are less than $1,000. An enrollee would have
to pay 50% of expenditures between $1,000 and $2,000. The prescription drug
benefit proposed by the House Democrats (H.R. 5019) would also use coinsurance
rates. Enrollees would pay 20% of all drug expenses after the enrollee pays a $100
deductible.
Congress faces several decisions in designing the cost-sharing of a prescription
drug benefit for the Medicare population. One decision is whether to use flat
copayments or coinsurance rates. Copayments might be simple for enrollees to
understand. However, two individuals with equal levels of drug costs may consume
different quantities and types of drugs. Because of different consumption patterns,
these two individuals could pay different out-of-pocket amounts under a copayment
plan. Another decision is the amount of cost-sharing enrollees should be required to
pay. Low cost-sharing makes the drug benefit more affordable. Low cost-sharing
also makes the benefit more expensive for the government, and raises the possibility
of adverse selection.

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Contents
Proposed Cost-Sharing Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Coinsurance Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Copayment Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
List of Figures
Figure 1. Out-of-Pocket Spending Under Proposed Prescription Drug Benefits . 14
Figure 2. Out-of-Pocket Spending Under Proposed Prescription Drug Benefits
(When Total Drug Costs Are Less Than $1,200) . . . . . . . . . . . . . . . . . . . . 15
List of Tables
Table 1. Cost-Sharing Under Proposed Drug Benefits . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Hypothetical Copayments Under the Amendment Sponsored by
Graham, et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

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Medicare: Beneficiary Cost-Sharing Under
Proposed Prescription Drug Benefits
How to provide a prescription drug benefit for Medicare beneficiaries has been
a major issue in the 107th Congress. One key aspect of any prescription drug proposal
is how beneficiary cost-sharing would be structured.1 Cost-sharing refers to the
amount that an enrollee in an insurance plan must pay for medical goods and
services. Cost-sharing generally entails some combination of deductibles,
coinsurance rates or copayments, and limits on beneficiary expenses. Box 1
describes some common insurance terms that relate to cost-sharing.
Box 1. Terms Used to Describe Cost-Sharing
Deductible: The amount an enrollee must pay out-of-pocket before the insurer begins paying for
prescription drug costs. Generally, the enrollee must meet this amount each year. Plans with no
deductible are usually said to provide “first-dollar” coverage.
Coinsurance rate: The percentage of prescription drug costs which are paid by the enrollee.
Copayment: A flat dollar amount that the enrollee must pay for each prescription filled. A
copayment differs from coinsurance in that the copayment amount is fixed regardless of the price
of the drug. However, copayments may vary based on the type of drug (e.g., one copayment
amount for brand-name drugs, another for generic drugs).
Premium: The fixed amount an enrollee must pay to obtain an insurance policy. The enrollee pays
this amount regardless of whether he or she incurs drug expenses. Premiums for health care
policies are usually paid on a monthly basis. While premiums technically are not considered part
of cost-sharing, it is necessary to take them into account when comparing plans with dissimilar
cost-sharing requirements.
Coverage limit: An amount of drug expenses at which the third-party payer (federal government,
insurance plan, etc.) stops covering an enrollee’s costs. Once an enrollee’s drug costs exceed the
coverage limit, the enrollee must pay for all additional drug expenses. Some plans with a coverage
limit provide additional coverage after out-of-pocket expenses exceed a certain threshold. Such
plans are usually described as a “doughnut” plan because there is a range of expenditures (the
“hole”) where the enrollee pays 100% of expenditures.
Stop-loss amount: A limit on how much enrollees are required to pay each year out-of-pocket
(excluding premiums). Once an enrollee meets the stop-loss amount, all additional drug expenses
for the year are paid by the third-party payer (e.g., Medicare, private insurance plan). When
applying the stop-loss amount, some proposals do not count payments made by third-party payers
on behalf of enrollees.
1 There are other issues associated with a prescription drug benefit, such as how much risk
would be borne by private insurance. See CRS Report RL31496, Medicare: Major
Prescription Drug Provisions of Selected Bills, by Jennifer O’Sullivan.

