Order Code RL31525
CRS Report for Congress
Received through the CRS Web
Medicare: Beneficiary Cost-Sharing Under
Proposed Prescription Drug Benefits
Updated June 26, 2003
Chris L. Peterson
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Medicare: Beneficiary Cost-Sharing Under
Proposed Prescription Drug Benefits
Summary
Medicare, the nationwide health insurance program for the aged and disabled,
does not cover most outpatient prescription drugs. To address this gap in the
Medicare benefit, proposals that have passed in House and Senate Committees in the
108th Congress would cover at least a portion of beneficiaries’ prescription drug
costs. In mid-June, both the House Ways and Means Committee and the House
Energy and Commerce Committee approved the Medicare Prescription Drug and
Modernization Act of 2003 (H.R. 2473). Although differences exist between their
versions of the bill, the prescription drug standard coverage and low-income
provisions are similar. Their versions of the bill have been consolidated into H.R.
1. On June 12, the Senate Finance Committee approved the Prescription Drug and
Medicare Improvement Act of 2003 (S. 1). This report provides background on how
the cost-sharing and premium provisions under each bill would affect the amount that
a beneficiary pays annually for prescription drugs.
Each of these proposals has a different form of cost-sharing (that is, the share
of an enrollee’s drug costs that are not paid by the Medicare prescription drug plan).
Under S. 1, the plan would pay 50% of drug costs after the enrollee paid the $275
deductible (in 2006). After $4,500 in total drug spending (again, in 2006 dollars), the
enrollee would pay for all prescription drug spending until reaching the $3,700 “true”
out-of-pocket maximum (that is, cost-sharing amounts excluding those paid on behalf
of the enrollee by private health insurance). After reaching that level of prescription
drug spending, the plan would cover 90% of spending. The prescription drug cost-
sharing and premiums are reduced or eliminated for certain low-income beneficiaries.
H.R. 1 includes a prescription drug proposal with a deductible of $250, after
which the plan would cover 80% of spending. After $2,000 in total spending, the
beneficiary would be responsible for all prescription drug costs until reaching the
“true” out-of-pocket maximum. Like S. 1, the true out-of-pocket maximum in H.R.
1 is $3,500, and private health insurance payments do not apply toward it. However,
under H.R. 1, once the true out-of-pocket maximum is reached, the plan would pay
for all additional prescription drug spending.
Based on the premiums and cost-sharing in S. 1, the breakeven point — which
is where the amount that an individual pays for in cost-sharing and premiums is equal
to what he or she would have paid without any drug coverage — is at $1,155 in total
annual drug spending for the typical beneficiary (that is, for those not receiving low-
income assistance). Under H.R. 1, enrollees would receive more in benefits from the
plan than if they lacked such coverage after spending $775 in prescription drugs.

Contents
Proposed Cost-Sharing Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Cost-Sharing Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
List of Figures
Figure 1. Annual Out-of-Pocket and Premium Spending, by Total Drug
Spending, Up to $2,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 2. Annual Out-of-Pocket and Premium Spending, by Total Drug
Spending, Up to $12,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Tables
Table 1. Annual Premium and Cost-Sharing Under Drug Proposals . . . . . . . . . . 3

Medicare: Beneficiary Cost-Sharing Under
Proposed Prescription Drug Benefits
Providing a prescription drug benefit for Medicare beneficiaries is an important
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 in a plan 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).
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.
Out-of-pocket maximum, or 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 out-of-pocket
maximum, all additional expenses for the year are paid by the third-party payer (e.g., Medicare,
private insurance plan). S. 1, however, requires beneficiaries to pay a 10% coinsurance after
the “maximum out-of-pocket” is reached. Under S. 1 and H.R. 1, cost-sharing amounts paid by
private insurers on behalf of enrollees do not apply toward the out-of-pocket maximum.
In addition to the cost-sharing that exists under a plan, enrollees generally must
pay a premium. A premium is 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
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 RL31966, Medicare Prescription
Drug and Reform Legislation,
by Jennifer O’Sullivan et al.

