Order Code RL31525
CRS Report for Congress
Received through the CRS Web
Medicare: Beneficiary Cost-Sharing
Under Prescription Drug Legislation
Updated July 25, 2003
Chris L. Peterson and Jim S. Hahn
Analysts in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Medicare: Beneficiary Cost-Sharing Under
Prescription Drug Legislation
Summary
In late June 2003, both the Senate and the House passed legislation to add a
prescription drug benefit to the Medicare program. Although the Prescription Drug
and Medicare Improvement Act of 2003 (S. 1) and the Medicare Prescription Drug
and Modernization Act of 2003 (H.R. 1) have many differences, the structure of the
proposed standard prescription drug coverage is similar. This report provides an
analysis of how the cost-sharing and premium provisions under each bill would affect
the amount that a beneficiary would pay 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 is 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 (the “coverage limit”), 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). This occurs when the total spending on
prescription drugs exceeds $5,813, assuming none of the cost-sharing is paid for by
private insurance. After reaching this threshold, Medicare would cover 90% of all
additional drug expenses.
Standard prescription drug coverage under H.R. 1 includes a deductible of $250,
after which the plan would cover 80% of spending up to the $2,000 coverage limit.
The beneficiary would then be responsible for all prescription drug costs until
reaching the “true” out-of-pocket maximum of $3,500, when total expenditures reach
$4,900, assuming none of the cost-sharing is paid for by private insurance. Once the
true out-of-pocket maximum is reached, the plan would cover all additional
prescription drug expenses.
Under both bills, Medicare does not contribute directly toward the cost of drugs
when annual drug expenses fall in a certain range, although Medicare contributes
directly toward beneficiary drug expenses at levels below and above this range. This
aspect of the coverage is often referred to as the “doughnut hole.”
Low-income beneficiaries receive subsidies under both bills resulting in zero or
small deductibles, premiums and coinsurance rates or copayments. While S. 1
requires minimal coinsurance below the coverage limit (2.5%, 5% or 10% depending
on the beneficiary’s low-income category), H.R. 1 requires fixed copayments of
$2/generic prescription or $5/brand name prescription. In addition, low-income
beneficiaries would still face a “doughnut hole” under H.R. 1 but not under S. 1.
Based on beneficiaries’ expected out-of-pocket costs under the two plans,
neither can be said to be more or less generous than the other for all beneficiaries.
Out-of-pocket costs could be lower under S. 1 or H.R. 1, depending on a
beneficiary’s total annual drug expenditures. However, the absence of a “doughnut
hole” in S. 1 for low-income beneficiaries means that, for many of these individuals,
S. 1 would result in lower out-of-pocket costs than H.R. 1.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Cost-Sharing and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Proposed Cost-Sharing Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The “doughnut hole” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Income-based provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Low-income subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Other income-related provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Cost-Sharing Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Comparing Beneficiary Out-of-Pocket Expenses . . . . . . . . . . . . . . . . . . . . . . . . 14
Beneficiaries receiving the standard benefit . . . . . . . . . . . . . . . . . . . . . . . . 14
Breakeven . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Low-income beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
List of Figures
Figure 1. Beneficiary Cost-Sharing by Total Annual Drug Expenditures
Under S. 1 and H.R. 1, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 2. Annual Out-of-Pocket and Premium Spending, by Total
Drug Spending, Up to $2,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Figure 3. Annual Out-of-Pocket and Premium Spending, by Total Drug
Spending, Up to $12,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
List of Tables
Table 1. Summary of Prescription Drug Standard Coverage Under S. 1
and H.R. 1, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table 2. Summary of Prescription Drug Coverage for Low-Income
Individuals Under S. 1 and H.R. 1, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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Medicare: Beneficiary Cost-Sharing Under
Prescription Drug Legislation
Introduction
In late June 2003, both the Senate and the House passed legislation to add a
prescription drug benefit to the Medicare program. The structure of the proposed
standard prescription drug coverage is similar under both the Prescription Drug and
Medicare Improvement Act of 2003 (S. 1) and the Medicare Prescription Drug and
Modernization Act of 2003 (H.R. 1). Within that structure, however, the amounts
paid in cost-sharing by beneficiaries can differ substantially between the bills,
depending on each beneficiary’s total prescription drug spending and whether the
beneficiary qualifies for low-income assistance. This report provides an analysis of
how the cost-sharing and premium provisions under each bill would affect the
amount that a beneficiary would pay annually for prescription drugs.1 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 two plans.
Cost-Sharing and Insurance
Insurance acts to reduce uncertainty and individuals’ exposure to high costs due
to catastrophic events such as severe illness. In general, individuals pay a premium,
and in exchange, insurers pay for their covered benefits. Premiums are paid
regardless of whether covered expenses are actually incurred.
In addition to premiums, enrollees may also face cost-sharing, which is the
portion of total expenses that enrollees must pay for covered benefits. Cost-sharing
in a health plan generally includes some combination of deductibles, coinsurance,
copayments, and limits on individuals’ total out-of-pocket expenses. Because these
concepts are necessary to evaluate and compare the prescription drug coverage in S.
1 and H.R. 1, they are described in Box 1.
1 For a discussion of 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.