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CRS-2
The 107th Congress has considered several proposals for a prescription drug
benefit. One bill, the Medicare Modernization and Prescription Drug Act of 2002
(H.R. 4954, sponsored by House Republicans) was passed on June 28, 2002. The
remaining bills did not receive enough support to pass. These bills are the Medicare
Outpatient Prescription Drug Act of 2002 (S.Amdt. 4309, sponsored by Senators
Graham, Miller, Kennedy, and Corzine); the 21st Century Medicare Act (S. 2729, also
referred to as the Tripartisan bill); and the Medicare Rx Drug Benefit and Discount
Act of 2002 (H.R. 5019, sponsored by House Democrats). This report provides
background on how the cost-sharing provisions under each bill would affect the
amount that a beneficiary would pay out-of-pocket.
Proposed Cost-Sharing Arrangements
The prescription drug benefit proposed by Senators Graham, Miller, Kennedy,
and Corzine (S.Amdt. 4309, hereafter referred to as Graham, et al.) would consist
of tiered copayments. This plan would have no deductible. Enrollees would pay $10
for each prescription filled with a generic drug and $40 for each prescription filled
with a brand name drug included in the formulary.2 For prescriptions filled with a
drug not included in the formulary, the enrollee would have to pay for the entire cost
of the drug. A stop-loss amount of $4,000 would be in effect; in other words, once
an enrollee’s cumulative out-of-pocket payments reached $4,000 for the year, he or
she would not be liable for any additional drug costs for the year. Under this
proposal, enrollees would pay a $25 monthly premium.
The Tripartisan proposal (S. 2729) would use coinsurance rates rather than flat
copayments. Under this plan, enrollees would have to meet an annual deductible of
$250. That is, the enrollee would be responsible for paying for the first $250 of his
or her annual drug expenditures. Once the enrollee’s cumulative drug expenses
exceeded $250 within the year, insurance coverage would begin. The enrollee would
pay 50% of drug costs above the $250 deductible but below $3,450. The enrollee
would be responsible for paying for all drug costs beyond the $3,450 coverage limit.
Once the enrollee’s total drug costs reached $5,300 (equivalent to $3,700 out-of-
pocket, excluding premiums), the enrollee would pay 10% of future drug costs for
the year. Although no dollar amount for the premium is specified in the legislation,
it has been reported that enrollees would pay a monthly premium of $24 under this
plan.3
The House Republican proposal (H.R. 4954) is similar to the Tripartisan
proposal. Both plans have $250 deductible, a coverage limit, and a $3,700 stop-loss
provision. Unlike the Tripartisan bill, the House Republican proposal would have
two coinsurance rates. The enrollee would be required to pay 20% of expenditures
beyond the deductible so long as cumulative expenditures for the year are less than
2 A formulary is a list of preferred drugs developed by a pharmacy benefit manager (PBM).
PBMs often lower the costs of prescription drug benefit by encouraging enrollees to use
drugs included in the formulary.
3 Pear, Robert. Senate Begins Debate on Rival Medicare Prescription Plans, New York
Times, July 16, 2002.

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CRS-3
$1,000. Once an enrollee’s cumulative expenses exceed $1,000 for the year, the
enrollee would have to pay 50% of future expenditures. The 50% rate would be in
effect until the enrollee’s cumulative expenditures reach $2,000 (the first coverage
limit). Any additional expenditure beyond the $2,000 coverage limit would have to
be paid entirely by the enrollee. Once the enrollee’s total drug costs reached $4,800
(equivalent to $3,700 out-of-pocket, excluding premiums), the enrollee would not be
required to pay for any additional drug expenses for the year. Although no dollar
amount for the premium is specified in the legislation, it has been reported that
enrollees would pay a monthly premium of $33 under this plan.4
The prescription drug benefit proposed by the House Democrats (H.R. 5019)
would also use coinsurance rates. This proposal would have an annual deductible of
$100. Enrollees would pay 20% of all drug expenses after this deductible is met.
Once the enrollee’s total drug costs reached $9,600 (equivalent to $2,000 out-of-
pocket, excluding premiums), the enrollee would not be liable for any additional
expenses. Enrollees would be charged a monthly premium of $25.
While all four proposals have a stop-loss amount, they differ on which payments
apply towards the stop-loss. The proposals sponsored by Graham, et al., and by the
House Democrats would apply payments made by third-party payers (e.g., a retiree
health plan, a state pharmaceutical assistance program) on behalf of the enrollee
towards the stop-loss amount. The Tripartisan and House Republican proposals
would apply payments made by the enrollee, another individual (such as an enrollee’s
family member), or Medicaid, or payments on behalf of the enrollee under the bills’
low-income subsidy provisions.
Table 1 summarizes the major cost-sharing provisions of the four proposed
prescription drug benefits.
The next section discusses how cost-sharing would be calculated under the
proposals that would use coinsurance. Following the section on coinsurance, the
proposal to use copayments is discussed.
4 Pear, Robert. House Votes to Place Prescription Drugs Under Coverage by Medicare, New
York Times, June 28, 2002.