CRS-2
monthly basis. While premiums technically are not considered part of cost-sharing,
it is useful to take them into account when comparing plans with dissimilar
cost-sharing requirements.
In mid-June, both the House Ways and Means Committee and the House Energy
and Commerce Committee approved the Medicare Prescription Drug and
Modernization Act of 2003 (H.R. 2473). Although differences exist between their
versions of the bill, the prescription drug standard coverage and low-income
provisions are similar. Their versions of the bill have been consolidated into H.R.
1. On June 12, the Senate Finance Committee approved the Prescription Drug and
Medicare Improvement Act of 2003 (S. 1). This report provides background on how
the cost-sharing and premium provisions under each bill would affect the amount that
a beneficiary pays annually for prescription drugs. In addition, this report gives
examples of how annual cost-sharing would differ for beneficiaries with various
levels of total prescription drug spending in 2006 under the plans.
Proposed Cost-Sharing Arrangements
Under S. 1 — in which the new prescription drug benefit would take effect in
2006, as in H.R. 1 — the plan would pay 50% of drug costs after the enrollee paid
the $275 deductible. The coverage limit is $4,500. That is, after $4,500 in total drug
spending (again, in 2006 dollars), the enrollee would pay for all prescription drug
spending until reaching the out-of-pocket maximum. Under this plan the maximum
out-of-pocket is $3,700 and is often referred to as the “true” out-of-pocket maximum
because cost-sharing amounts paid on behalf of the enrollee by private health
insurance do not count toward the $3,700. After reaching that level of prescription
drug spending, the plan would cover 90% of spending.
Under this proposal,
enrollees would pay a $35 monthly premium in 2006.2
The prescription drug standard coverage in H.R. 1 has a deductible of $250,
after which the plan would cover 80% of spending, until total prescription drug
spending reaches the coverage limit of $2,000. The out-of-pocket maximum in H.R.
1 is $3,500. As in S. 1, private health insurance payments do not apply toward the
out-of-pocket maximum. However, under H.R. 1, once the true out-of-pocket
maximum is reached, the plan would pay for all additional prescription drug
spending. Under this proposal, enrollees would also pay a $35 monthly premium in
2006.
Table 1 summarizes the major cost-sharing provisions of the prescription drug
plans in S. 1 and H.R. 1.
2 The premium amount is an estimate from the Congressional Budget Office, which also
provided the premium estimate for H.R. 1.

CRS-3
Table 1. Annual Premium and Cost-Sharing
Under Drug Proposals
S. 1
H.R. 1
Premium
$420
$420
Deductible
$275
$250
Cost-sharing
Single coinsurance up to
Single coinsurance up to
coverage limit
coverage limit
Cost-sharing amounts
50% of drug costs above
20% of drug costs above
deductible and up to coverage
deductible and up to coverage
limit
limit
Coverage limit
$4,500
$2,000
Range of expenditures
$4,500-$5,813a
$2,000-$4,900a
where enrollee pays for
100% of drug costs

Out-of-pocket maximum
$3,700 out-of-pocket
$3,500 out-of-pocket
($5,813 total expendituresa)
($4,900 total expendituresa)
Out-of-pocket payments
Cost-sharing paid by enrollee,
Cost-sharing paid by enrollee,
applied towards stop-loss
another individual, Medicaid,
another individual, Medicaid,
amount
low-income subsidy
low-income subsidy
Enrollee payments beyond
10% of expenditures beyond
None
out-of-pocket maximum
out-of-pocket maximum
Note: The table does not include some of the plans’ reduced cost-sharing for low-income beneficiaries
or increased cost-sharing for high-income beneficiaries.
a Assumes all cost-sharing is paid by the enrollee.