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CRS-2
Box 1. Terms Used to Describe Cost-Sharing
Deductible: The amount an enrollee in an insurance plan must pay out-of-pocket before the
insurer begins paying for covered services. Generally, the enrollee must meet this amount each
year. Plans with no deductible are said to provide “first-dollar” coverage.
Coinsurance rate: The percentage of covered costs paid by the enrollee. The terms of coverage
can specify various coinsurance rates for different aspects of coverage, for instance before and after
a threshold of expenses.
Copayment: A fixed dollar amount that the enrollee must pay for each covered benefit — for
instance, a filled prescription. A copayment differs from coinsurance in that the copayment amount
does not vary with the cost of the service. However, copayments may differ based on the type of
drug (for example, one copayment amount for brand-name drugs, another for generic drugs).
Coverage limit: The total amount of incurred expenses at which the insurer (federal government,
health care plan, etc.) reduces its contributions to the enrollee’s expenses. For example, once an
enrollee’s drug costs exceed the coverage limit, the enrollee must pay for most or all the additional
drug expenses.
Out-of-pocket maximum, or catastrophic coverage threshold: The amount that enrollees are
required to pay each year out-of-pocket (excluding premiums), before stop-loss (or “catastrophic”)
coverage begins. Typically, the insurer (for instance, Medicare or a private health plan) pays almost
all additional expenses once an enrollee meets the annual catastrophic threshold.
Proposed Cost-Sharing Arrangements
Both S. 1 and H.R. 1 would create a “standard” prescription drug benefit in
Medicare that would take effect in 2006. Variations in the beneficiary cost-sharing
requirements of the two proposed plans will affect the level of potential out-of-pocket
costs to individual beneficiaries. Since participation is voluntary under both bills,
expected out-of-pocket expenses are likely to be a critical factor when beneficiaries
consider whether to enroll.
Under S. 1, the standard coverage would pay 50% of drug costs after the
enrollee has 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 out-of-pocket maximum is $3,700. This amount is often referred to as the
“true” out-of-pocket maximum because, under S. 1, cost-sharing paid on behalf of
the enrollee by private health insurance does 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 standard prescription drug 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 true out-of-pocket maximum in
2 The premium amount is an estimate from the Congressional Budget Office, which also
provided the premium estimate for H.R. 1.

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CRS-3
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 standard
prescription drug coverage in S. 1 and H.R. 1.
Table 1. Summary of Prescription Drug Standard Coverage
Under S. 1 and H.R. 1, 2006
S. 1
H.R. 1
Annual premium
$420 ($35/month)a
$420 ($35/month)a
Annual deductible
$275
$250
Coinsurance on drug costs
50%
20%
above deductible and up to
coverage limit
Coverage limit
$4,500
$2,000
Range of expenditures
$4,500-$5,813b
$2,000-$4,900b
where enrollee pays for
100% of drug costs
Catastrophic threshold
$3,700 out-of-pocket
$3,500 out-of-pocket
($5,813 total expendituresb)
($4,900 total expendituresb)
Cost-sharing payments that
Cost-sharing paid by enrollee,
Cost-sharing paid by enrollee,
apply toward out-of-pocket
another individual, Medicaid,
another individual, Medicaid,
maximum
or a state pharmaceutical
or a state pharmaceutical
assistance program
assistance program
Coinsurance beyond
10%
None
catastrophic threshold
a Amount estimated by the Congressional Budget Office (CBO).
b Assumes none of the cost-sharing is paid by private insurance.