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CRS-4
Table 1. Cost-Sharing Under Proposed Drug Benefits
House
House
Graham, et al.
Tripartisan
Republican
Democratic
(S. 2625)
(S. 2729)
(H.R. 4954)
(H.R. 5019)
Monthly
$25
$24
$33
$25
premium
Deductible
None
$250
$250
$100
Cost-sharing
Tiered
Single
Tiered
Single
copayments
coinsurance
coinsurance
coinsurance
Cost-sharing
$10 for generic
50% of drug
20% of drug
20% of drug
amounts
drugs; $40 for
costs above
costs above
costs above
preferred brand
deductible and
deductible and
deductible
name drugs;
up to coverage
up to $1,000;
full-cost for
limit
50% of drug
non-preferred
costs up to
brand name
coverage limit
drugs
Coverage limit
None
$3,450
$2,000
None
Range of
None
$3,450-$5,300
$2,000-$4,800
None
expenditures
where enrollee
pays for 100%
of drug costs
Stop-loss
$4,000 out-of-
$3,700 out-of-
$3,700 out-of-
$2,000 out-of-
amount
pocket
pocket
pocket
pocket
($5,300 total
($4,800 total
($9,600 total
expenditures)
expenditures)
expenditures)
Out-of-pocket
Cost-sharing
Cost-sharing
Cost-sharing
Cost-sharing
payments
paid by enrollee
paid by enrollee,
paid by enrollee,
paid by enrollee
applied
or by third-party
another
another
or by third-party
towards stop-
payer on
individual,
individual,
payer on
loss amount.
enrollee’s behalf
Medicaid, low-
Medicaid, low-
enrollee’s behalf
income subsidy
income subsidy
Enrollee
None
10% of
None
None
payments
expenditures
beyond stop-
beyond stop-loss
loss amount
Note: Premiums for the Tripartisan and House Republican proposals are estimates.

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CRS-5
Coinsurance Proposals
The three proposals that would use coinsurance rates (the Tripartisan plan and
both House proposals) can be compared by examining how much a hypothetical
enrollee with a given level of drug costs would pay under each proposal. For a given
level of prescription drug expenses, a beneficiary’s out-of-pocket payments will vary
depending on the combination of premium, deductible, coinsurance rates, coverage
limit, and out-of-pocket limit. The cost to the government of providing coverage will
also vary depending on these plan characteristics. More specifically, if a plan is
designed to increase the beneficiary’s share of the cost, the government’s share of the
cost will decrease.
The following examples illustrate how, for given levels of total drug
expenditures, an enrollee’s out-of-pocket payments would vary under the Tripartisan
proposal and the two House proposals. The examples assume that all cost-sharing
is paid by the enrollee; they do not show the different effects that would result when
third-party payers make cost-sharing payments on behalf of enrollees. The following
examples do not take into account reductions in expenditures that may occur because
of the use of pharmacy benefit managers (PBMs) to control program costs.
Example 1: Enrollee has zero annual drug costs
Tripartisan
House Republican
House Democratic
(S. 2729)
(H.R. 4954)
(H.R. 5019)
Annual premiums
$288
Annual premiums
$396
Annual premiums
$300
Total payments
$288
Total payments
$396
Total payments
$300
Note: Premiums for the Tripartisan and House Republican proposals are estimates.
In Example 1, the enrollee does not have any drug expenditures. About 10% of
Medicare Fee-for-Service enrollees fall into this category.5 The enrollee participating
in the drug benefit would have to pay annual premiums based on the specific
proposal.
5 Congressional Budget Office, March 2002 baseline projections.

