Order Code RL31525
Report for Congress
Received through the CRS Web
Medicare: Beneficiary Cost-Sharing Under
Proposed Prescription Drug Benefits
Updated January 24, 2003
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
Providing a prescription drug benefit for Medicare beneficiaries is a policy issue
facing the 108th Congress. In designing a prescription drug benefit, the 108th
Congress may draw upon features of proposals put forth in the previous Congress.
One bill introduced in the 107th Congress, 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 the 107th Congress
did not receive enough support to pass. These bills were 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 in the 107th Congress would have had 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 have consisted of tiered copayments. Enrollees would have paid $10
for each generic prescription filled and $40 for each brand name prescription filled.
The Tripartisan proposal (S. 2729) would have used coinsurance rates rather than flat
copayments. Under this plan, enrollees would have paid 50% of drug costs after
paying a $250 deductible. The House Republican proposal (H.R. 4954) was similar
to the Tripartisan proposal, except that the House Republican proposal would have
used tiered coinsurance rates. The enrollee would have been required to pay 20% of
expenditures beyond the $250 deductible so long as cumulative expenditures for the
year were less than $1,000. An enrollee would have had to pay 50% of expenditures
between $1,000 and $2,000. The prescription drug benefit proposed by the House
Democrats (H.R. 5019) would have also used coinsurance rates. Enrollees would
have paid 20% of all drug expenses after the enrollee paid a $100 deductible.
The 108th Congress faces several decisions if it wants to enact a prescription
drug benefit for the Medicare population. Several of these decisions pertain to the
cost-sharing design of the benefit. 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
Providing a prescription drug benefit for Medicare beneficiaries is a policy issue
facing the 108th 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 considered several proposals for a prescription drug benefit.
In designing a prescription drug benefit, the 108th Congress may draw upon features
of proposals put forth in the previous Congress. One bill introduced in the 107th
Congress, the Medicare Modernization and Prescription Drug Act of 2002 (H.R.
4954, sponsored by House Republicans) was passed on June 28, 2002. The other
bills did not receive enough support to pass. These bills were 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 have affected
the amount that a beneficiary paid 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.) consisted of
tiered copayments. This plan would not have required a deductible. Enrollees would
have paid $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 paid for the entire cost of the drug. A stop-loss amount of $4,000 would have
been 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 have been liable for any additional
drug costs for the year. Under this proposal, enrollees would have paid a $25
monthly premium.
The Tripartisan proposal (S. 2729) consisted of coinsurance rates rather than flat
copayments. This plan would have required enrollees to meet an annual deductible
of $250. That is, the enrollee would have been 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 have begun. The
enrollee would have paid 50% of drug costs above the $250 deductible but below
$3,450. The enrollee would have been 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
have paid 10% of future drug costs for the year. Although no dollar amount for the
premium was specified in the legislation, it was reported that enrollees would have
paid a monthly premium of $24 under this plan.3
The House Republican proposal (H.R. 4954) was similar to the Tripartisan
proposal. Both plans would have required a $250 deductible, a coverage limit, and
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
a $3,700 stop-loss provision. Unlike the Tripartisan bill, the House Republican
proposal would have had two coinsurance rates. The enrollee would have been
required to pay 20% of expenditures beyond the deductible so long as cumulative
expenditures for the year were less than $1,000. Once an enrollee’s cumulative
expenses exceeded $1,000 for the year, the enrollee would have had to pay 50% of
future expenditures. The 50% rate would have been in effect until the enrollee’s
cumulative expenditures reached $2,000 (the first coverage limit). Any additional
expenditure beyond the $2,000 coverage limit would have had 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 have paid for any
additional drug expenses for the year. Although no dollar amount for the premium
was specified in the legislation, it was reported that enrollees would have paid a
monthly premium of $33 under this plan.4
The prescription drug benefit proposed by the House Democrats (H.R. 5019)
also would have used coinsurance rates. This proposal would have required an
annual deductible of $100. Enrollees would have paid 20% of all drug expenses after
this deductible was met. Once the enrollee’s total drug costs reached $9,600
(equivalent to $2,000 out-of-pocket, excluding premiums), the enrollee would not
have been liable for any additional expenses. Enrollees would have been charged a
monthly premium of $25.
While all four proposals had a stop-loss amount, they differed on which
payments would have applied towards the stop-loss. The proposals sponsored by
Graham, et al., and by the House Democrats would have applied 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 have applied 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 prescription
drug benefits proposed in the 107th Congress.