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CRS-4
The “doughnut hole”
Under both S. 1 and H.R. 1, Medicare does not contribute toward the cost of
drugs when an individual’s annual drug expenses fall in a certain range — that is,
when expenses are above the coverage limit but below the total amount necessary to
reach the out-of-pocket maximum. This aspect of the coverage has been referred to
as the “doughnut hole.”3
Under S. 1, beneficiaries receiving the standard benefit must pay the full cost
of drugs once they reach the coverage limit of $4,500 and until their out-of-pocket
payments reach the catastrophic cap of $3,700. Because of the $275 deductible and
the 50% coinsurance up to the initial coverage limit, beneficiaries with the standard
benefit will have spent $2,387.50 out-of-pocket (excluding the premium) when they
accumulate $4,500 worth of drug costs. Assuming none of the cost-sharing is paid
for by private insurance, they will have to spend an additional $1,312.50 to reach the
catastrophic cap of $3,700. Since there is no Medicare contribution over this range,
the beneficiary will bear the full cost of drugs from the coverage limit of $4,500 until
accumulated drug expenses reach $5,812.50, as shown in Figure 1.
The drug benefit is structured similarly in the House bill, however the amounts
are different. Beneficiaries are responsible for the entire cost of drugs between
$2,000 and $4,900, assuming none of the cost-sharing is paid for by private
insurance. Although this range is larger than the one in the Senate bill, H.R. 1 has
lower coinsurance rates than S. 1.
3 Some have referred to this as a “gap in coverage,” which can be misleading. Coverage
continues to be in effect even when Medicare is not contributing directly to the cost of
drugs, and the beneficiaries’ out-of-pocket expenditures contribute toward the catastrophic
cap. While there may be a gap in Medicare payments, there continues to be coverage.

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CRS-5
Figure 1. Beneficiary Cost-Sharing by Total Annual Drug Expenditures Under S. 1 and H.R. 1, 2006
S1
HR1
100%
HR1 "Doughnut Hole"
Beneficiary pays all costs
90%
from $2,001 to $4,900
S1 "Doughnut
80%
Hole"
Beneficiary pays
y
all costs from
70%
$4,501 to $5,813
neficiar
e
60%
S1 deductible
is $275
50%
HR1 deductible
is $250
t-of-Pocket by B
40%
u
30%
% Paid O
20%
S1 catastrophic
coverage begins at $5,813
2006 projected median drug
2006 projected average drug
10%
expenditures ($1,891)
expenditures ($3,155)
HR1 catastrophic
coverage begins at $4,900
0%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Total Annual Drug Expenditures
Source: Congressional Research Service (CRS). The projected median and average prescription drug expenditures for 2006 are from the 2003
baseline of the Congressional Budget Office (CBO) and represent spending by or for Medicare enrollees.