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CRS-6
Example 2: Enrollee’s annual drug costs equal $50
Tripartisan
House Republican
House Democratic
(S. 2729)
(H.R. 4954)
(H.R. 5019)
Annual premiums
$288
Annual premiums
$396
Annual premiums
$300
Out-of-pocket
$50
Out-of-pocket
$50
Out-of-pocket
$50
Total payments
$338
Total payments
$446
Total payments
$350
Note: Premiums for the Tripartisan and House Republican proposals are estimates.
In the second example, the enrollee’s annual drug expenditures equal $50. As
with the first example, the enrollee must pay the annual premium amount. The $50
in drug costs fall below the $100 deductible proposed under the House Democratic
plan and below the $250 deductible proposed under the House Republican and
Tripartisan plans. Consequently, the enrollee would be required to pay the entire $50
out-of-pocket under all three proposals.

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CRS-7
Example 3: Enrollee’s annual drug costs equal $750
Tripartisan
House Republican
House Democratic
(S. 2729)
(H.R. 4954)
(H.R. 5019)
Annual premiums
$288
Annual premiums
$396
Annual premiums
$300
Deductible
$250
Deductible
$250
Deductible
$100
Coinsurance
Coinsurance
Coinsurance
(= 50% of $500a)
$250
(= 20% of $500a)
$100
(= 20% of $650b)
$130
Total payments
$788
Total payments
$746
Total payments
$530
Note: Premiums for the Tripartisan and House Republican proposals are estimates.
a Equal to total drug expenditures ($750) minus the deductible ($250).
b Equal to total drug expenditures ($750) minus the deductible ($100).
In Example 3, the enrollee has $750 in annual drug costs. This amount exceeds
the deductibles proposed by each plan. In the case of the House Democratic plan, the
enrollee’s costs exceed the deductible by $650. The enrollee would pay the annual
premiums, the full $100 deductible, and 20% of the $650 amount. In the case of the
House Republican and the Tripartisan plans, the enrollee’s costs exceed the
deductible by $500. Under the House Republican plan, the enrollee would pay the
annual premiums, the full $250 deductible, and 20% of the $500 amount. Under the
Tripartisan plan, the enrollee would pay the annual premiums, the full $250
deductible, and 50% of the $500 amount.

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CRS-8
Example 4: Enrollee’s annual drug costs equal $1,500
Tripartisan
House Republican
House Democratic
(S. 2729)
(H.R. 4954)
(H.R. 5019)
Annual premiums
$288
Annual premiums
$396
Annual premiums
$300
Deductible
$250
Deductible
$250
Deductible
$100
Coinsurance
First coinsurance
Coinsurance
(= 50% of $1,250a)
$625
(= 20% of $750b)
$150
(= 20% of $1,400a)
$280
Second coinsurance
(= 50% of $500c)
$250
Total payments
$1,163
Total payments
$1,046
Total payments
$680
Note: Premiums for the Tripartisan and House Republican proposals are estimates.
a Equal to total drug expenditures ($1,500) minus the deductible.
b Equal to $1,000 minus the deductible ($250).
c Equal to total drug expenditures ($1,500) minus $1,000.
The fourth example illustrates enrollee out-of-pocket spending when the
enrollee’s total drug costs equal $1,500. Under the House Republican plan, the
coinsurance rate changes to 50% once the enrollee’s cumulative expenses exceed
$1,000. Thus, the enrollee would pay (1) the annual premiums; (2) the $250
deductible; (3) 20% of $750, where $750 equals the difference between $1,000 and
the $250 deductible; and (4) 50% of $500, where $500 equals the difference between
the total drug expenses and $1,000.
The Tripartisan and House Democratic proposals would work the same way in
this example as they did in the previous example. Under the Tripartisan plan, the
enrollee would pay the annual premiums, the $250 deductible, and 50% of expenses
above the deductible. Under the House Democratic plan, the enrollee would pay the
annual premiums, the $100 deductible, and 20% of expenses above the deductible.