CRS-4
Cost-Sharing Examples
Both 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 each plan’s deductible, coinsurance, coverage limit, and out-of-pocket
maximum.
The cost to the government of providing coverage will also vary
depending on these plan characteristics as well as the premium charged to enrollees.
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 assume that all cost-sharing is paid by the enrollee; they
do not show the different effects that would have resulted when private health
insurance makes cost-sharing payments on behalf of enrollees. However, since the
only impact of this provision is on the calculation of the maximum out-of-pocket,
accounting for the provision would affect only those beneficiaries with high out-of-
pocket prescription drug spending. Also, the following examples do not take into
account reductions in expenditures that might result because of the use of the effects
of formularies, pharmacy benefit managers (PBMs), and incentives regarding the use
of generic medications.
Example 1: Enrollee has zero annual drug costs
S. 1
H.R. 1
Premium
$420
Premium
$420
Total payments
$420
Total payments
$420
In Example 1, the enrollee does not have any drug expenditures, and therefore
would only pay the premiums.
Example 2: Enrollee’s annual drug costs equal $50
S. 1
H.R. 1
Deductible
$50
Deductible
$50
Premium
$420
Premium
$420
Total payments
$470
Total payments
$470
In the second example, the enrollee’s annual drug expenditures equal $50. The
$50 in drug costs fall below both of the plans’ deductibles. Consequently, the
enrollee pays the entire $50 plus the premiums under both proposals.

CRS-5
Example 3: Enrollee’s annual drug costs equal $750
S. 1
H.R. 1
Deductible
$275
Deductible
$250
Coinsurance
Coinsurance
(= 50% of $475a)
$238
(= 20% of $500b)
$100
Premium
$420
Premium
$420
Total payments
$933
Total payments
$770
a Equal to total drug expenditures ($750) minus the deductible ($275).
b Equal to total drug expenditures ($750) minus the deductible ($250).
In Example 3, the enrollee has $750 in total annual drug spending. This amount
exceeds the deductibles proposed in both plans. Under S. 1, the enrollee’s total
prescription drug spending would exceed the deductible by $475. Thus, this enrollee
would pay the premiums, the full $275 deductible and 50% of the $475 amount. In
the case of H.R. 1, the enrollee’s costs would exceed the deductible by $500. The
enrollee would pay the premiums, the full $250 deductible and 20% of the $500
amount.
Example 4: Enrollee’s annual drug costs equal $1,500
S. 1
H.R. 1
Deductible
$275
Deductible
$250
Coinsurance
First coinsurance
(= 50% of $1,225a)
$613
(= 20% of $1,250a)
$250
Premium
$420
Premium
$420
Total payments
$1,308
Total payments
$920
a Equal to total drug expenditures ($1,500) minus the deductible.
The fourth example illustrates enrollee out-of-pocket spending when the
enrollee’s total drug costs equal $1,500. The proposals would work the same way
in this example as in the previous example. Under S. 1, the enrollee would pay the
premiums as well as the $275 deductible and 50% of expenses above the deductible.
Under H.R. 1, the enrollee would pay the premiums, the $250 deductible and 20%
of expenses above the deductible.

CRS-6
Example 5: Enrollee’s annual drug costs equal $3,000
S. 1
H.R. 1
Deductible
$275
Deductible
$250
Coinsurance
Coinsurance
(= 50% of $2,725a)
$1,363
(= 20% of $1,750b)
$350
Expenditures above
$2,000 coverage
limit
$1,000
Premium
$420
Premium
$420
Total payments
$2,058
Total payments
$2,020
a Equal to total drug expenditures ($3,000) minus the deductible.
b Equal to the coverage limit ($2,000) minus the deductible ($250).
In Example 5, the enrollee’s cumulative drug costs for the year equal $3,000.
Under S. 1, the enrollee’s payments would be calculated in the same manner as in the
previous two examples.
Under H.R. 1, 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 pay these excess expenses out-of-
pocket. In total, the enrollee would pay the premiums as well as the following cost-
sharing: (1) the $250 deductible; (2) 20% of $1,750, where $1,750 equals the
difference between the deductible and the coverage limit of $2,000; and (3) those
expenditures exceeding the initial coverage limit.
Example 6: Enrollee’s annual drug costs equal $4,500
S. 1
H.R. 1
Deductible
$275
Deductible
$250
Coinsurance
Coinsurance
(= 50% of $4,225a)
$2,113
(= 20% of $1,750b)
$350
Expenditures above
$2,000 coverage
limit
$2,500
Premium
$420
Premium
$420
Total payments
$2,808
Total payments
$3,520
a Equal to total drug expenditures minus the deductible ($250). Total spending of $4,500 is the
coverage limit for this plan. Thus, any additional prescription drug spending, up to the out-of-
pocket maximum, would be paid for by the enrollee.
b Equal to the coverage limit ($2,000) minus the deductible ($250).