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CRS-6
Income-based provisions
Both S. 1 and H.R. 1 alter the standard benefit’s cost-sharing requirements for
beneficiaries at certain income levels (sometimes with additional eligibility criteria).
S. 1 provides assistance for various categories of low-income beneficiaries through
reduced premiums, deductibles, and coinsurance. H.R. 1 also reduces premiums and
deductibles for low-income beneficiaries, but requires low fixed-dollar copayments
for each prescription rather than coinsurance for spending below the coverage limit.
In addition, H.R. 1 modifies the cost-sharing limits for higher income beneficiaries.
Low-income subsidies. In Table 2, the provisions in S. 1 and H.R. 1 for
low-income Medicare beneficiaries are summarized using three income categories.
Besides a deductible that may be required, beneficiaries in each income category face
three cost-sharing rates, depending on their cumulative annual drug expenditures.
There is one coinsurance/copayment rate for cumulative annual drug expenditures up
to the coverage limit, a second rate when annual expenditures exceed the coverage
limit but the beneficiary’s total out-of-pocket costs are less than the catastrophic
threshold, and a third rate once a beneficiary has exceeded the catastrophic threshold.
The bills’ provisions are summarized in Table 2 using the following three
income categories: beneficiaries with countable income at or below 100% of poverty,
beneficiaries with countable income between 100% and 135% of poverty, and other
subsidy eligible beneficiaries.4 There are two additional eligibility criteria besides
income, which differ between the bills. Under S. 1, Medicare beneficiaries who are
also eligible for Medicaid (“dual eligible”) are not permitted to enroll in one of the
three low-income categories; dually eligible beneficiaries would receive their
prescription drugs through their state’s Medicaid program. Under H.R. 1, however,
dually eligible beneficiaries could qualify in one of the low-income categories, with
states required to maintain Medicaid prescription drug benefits as a “wraparound” to
the Medicare coverage. In addition, to qualify for low-income assistance under the
bills, beneficiaries must have assets below various thresholds, as discussed below.5
4 “Countable income” means the amount of income counted for determining eligibility for
Supplemental Security Income (SSI) and is defined in Section 1612 of the Social Security
Act, as amended. “Poverty line,” or “poverty,” refers to the federal poverty guidelines
published by the Department of Health and Human Services. The 2003 federal poverty
guideline for an unmarried, aged Medicare beneficiary is $8,980 in countable income in the
48 contiguous states and the District of Columbia, $11,210 in Alaska, and $10,330 in
Hawaii. The 2003 federal poverty guideline for a married, aged Medicare beneficiary is
$12,120 in the 48 contiguous states and the District of Columbia, $15,140 in Alaska, and
$13,940 in Hawaii. Because the guidelines apply to “countable income” (which excludes
certain amounts and types of income), persons may qualify even though their total income
is above these amounts. For further information, see CRS Report RL31736, Medicare
Prescription Drug Proposals: Estimates of Aged Beneficiaries Who Fall Below Income
Criteria, by State, by Chris L. Peterson and Paulette C. Morgan.
5 For additional details on these and other provisions in S. 1 and H.R. 1, see CRS Report
RL31992, Medicare Prescription Drug Provisions of S. 1, as Passed by the Senate, and H.R.
1, as Passed by the House, by Jennifer O’Sullivan.

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CRS-7
Under S. 1, the lowest cost-sharing is available to Qualified Medicare
Beneficiaries (QMBs). These are beneficiaries with countable income at or below
100% poverty who do not qualify for full Medicaid benefits (as previously
mentioned) and have countable assets, or resources, of less than $4,000 for an
individual or $6,000 for a married couple.6 QMBs would pay no premiums7 or
deductibles under S. 1. QMBs would pay coinsurance of 2.5% up to the coverage
limit of $4,500, and then 5% for additional drug expenditures until they have spent
$3,700 out-of-pocket. Should they reach the out-of-pocket maximum (by incurring
$76,250 in total drug expenditures, assuming none of the cost-sharing is paid for by
private insurance), they would then be responsible for a 2.5% coinsurance for all
additional drug expenditures.
For beneficiaries who would qualify as QMBs except that their countable
income is too high — in this case, those with countable income between 100% and
135% of poverty — separate cost-sharing amounts would be in place.8 Like, QMBs,
these individuals would not be required to pay premiums or deductibles. However,
some of their coinsurance rates would be higher than QMBs’. These beneficiaries
would pay coinsurance of 5% up to the initial coverage limit of $4,500, then pay 10%
of additional drug expenditures until they have spent $3,700 out-of-pocket (by
incurring total drug expenditures of $39,250, assuming none of the cost-sharing is
paid for by private insurance). Like QMBs, they would then be responsible for a
2.5% coinsurance for all drug expenditures above the out-of-pocket maximum.
For beneficiaries who are not eligible for the previous two categories (or for
Medicaid), they may be eligible as other subsidy eligible beneficiaries. Under S.
1, those in this category must have income below 160% of poverty.9 No assets test
is required for this category. The monthly premium for these beneficiaries is
eliminated for those with income below 135% of poverty. For subsidy eligible
beneficiaries between 135% and 160% of poverty, the premium is determined by
income on a linear sliding scale.10 The annual deductible would be $50. These
6 States may waive the assets test. For those states that did not eliminate the assets test, S.
1 raises the limits to $10,000 for an individual and $20,000 for a married couple beginning
in 2009. Throughout this report, “countable assets” refers to the amount of assets counted
for determining eligibility for Supplemental Security Income (SSI), defined in Section 1613
of the Social Security Act, as amended.
7 Additional amounts may be required for prescription drug plans with relatively high
premiums.
8 This group consists of Specified Low-income Medicare Beneficiaries (SLMBs), with
countable income between 100% and 120% of poverty, and Qualified Individuals (QI-1s),
with countable income between 120% and 135% of poverty.
9 Note that the term “countable” income is not used here. S. 1 does not specify the
definition of income for this category of beneficiaries. However, eligibility determinations
would be made by the states, just as they are for Medicaid, QMBs, SLMBs and QI-1s.
10 Beneficiaries with income at 135% of poverty will have no premium, while those with
incomes equal to 160% of poverty would be responsible for the full $35 monthly premium.
In general, individuals with incomes equal to 147.5% of poverty (the midpoint of the range)
would have a $17.50 monthly premium.