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CRS-9
Example 5: Enrollee’s annual drug costs equal $3,000
Tripartisan
House Republican
House Democratic
(S. 2729)
(H.R. 4954)
(H.R. 5019)
Annual premiums
$288
Annual premiums
$396
Annual premiums
$300
Deductible
$250
Deductible
$250
Deductible
$100
Coinsurance
First coinsurance
Coinsurance
(= 50% of $2,750a)
$1,375
(= 20% of $750b)
$150
(= 20% of $2,900a)
$580
Second coinsurance
(= 50% of $1,000c)
$500
Expenditures above
$2,000 coverage
limit
$1,000
Total payments
$1,913
Total payments
$2,296
Total payments
$980
Note: Premiums for the Tripartisan and House Republican proposals are estimates.
a Equal to total drug expenditures ($3,000) minus the deductible.
b Equal to $1,000 minus the deductible ($250).
c Equal to the coverage limit ($2,000) minus $1,000.
In Example 5, the enrollee’s cumulative drug costs for the year equal $3,000.
Under the Tripartisan and House Democratic proposals, the enrollee’s payments
would be calculated in the same manner as in the previous two examples.
Under the House Republican proposal, coverage would be limited to the first
$2,000 of drug expenses. Thus, the $3,000 in expenses generated by the enrollee
would exceed the initial coverage limit by $1,000. The enrollee would be required
to pay these excess expenses out-of-pocket. In total, the enrollee would pay (1) the
annual premiums; (2) the $250 deductible; (3) 20% of $750, where $750 equals the
difference between the deductible and $1,000; (4) 50% of $1,000, where $1,000
equals the difference between the initial coverage limit ($2,000) and $1,000; and (5)
those expenditures exceeding the initial coverage limit, which would equal $1,000
in this example.

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CRS-10
Example 6: Enrollee’s annual drug costs equal $4,500
Tripartisan
House Republican
House Democratic
(S. 2729)
(H.R. 4954)
(H.R. 5019)
Annual premiums
$288
Annual premiums
$396
Annual premiums
$300
Deductible
$250
Deductible
$250
Deductible
$100
Coinsurance
First coinsurance
Coinsurance
(= 50% of $3,200a)
$1,600
(= 20% of $750b)
$150
(= 20% of $4,400c)
$880
Second coinsurance
$500
(= 50% of $1,000d)
Expenditures above
Expenditures above
$3,450 coverage
$2,000 coverage
limit
$1,050
limit
$2,500
Total payments
$3,188
Total payments
$3,796
Total payments
$1,280
Note: Premiums for the Tripartisan and House Republican proposals are estimates.
a Equal to coverage limit ($3,450) minus the deductible ($250).
b Equal to $1,000 minus the deductible ($250).
c Equal to total drug expenditures ($4,500) minus the deductible ($100).
d Equal to the coverage limit ($2,000) minus $1,000.
In Example 6, the enrollee’s cumulative drug costs for the year equal $4,500.
The enrollee’s payments under the House Republican and House Democratic
proposals would be calculated in the same manner as in the previous two examples.
Under the Tripartisan proposal, no coverage would be provided after $3,450
worth of total expenses (including the $250 deductible). Thus, the $4,500 in
expenses generated by the enrollee would exceed the coverage limit by $1,050. The
enrollee would be required to pay these excess expenses out-of-pocket. In total, the
enrollee would pay (1) the annual premiums; (2) the $250 deductible; (3) 50% of
$3,200, where $3,200 equals the difference between the deductible and $3,450; (4)
those expenditures exceeding the coverage limit, which would equal $1,050 in this
example.