CRS-7
In Example 6, the enrollee’s cumulative drug costs for the year equal $4,500.
The enrollee’s payments under these proposals would be calculated in the same
manner as in the previous example.
Example 7: Enrollee’s annual drug costs equal $6,000
S. 1
H.R. 1
Deductible
$275
Deductible
$250
Coinsurance
Coinsurance
(= 50% of $4,225a)
$2,113
(= 20% of $1,750b)
$350
Expenditures
Expenditures
between $4,500
between $2,000
coverage limit and
coverage limit and
$5,813c
$1,312
$4,900d
$2,900
10% of $187e
$19
Premium
$420
Premium
$420
Total payments
$4,139
Total payments
$3,920
Note: Assumes all cost-sharing applies to the out-of-pocket maximum.
a Equal to coverage limit ($4,500) minus the deductible ($275).
b Equal to the coverage limit ($2,000) minus the deductible ($250).
c The level of cumulative expenditures at which enrollee spends $3,700 out-of-pocket is $5,813.
d The level of cumulative expenditures at which enrollee spends $3,500 out-of-pocket is $4,900.
e Equal to total drug expenditures ($6,000) minus $5,813.
Example 7 illustrates a situation in which an enrollee’s payments exceed the
bills’ out-of-pocket maximums. H.R. 1 limits enrollee out-of-pocket payments
(excluding premiums) to $3,500. In this example, the enrollee’s cost-sharing would
have otherwise exceeded this limit. With total drug expenses of $6,000, the enrollee
would have paid $4,600, in cost-sharing (excluding premiums) without the plan’s
out-of-pocket maximum. However, because $4,600 exceeds the plan’s out-of-pocket
limit, the enrollee would pay only $3,500 in cost-sharing for the year. With a $250
deductible, a 20% coinsurance rate up to $2,000 in total spending, and no coverage
above the $2,000 coverage limit, an enrollee would reach the $3,500 limit on out-of-
pocket payments once the enrollee’s drug expenses exceeds $4,900 for the year.
Thus, any enrollee with drug expenses above $4,900 per year would pay a total of
$3,500 plus premiums under H.R. 1 (assuming all cost-sharing applies to the out-of-
pocket maximum).
Under S. 1, an enrollee reaches the $3,700 out-of-pocket maximum once
cumulative drug costs exceed $5,813 (assuming all cost-sharing applies to the out-of-
pocket maximum) plus premiums.
The enrollee would then pay 10% of all
expenditures above that amount. In total, this enrollee would pay premiums, the
$3,700 amount plus $19, which equals 10% of prescription drug expenditures above
$5,813.