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CRS-8
beneficiaries would pay coinsurance of 10% between the deductible and the initial
coverage limit of $4,500, then pay 20% of additional drug expenditures until they
have spent $3,700 out-of-pocket. They would then be responsible for a 10%
coinsurance for all drug expenditures above the out-of-pocket maximum, as in
standard coverage.
Table 2. Summary of Prescription Drug Coverage for
Low-Income Individuals Under S. 1 and H.R. 1, 2006
Countable incomea
Countable incomea
at or below 100%
between 100% and
Other subsidy
of poverty, plus
135% of poverty,
eligible
assets testb
plus assets testb
beneficiariesc
S. 1
H.R. 1
S. 1
H.R. 1
S. 1
H.R. 1
Monthly premiumd
$0
$0
$0
$0
$0-$35
$0-$35
Annual deductible
$0
$0
$0
$0
$50
$250
Beneficiary’s coinsurance/copayment
Up to coverage
$2/generic,
$2/generic,
2.5%
5%
10%
20%
limit
$5/brand
$5/brand
Coverage limit
$4,500
$2,000
$4,500
$2,000
$4,500
$2,000
From coverage
limit to out-of-
5%
100%
10%
100%
20%
100%
pocket maximum
Out-of-pocket
$3,700
$3,500
$3,700
$3,500
$3,700
$3,500
maximum
Beyond out-of-
2.5%
0%
2.5%
0%
10%
0%
pocket maximum
a “Countable income” means the amount of income counted for determining eligibility for
Supplemental Security Income (SSI), defined in Section 1612 of the Social Security Act, as
amended. “Poverty” refers to the federal poverty guidelines published by the Department of
Health and Human Services.
b Under both S. 1 and H.R. 1, eligibility in these income categories also requires that beneficiaries
have countable assets below certain thresholds. “Countable assets” refers to the amount of
assets counted for determining eligibility for SSI, defined in Section 1613 of the Social Security
Act, as amended. In 2006, countable resources in these categories are limited to $4,000 for an
individual and $6,000 for a married couple under S. 1. Under H.R. 1, countable resources in
these categories are limited to $6,000 for an individual and $9,000 for a married couple.
Additional eligibility criteria for these categories are mentioned in the text of this report and
discussed in greater detail in CRS Report RL31992, Medicare Prescription Drug Provisions
of S. 1, as Passed by the Senate, and H.R. 1, as Passed by the House, by Jennifer O’Sullivan.
c For S. 1, these are beneficiaries who have income below 160% of poverty and do not qualify for full
Medicaid or in the other two categories in the table; no assets test applies. For H.R. 1, these
beneficiaries are those with countable income between 135% and 150% of poverty who have
countable assets of less than $6,000 for an individual or $9,000 for a married couple.
d Additional amounts may be required for prescription drug plans with relatively high premiums. The
full $35 premium is an estimate from the Congressional Budget Office (CBO).