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CRS-11
Example 7: Enrollee’s annual drug costs equal $6,000
Tripartisan
House Republican
House Democratic
(S. 2729)
(H.R. 4954)
(H.R. 5019)
Annual premiums
$288
Annual premiums
$396
Annual premiums
$300
Deductible
$250
Deductible
$250
Deductible
$100
Coinsurance
First coinsurance
Coinsurance
(= 50% of $3,200a)
$1,600
(= 20% of $750b)
$150
(= 20% of $5900c)
$1,180
Second
coinsurance
$500
(= 50% of $1,000e)
Expenditures
Expenditures
between $3,450
between $2,000
coverage limit and
coverage limit and
$5,300d
$1,850
$4,800d
$2,800
10% of $700f
$70
Total payments
$4,058
Total paymentsg
$4,096
Total payments
$1,580
Note: Premiums for the Tripartisan and House Republican proposals are estimates.
a Equal to coverage limit ($3,450) minus the deductible ($250).
b Equal to $1,000 minus the deductible ($250).
c Equal to total drug expenditures ($6,000) minus the deductible ($100).
d Equal to the level of cumulative expenditures at which enrollee spends $3,700 out-of-pocket.
e Equal to the coverage limit ($2,000) minus $1,000.
f Equal to total drug expenditures ($6,000) minus $5,300.
g Equal to limit on out-of-pocket payments ($3,700) plus annual premiums.
Example 7, illustrates a situation in which an enrollee’s payments exceed the
$3,700 stop-loss amount that would exist under the Tripartisan and House
Republican proposals.
Using the same methods as the previous example, the enrollee would have
potential out-of-pocket payments of $4,900, plus the annual premiums, under the
House Republican proposal. But $4,900 is greater than the $3,700 limit. Thus, the
enrollee’s total payments for the year would be $3,700 plus the annual premiums, a
total of $4,096. This amount, $4,096, is the maximum that an enrollee would pay in
a year under the House Republican proposal. This maximum would be paid by any
enrollee with annual drug costs greater than $4,800.
Under the Tripartisan plan, an enrollee would reach the $3,700 limit on out-of-
pocket payments once cumulative drug costs reached $5,300. The enrollee would
then pay 10% of all expenditures above that amount. In total, the enrollee would pay
(1) the annual premiums; (2) the $250 deductible; (3) 50% of $3,200, where $3,200
equals the difference between the deductible and $3,450; (4) $1,850, which equals
the amount of expenditures exceeding the $3,450 coverage limit but less than $5,300;
and (5) $70, which equals 10% of expenditures above $5,300. Because the enrollee
continues to pay a portion of expenditures after the stop-loss amount is met, out-of-
pocket payments continue to increase. Unlike the House Republican plan, there is
no maximum out-of-pocket amount under the Tripartisan plan.

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CRS-12
Example 8: Enrollee’s annual drug costs equal $12,000
Tripartisan
House Republican
House Democratic
(S. 2729)
(H.R. 4954)
(H.R. 5019)
Annual premiums
$288
Annual premiums
$396
Annual premiums
$300
Deductible
$250
Deductible
$250
Deductible
$100
Coinsurance
$1,600
First coinsurance
Coinsurance
$150
(= 50% of $3,200a)
(= 20% of $750b)
(= 20% of $9,500c)
$1,900
Second
coinsurance
(= 50% of
$1,000e)
$500
Expenditures
Expenditures
between $3,450
between $2,000
coverage limit and
coverage limit
$5,300d
$1,850
$4,800d
$2,800
10% of $6,700f6
$670
Total payments
$4,658
Total paymentsg
$4,096
Total paymentsg
$2,300
Note: Premiums for the Tripartisan and House Republican proposals are estimates.
a Equal to coverage limit ($3,450) minus the deductible ($250).
b Equal to $1,000 minus the deductible ($250).
c Equal to the level of cumulative expenditures at which enrollee spends $2,000 out-of-pocket ($9,600)
minus the deductible ($100).
d Equal to the level of cumulative expenditures at which enrollee spends $3,700 out-of-pocket.
e Equal to the coverage limit ($2,000) minus $1,000.
f Equal to total drug expenditures ($12,000) minus $5,300.
g Equal to limit on out-of-pocket payments plus annual premiums.
The House Democratic proposal would limit enrollee out-of-pocket payments
(excluding premiums) to $2,000. In Example 8, the enrollee’s cost-sharing would
otherwise exceed this limit. With total drug expenses of $12,000, the enrollee would
have had to pay $2,480 under the 20% coinsurance rule. Because $2,480 exceeds the
plan’s limit, the enrollee only has to pay $2,000 for the year, plus $300 in premiums.
With a 20% coinsurance rate and a $100 deductible, an enrollee would reach the
$2,000 limit on out-of-pocket payments once the enrollee’s drug expenses exceeded
$9,600 for the year. Thus, any enrollee with drug expenses above $9,600 per year
would pay a total of $2,300 under the House Democratic proposal.
Figure 1 provides a graphical representation of the relationship between an
enrollee’s total drug costs and his or her total out-of-pocket expenditures (including
annual premiums). The dashed line in Figure 1 represents the amount that an
individual would pay if he or she did not have any insurance coverage for
prescription drugs. The dashed line also coincides with points where the amount that
an individual pays out-of-pocket is exactly equal to his or her total drug costs. Points
below this line represent levels of drug costs where the enrollee pays less in out-of-
pocket expenses than the amount of his or her drug costs. Points above the dashed
line represent levels of drug costs where the enrollee must pay more in out-of-pocket