CRS-8
Example 8: Enrollee’s annual drug costs equal $12,000
S. 1
H.R. 1
Deductible
$275
Deductible
$250
Coinsurance
Coinsurance
(= 50% of $4,225a)
(= 20% of
$2,113
$1,750b)
$350
Expenditures
Expenditures
between $4,500
between $2,000
coverage limit and
coverage limit
$5,813c
$1,312
and $4,900d
$2,900
10% of $6,187e
$619
Premium
$420
Premium
$420
Total payments
$4,739
Total payments
$3,920
Note: Assumes all cost-sharing applies to the out-of-pocket maximum.
a Equal to coverage limit ($4,500) minus the deductible ($275).
b Equal to coverage limit ($2,000) minus the deductible ($250).
c The level of cumulative expenditures at which enrollee spends $3,700 out-of-pocket is $5,813.
d The level of cumulative expenditures at which enrollee spends $3,500 out-of-pocket is $4,900.
e Equal to total drug expenditures ($12,000) minus $5,813.
In Example 8, the enrollee’s cumulative drug costs for the year equal $12,000.
The enrollee’s payments would be calculated in the same manner as in the previous
example.
An individual enrollee with a certain amount of total prescription drug spending
may have very different experiences in each of these plans because of the structure
of the plans’ benefits and resulting cost-sharing. Figure 1 and Figure 2 illustrate
beneficiaries’ out-of-pocket payments at different levels of total drug spending, based
on the cost-sharing listed in Table 1. Figure 1 displays total prescription drug
spending up to $2,000. Figure 2 shows spending up to $12,000, although some
enrollees may have spending exceeding that amount. The figures assume that all
cost-sharing applies to each plan’s out-of-pocket maximum and does not account for
some of the plans’ reduced cost-sharing for low-income beneficiaries or increased
cost-sharing for high-income beneficiaries.
The line in the figures labeled “No drug coverage” represents the amount that
an individual would pay if he or she did not have any insurance coverage for
prescription drugs not presently covered by Medicare. The lines of the other plans
cross this line at the “breakeven point” of their respective plans — that is, the point
where the amount that an individual pays for a plan’s cost-sharing and premiums is
equal to his or her total drug costs. The breakeven point could also be described as
the point where the amount that an individual pays for a plan’s cost-sharing and
premiums is equal to what he or she would have paid without any drug coverage. In
the figures, line segments to the right of the “No drug coverage” line represent levels
of drug spending where the enrollee pays less in out-of-pocket expenses and
premiums than if they had no drug coverage. In the figures, line segments to the left

CRS-9
of this line represent levels of drug spending where the enrollee pays more in out-of-
pocket expenses and premiums than if he or she had no drug coverage.
Based on the premium and cost-sharing outlined in H.R. 1, the breakeven point
is at $775 in total annual drug spending. Under S. 1, enrollees would receive more
in benefits from the plan than if they lacked such coverage after spending $1,155 in
prescription drugs.

CRS-10
Figure 1. Annual Out-of-Pocket and Premium Spending, by Total Drug Spending, Up to $2,000
No drug coverage
$1,400
S. 1
$1,200
H.R. 1
Spending $1,000
ium
$800
Prem
nd
a

$600
$400
t-of-Pocket
u
O

$200
$0
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Total Drug Spending
Source: Congressional Research Service (CRS).
Note: The figure assumes that all cost-sharing applies to each plan’s out-of-pocket maximum. The figure does not reflect some of the plans’ reduced cost-sharing for low-income
beneficiaries or increased cost-sharing for high-income beneficiaries.

CRS-11
Figure 2. Annual Out-of-Pocket and Premium Spending, by Total Drug Spending, Up to $12,000
No drug coverage
$8,000
Spending $6,000
S. 1
Premium
nd
a
$4,000
H.R. 1
$2,000
Out-of-Pocket
$0
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
Total Drug Spending
Source: Congressional Research Service (CRS).
Note: The figure assumes that all cost-sharing applies to each plan’s out-of-pocket maximum. The figure does not reflect some of the plans’ reduced cost-sharing for low-income
beneficiaries or increased cost-sharing for high-income beneficiaries.

CRS-12
Conclusion
The cost-sharing design and premium amounts are some of the issues that the
108th Congress is considering 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 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, low cost-sharing makes the benefit more expensive
for the government and raises the possibility of adverse selection and overutilization.
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.