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CRS-9
Under H.R. 1, the most generous cost-sharing assistance is available to those
with countable income at or below 135% of poverty who have countable assets, or
resources, of less than $6,000 for an individual or $9,000 for a married couple. This
category of beneficiaries under H.R. 1 is comparable in terms of income criteria to
two categories of beneficiaries in S. 1, beneficiaries with countable income at or
below 100% poverty and those with countable income between 100% and 135%
of poverty, even though other eligibility criteria (that is, the assets test and whether
they can be dually eligible) differ.
For these beneficiaries in H.R. 1, no premiums or deductible would be required,
as in S. 1. However, rather than facing a coinsurance rate, copayments are required
up to the coverage limit for these beneficiaries in H.R. 1: $2 per generic prescription
drug and $5 per brand drug. Under H.R. 1, these beneficiaries are responsible for all
prescription drug costs in the doughnut hole, unlike S. 1. However, once reaching
the true out-of-pocket maximum, beneficiaries under H.R. 1 would have no cost-
sharing, whereas S. 1 requires a 2.5% coinsurance.
For H.R. 1, other subsidy eligible beneficiaries are defined as those with
countable income between 135% and 150% of poverty who have countable assets of
less than $6,000 for an individual or $9,000 for a married couple. The cost-sharing
for these beneficiaries is the same as for those in the bill’s standard coverage. The
only additional benefit for these individuals is that the premium is determined on a
linear sliding scale.11
Other income-related provisions. The standard prescription drug benefit
under H.R. 1 is also modified for some higher income individuals.12 The annual out-
of-pocket maximum is increased for beneficiaries with adjusted gross income(AGI)
above $60,000 in 2006.13 For those with AGI of $200,000 or higher in 2006, the
out-of-pocket maximum is $11,620, rather than $3,500 for standard coverage. For
those beneficiaries with AGI between $60,000 and $200,000, the out-of-pocket
maximum is determined on a linear sliding scale.
11 Beneficiaries with income at 135% of poverty will have no premium, while those with
incomes equal to 150% of poverty would be responsible for the full $35 monthly premium.
In general, individuals with incomes equal to 142.5% of poverty (the midpoint of the range)
would have a $17.50 monthly premium.
12 S. 1 does not modify drug benefits to more affluent beneficiaries.
13 For married couples, the AGI would be divided by two and the income test applied for
each beneficiary. AGI is derived by reducing total, or gross, income by certain amounts,
such as for an IRA or student loan interest.

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CRS-10
Cost-Sharing Examples
The following section compares how much a hypothetical enrollee with a given
level of drug costs would pay under the standard coverage in S. 1 and H.R. 1. 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.
Each of the following examples assumes that none the cost-sharing is paid by
private insurance. The calculations do not consider reductions in expenditures due
to negotiated discounts, the effects of formularies and pharmacy benefit managers
(PBMs), or the consequences of incentives to use 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.

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CRS-11
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.

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CRS-12
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 $3,000.14
Under S. 1, the enrollee’s payments would be calculated in a similar manner to the
previous two examples, resulting in total payments of $2,058.
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).
14 CBO projects that in 2006, Medicare beneficiaries will spend an average of $3,155
annually on drugs

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CRS-13
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 a similar
manner as in the previous example. Under S. 1, the beneficiary would pay $2,808
while under H.R. 1, the total out-of-pocket costs would be $3,520.
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 between $4,500
Expenditures between $2,000
coverage limit and $5,813c
$1,312
coverage limit and $4,900d
$2,900
10% of $187e
$19
Premium
$420
Premium
$420
Total payments
$4,139
Total payments
$3,920
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.15 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.
15 Without the out-of-pocket limit, the beneficiary would have to pay a $250 deductible,
$350 in coinsurance up to coverage limit of $2,000, and the full $4,000 between $2,000 and
$6,000 for a total of $4,600.

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CRS-14
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)
$2,113
(= 20% of $1,750b)
$350
Expenditures between $4,500
Expenditures between $2,000
coverage limit and $5,813c
$1,312
coverage limit 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 a similar manner as in the previous
example. This enrollee would pay $4,739 under S. 1 and $3,920 under H.R. 1.
Comparing Beneficiary Out-of-Pocket Expenses
Beneficiaries receiving the standard benefit
Based on the out-of-pocket costs to Medicare beneficiaries, neither plan can be
said to be more or less generous than the other for all beneficiaries. Out-of-pocket
costs can be either higher or lower under S. 1 or H.R. 1, depending on an individual’s
total annual drug expenditures. Figure 2 and Figure 3 illustrate beneficiaries’ out-
of-pocket payments plus premiums at different levels of total drug spending, based
on the cost-sharing requirements listed in Table 1. Figure 2 displays total
prescription drug spending up to $2,000, while Figure 3 shows spending up to
$12,000.16 The figures assume that all cost-sharing applies to each plan’s
out-of-pocket maximum and does not account for the plans’ reduced cost-sharing for
low-income beneficiaries or, under H.R. 1, increased cost-sharing for high-income
beneficiaries.
The structure of the benefit and cost-sharing in S. 1 and H.R. 1 produces many
changes in coinsurance rates and out-of-pocket costs as total annual drug spending
increases, as can be seen in the kinks and corners in the figures. For beneficiaries
receiving the standard benefit, H.R. 1 requires less beneficiary out-of-pocket and
16 CBO projects that 4.5% of beneficiaries will spend more than $12,000 on prescription
drugs in 2006. See CBO, March 2003 baseline projections.