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CRS-13
expenses than his or her actual drug costs. In other words, the enrollee gets less out
of the benefit in dollar terms than he or she pays in. This situation arises from the
presence of fixed payments, such as premiums and deductibles.
A more detailed depiction of Figure 1 that focuses on low values of total drug
costs is shown in Figure 2. In Figure 2, the line representing the Tripartisan
proposal crosses the dashed line (which represents no insurance) at $826. This
means that an enrollee would need to have drug expenditures over $826 before he or
she would get more out of the benefit, in dollar terms, than what he or she paid.
Thus, $826 represents a “break-even” point. To get a positive dollar benefit under
the House Republican and House Democratic proposals, an enrollee would need to
incur drug costs over $745 and $475, respectively.

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CRS-14
Figure 1. Out-of-Pocket Spending Under Proposed Prescription Drug Benefits
$9,000
No Insurance
$7,500
ng $6,000
Tripartisan
$4,500
House Republican
t-of-Pocket Spendi
u $3,000
O
House Democratic
$1,500
$0
$0
$1,500
$3,000
$4,500
$6,000
$7,500
$9,000
$10,500
$12,000
Total Drug Costs
Source: Congressional Research Service (CRS).
Note: Out-of-pocket spending includes annual premiums.

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CRS-15
Figure 2. Out-of-Pocket Spending Under Proposed Prescription Drug Benefits
(When Total Drug Costs Are Less Than $1,200)
$900
Tripartisan
$750
House Republican
ng $600
House Democratic
$450
t-of-Pocket Spendi
u $300
O
$150
No Insurance
$0
$0
$150
$300
$450
$600
$750
$900
$1,050
$1,200
Total Drug Costs
Source: Congressional Research Service (CRS).
Note: Out-of-pocket spending includes annual premiums.

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CRS-16
Copayment Proposal
The proposal sponsored by Graham, et al., would require enrollees to pay flat
payments per prescription rather than a percentage of their drug costs. Enrollees
would pay $10 for each prescription filled with a generic drug, $40 for each
prescription filled with a brand-name drug included in the formulary, and the full cost
for each prescription filled with a brand-name drug not included in the formulary.
The amount that an enrollee would pay in cost-sharing, relative to that enrollee’s
total drug costs, is likely to vary significantly depending on the enrollee’s drug
utilization patterns. Under a coinsurance proposal described above, individuals with
identical levels of annual drug costs pay the same amount in cost-sharing (ignoring
special provisions for low-income beneficiaries). This is not necessarily true under
a drug benefit that uses copayments. For individuals with identical annual drug costs,
the number of prescriptions filled in a year can vary significantly. For example,
Medicare beneficiaries with annual drug costs around $500 fill between 2 and 83
prescriptions per year.6 Some of this variation is due to different amounts of pills per
prescription (e.g., 30-day supply versus a 90-day supply); the proposal sponsored by
Graham, et. al., could reduce some of this variation because the bill provides a
definition of what constitutes a prescription. Even so, the exact amount that an
individual with $500 in annual drug costs would pay under a copayment system
would still vary depending on the number of prescriptions and the share of those
prescriptions filled with generic drugs. Because of this variation, it is not possible
to link cost-sharing payments under a copayment plan to an enrollee’s total drug
costs or calculate a break-even point, as was done for the proposals that would use
coinsurance rates.
Table 2 illustrates how much an individual could pay under the proposal
sponsored by Graham, et al. The number of prescriptions specified are hypothetical;
the table includes payments when an enrollee fills 22 prescriptions per year, the
average number of prescriptions filled by noninstitutionalized Medicare beneficiaries
in 1998.7 Ranges of payments are provided to reflect three different scenarios: all
prescriptions are filled with generic drugs, 50% of prescriptions is filled with generic
drugs and the other 50% is filled with brand name drugs, and all prescriptions are
filled with brand name drugs. Table 2 does not illustrate the situation where an
enrollee receives a prescription for a drug not included in the formulary; in this
situation, the enrollee would have to pay for the entire cost of the drug.
Table 2 depicts how the stop-loss amount would work under the proposal
sponsored by Graham, et. al. When total copayments reach $4,000, the enrollee does
not have to pay for any additional prescriptions filled. The number of prescriptions
it would take to reach the stop-loss amount depends on the mix of prescriptions an
enrollee uses. In the examples provided in Table 2, an enrollee who uses all brand
name drugs would reach the stop-loss amount once he or she filled 100 prescriptions
for the year. An enrollee whose prescriptions are one-half generic and one-half brand
6 Centers for Medicare and Medicaid Services, 1998 Medicare Current Beneficiary Survey.
7 Ibid.