The next section discusses how cost-sharing would have been calculated under
the proposals that would have used coinsurance. Following the section on
coinsurance, the proposal that would have used 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 have used 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 have paid 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 have varied 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
have resulted when third-party payers make cost-sharing payments on behalf of
enrollees. The following examples do not take into account reductions in
expenditures that might have occurred 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 had 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 have been 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 would have exceeded the deductible by $650. The enrollee would
have paid 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 would have exceeded the deductible by $500. Under the House Republican
plan, the enrollee would have paid the annual premiums, the full $250 deductible,
and 20% of the $500 amount. Under the Tripartisan plan, the enrollee would have
paid 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 would have changed to 50% once the enrollee’s cumulative
expenses exceeded $1,000. Thus, the enrollee would have paid (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 have worked the same
way in this example as they would have in the previous example. Under the
Tripartisan plan, the enrollee would have paid the annual premiums, the $250
deductible, and 50% of expenses above the deductible. Under the House Democratic
plan, the enrollee would have paid 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 have been calculated in the same manner as in the previous two examples.
Under the House Republican proposal, coverage would have been limited to the
first $2,000 of drug expenses. Thus, the $3,000 in expenses generated by the enrollee
would have exceeded the initial coverage limit by $1,000. The enrollee would have
been required to pay these excess expenses out-of-pocket. In total, the enrollee
would have paid (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 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 have been calculated in the same manner as in the previous two
examples.
Under the Tripartisan proposal, no coverage would have been provided after
$3,450 worth of total expenses (including the $250 deductible). Thus, the $4,500 in
expenses generated by the enrollee would have exceeded the coverage limit by
$1,050. The enrollee would have been required to pay these excess expenses out-of-
pocket. In total, the enrollee would have paid (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
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 have existed under the Tripartisan and House
Republican proposals. Using the same methods as the previous example, the enrollee
would have had 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 have been
$3,700 plus the annual premiums, a total of $4,096. This amount, $4,096, was the
maximum that an enrollee would have paid in a year under the House Republican
proposal. This maximum would have been paid by any enrollee with annual drug
costs greater than $4,800.
Under the Tripartisan plan, an enrollee would have reached the $3,700 limit on
out-of-pocket payments once cumulative drug costs reached $5,300. The enrollee
would have then paid 10% of all expenditures above that amount. In total, the
enrollee would have paid (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 would have continued paying a portion of expenditures
after the stop-loss amount is met, out-of-pocket payments would have continued to
increase. Unlike the House Republican plan, there was 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 have limited enrollee out-of-pocket
payments (excluding premiums) to $2,000. In Example 8, the enrollee’s cost-sharing
would have otherwise exceeded 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 would have exceeded the plan’s limit, the enrollee only would have had to
pay $2,000 for the year, plus $300 in premiums.
With a 20% coinsurance rate and a $100 deductible, an enrollee would have
reached 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 have paid 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-

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CRS-13
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
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 have needed to have drug expenditures over $826
before he or she would have received 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 have needed 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
$3,000
Out-of-Pocket Spendi
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
$300
Out-of-Pocket Spendi
$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 have required enrollees to pay
flat payments per prescription rather than a percentage of their drug costs. Enrollees
would have paid $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 have paid in cost-sharing, relative to that
enrollee’s total drug costs, would have likely varied depending on the enrollee’s drug
utilization patterns. Under coinsurance plans, similar to those 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 have reduced some of this
variation because the bill provided a definition of what constitutes a prescription.
Even so, the exact amount that an individual with $500 in annual drug costs would
have paid under a copayment system still would have varied 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 have paid 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 have worked under the
proposal sponsored by Graham, et. al. When total copayments reach $4,000, the
enrollee would not have paid for any additional prescriptions filled. The number of
prescriptions it would have taken to reach the stop-loss amount would have depended
on the mix of prescriptions an enrollee uses. In the examples provided in Table 2,
an enrollee who used all brand name drugs would have reached the stop-loss amount
once he or she filled 100 prescriptions for the year. An enrollee whose prescriptions
6 Centers for Medicare and Medicaid Services, 1998 Medicare Current Beneficiary Survey.
7 Ibid.

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CRS-17
were one-half generic and one-half brand name would have reached the stop-loss
amount at 160 prescriptions. An enrollee who used only generic prescriptions would
have reached the stop-loss amount at 400 prescriptions. An enrollee who used drugs
off the formulary would have reached the limit with even fewer prescriptions.
Policy Options
The cost-sharing design is one of the many issues that the 108th 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 drugs 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 of the 107th Congress required
enrollees to pay late-enrollment penalties if they did 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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