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CRS-15
premium spending at levels of total drug spending between $250 and $3,100 and
when spending exceeds $5,600. However, for individuals with total annual drug
expenditures between $3,100 and $5,600, S. 1 would be less costly in out-of-pocket
and premium spending.
Breakeven. The breakeven point is the point where the amount that an
individual pays for a plan’s cost-sharing and premiums is equal to what would have
been paid in drug costs in the absence of any drug coverage. The line in the Figure
2 and Figure 3 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.
Where the lines representing out-of-pocket spending under S. 1 and H.R. 1 cross this
line is the “breakeven point” of the respective plans. 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; line segments to the left 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 $1,115 in prescription drugs. In 2006, 35% of seniors are expected to have
less than $1,000 in annual drug expenditures.17
While the breakeven point is one factor in a beneficiary’s decision whether to
participate in this insurance plan, other factors, such as attitudes toward risk and
uncertainty, are also important. Many beneficiaries will be making their decision
about whether to purchase the insurance based on their expected annual prescription
drug costs and their attitudes towards risk. All other things being equal, the higher
the breakeven point, the less likely beneficiaries will be to join voluntarily.
Low-income beneficiaries
Comparing the cost-sharing of S. 1 and H.R. 1 for low-income beneficiaries’
expenses below each bill’s coverage limit is difficult because copayments are used
under H.R. 1 rather than coinsurance. H.R. 1 proposes fixed copayments of $2 per
prescription for generics and $5 per prescription for brand name products. To make
a consistent comparison, data are needed about how the fixed copayments compare
with the average cost of generic and brand-name prescription expected in 2006.18
Based on data and projections from one of the largest pharmacy benefit management
(PBM) companies in North America, a $2 copayment per generic prescription and
a $5 copayment per brand name prescription imply an effective coinsurance rate of
about 7% in 2006. Therefore, low-income beneficiaries who have not reached the
coverage limit will have a higher average effective coinsurance rate under H.R. 1
(7%) than under S. 1 (2.5% or 5%, depending on the income category).
17 Ibid.
18 These figures can be highly variable and may change substantially with different data,
years, and assumptions. For instance, in a year when a popular brand name goes off patent
and generics enter the market, the market share of generics and the average cost of a
prescription will change in response.

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CRS-16
Standard coverage in both S. 1 and H.R. 1 includes a doughnut hole. Under S.
1, low-income beneficiaries are not responsible for all of the expenses in that range,
although some cost-sharing is still required (5%, 10% or 20% coinsurance). In
contrast, low-income beneficiaries under H.R. 1 would still face the doughnut hole,
identical to the one in H.R. 1's standard benefit.
The absence of a “doughnut hole” combined with a lower effective coinsurance
rate means that for many low-income Medicare beneficiaries, S. 1 would be more
generous than H.R. 1.

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CRS-17
Figure 2. 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
$1,000
remium Spending
$800
$600
ocket and P
$400
t-of-P
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 the plans’ reduced cost-sharing for low-income beneficiaries
or, under H.R. 1, increased cost-sharing for high-income beneficiaries.

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CRS-18
Figure 3. Annual Out-of-Pocket and Premium Spending, by Total Drug Spending, Up to $12,000
No drug coverage
$8,000
ng
ndi
$6,000
m Spe
iu
em
S. 1
$4,000
t and Pr
H.R. 1
ke
$2,000
Out-of-Poc
$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 the plans’ reduced cost-sharing for low-income beneficiaries
or, under H.R. 1, increased cost-sharing for high-income beneficiaries.

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