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CRS-17
name would reach the stop-loss amount at 160 prescriptions. An enrollee who uses
only generic prescriptions would reach the stop-loss amount at 400 prescriptions. An
enrollee using drugs off the formulary would reach the limit with even fewer
prescriptions.
Policy Options
The cost-sharing design is one of the many issues that Congress would need to
consider in developing a prescription drug benefit for the Medicare population.
Several options are available, each with particular trade-offs in terms of cost for
beneficiaries and program costs for the government.
One key decision is whether to design cost-sharing around coinsurance rates or
flat copayments. The advantage of coinsurance rates is that, aside from any special
provisions for low-income beneficiaries, individuals with identical levels of annual
drug costs would pay the same amount. On the other hand, copayments could be
easier for Medicare beneficiaries to understand; the enrollee pays the same amount
for all brand name drugs or for all generic drugs, regardless of the drugs’ cost, and
does not have to be concerned about deductibles, differing coinsurance rates, or
coverage limits.
Another policy issue concerns the amount of cost-sharing an enrollee should be
required to pay. Low levels of cost-sharing reduce the financial burden that enrollees
would have to bear. However, these reduced burdens must be borne by some entity.
If enrollees face low cost-sharing, the costs of providing a benefit must be picked up
by the government, third-party payers contracted by the government, or providers of
pharmaceutical goods and services.
In addition, the level of cost-sharing affects the break-even point, discussed
earlier in the report. Low cost-sharing results in a low break-even point, and a
relatively low break-even point could encourage more beneficiaries to choose to
participate in the prescription drug benefit. On the other hand, a relatively high
break-even point means that a larger share of beneficiaries are paying more for
coverage than they are receiving for benefits. Consequently, a relatively high break-
even point could result in lower program costs than if there were a low break-even
point. However, a break-even point that is too high might discourage many
beneficiaries from enrolling; this phenomena is referred to as “adverse selection.”
Under adverse selection, individuals with low expected drug costs choose to pay for
their drug entirely out-of-pocket instead of purchasing insurance coverage. Adverse
selection can result in higher program costs because there are fewer low-cost
enrollees participating in the program. The proposals require enrollees to pay late-
enrollment penalties if they do not elect coverage when first becoming eligible; such
penalties could reduce the possibility of adverse selection.

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CRS-18
Table 2. Hypothetical Copayments Under the Amendment Sponsored by Graham, et al.
Total payments
(equal to copayments + annual
Annual copayments
premium)
No. of
All
50% generic/
Annual
All
50% generic/
prescriptions
generic
50% brand
All brand
premium
generic
50% brand
All brand
0
$0
$0
$0
$300
$300
$300
$300
2
$20
$50
$80
$300
$320
$350
$380
6
$60
$150
$240
$300
$360
$450
$540
10
$100
$250
$400
$300
$400
$550
$700
22a
$220
$550
$880
$300
$520
$850
$1,180
50
$500
$1,250
$2,000
$300
$800
$1,550
$2,300
100
$1,000
$2,500
$4,000b
$300
$1,300
$2,800
$4,300
160
$1,600
$4,000b
$4,000b
$300
$1,900
$4,300
$4,300
200
$2,000
$4,000b
$4,000b
$300
$2,300
$4,300
$4,300
400
$4,000b
$4,000b
$4,000b
$300
$4,300
$4,300
$4,300
a Represents the average number of prescriptions filled by Medicare beneficiaries in 1998.
b Equal to the stop-loss amount.

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