Order Code RL32283
CRS Report for Congress
Received through the CRS Web
Medicare Endorsed Prescription
Drug Discount Card Program
April 1, 2004
Jennifer O’Sullivan
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Medicare Endorsed Prescription
Drug Discount Card Program
Summary
On December 8, 2003, the President signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (MMA, P.L. 108-173). This
legislation provides for the implementation of a Medicare prescription drug program,
effective January 1, 2006. In the interim, MMA requires the Secretary of Health and
Human Services (HHS) to establish a temporary program to endorse prescription
drug discount card programs meeting certain requirements. The purpose is to provide
access to prescription drug discounts to persons who voluntarily enroll with a private
card plan. Each card sponsor is to provide each enrollee with access to negotiated
prices. The program will also provide up to $600 in transitional assistance in both
2004 and 2005 for low-income persons enrolled in endorsed card programs.
All Medicare beneficiaries, except those receiving Medicaid drug coverage, are
eligible to enroll in a discount card program. Card enrollees with incomes below
135% of poverty are eligible for transitional assistance provided they do not have
drug coverage under a group health plan. Not all persons eligible to enroll will
actually enroll in the card program. Many persons who currently have access to
discount prices through other sources will likely elect not to enroll in the temporary
program. An individual can be enrolled in only one card program at a time.
Sponsors may charge a uniform annual enrollment fee, not to exceed $30; the Centers
for Medicare and Medicaid Services (CMS, the agency administering Medicare) will
pay the fee for those receiving transitional assistance.
A card sponsor must be a nongovernmental single legal entity doing business
in the U.S. It must have three years private sector experience in pharmacy benefit
management. At the time of application, it (or a subcontractor) must operate a
pharmacy benefit or similar program that serves at least 1 million covered lives. A
Medicare managed care organization may apply to become an exclusive card sponsor
by limiting drug card enrollment to persons enrolled in its managed care plan; certain
requirements otherwise applicable to card programs are waived for this group.
At a minimum, card programs will be required to offer a negotiated price for at
least one drug in each of the 209 therapeutic categories identified by CMS on a list
of medications frequently used by Medicare beneficiaries. Further, sponsors must
provide at least one generic drug for a negotiated price in at least 55% of the required
categories. The sponsor must contract with a sufficient number of pharmacies (other
than mail-order) in its service area to ensure that access requirements are met.
On March 25, 2004, CMS announced the endorsement of 28 private plan
sponsors; an additional 43 sponsors, representing 84 Medicare Advantage plans,
received endorsement. Beginning April 29, 2004, seniors will be able to obtain, by
zip code, information on plans available in the area, plan prices for drugs specified
by a senior, and pharmacies associated with the available card programs. Sponsors
will begin enrolling beneficiaries on May 3, 2004, and begin offering access to
discounts and transitional assistance June 1, 2004. This report will be updated as
events warrant.

Contents
Program Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Key Program Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Program Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Basic Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Eligibility for Transitional Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Transition Period to 2006 Prescription Drug Benefit . . . . . . . . . . . . . . 2
Transitional Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Card Sponsor Qualifications and Endorsement . . . . . . . . . . . . . . . . . . . . . . . 3
Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Service Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Medicare Endorsement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Enrollment in an Endorsed Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Enrollment Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Enrollment Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Program Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Covered Discount Card Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Formularies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Pharmacy Network Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Other Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Information and Outreach Activities; Customer Service . . . . . . . . . . . . 8
Transitional Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Medical Errors; Drug Interactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Grievance Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Privacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Special Endorsements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Special Endorsement for Managed Care Plans . . . . . . . . . . . . . . . . . . 10
Special Endorsements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Territories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
CMS Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Beneficiary Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Oversight and Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Costs for Sponsors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Formularies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Beneficiary Selection of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Price Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Measuring Negotiated Discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Transition to Permanent Drug Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Current Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Medicare Endorsed Prescription
Drug Discount Card Program
Program Overview
On December 8, 2003, the President signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (MMA, P.L. 108-173). This
legislation provides for the implementation of a Medicare prescription drug program,
effective January 1, 2006. In the interim, the legislation requires the Secretary of
Health and Human Services (HHS) to establish a temporary program to endorse
prescription drug discount card programs meeting certain requirements. The purpose
of these programs is to provide access to prescription drug discounts to persons who
voluntarily enroll with a private card plan. Each card sponsor is to provide each
enrollee with access to negotiated prices. The program will also provide up to $600
in transitional assistance in both 2004 and 2005 for low-income persons enrolled in
endorsed card programs.
On December 15, 2003, the Centers for Medicare and Medicaid Services (CMS,
the agency that administers Medicare) issued interim final regulations for the
endorsed card program.1 On February 5, 2004, CMS announced that it had received
106 applications for endorsement by the January 30, 2004 closing date. On March
25, 2004, CMS announced the endorsement of 28 private plan sponsors; an
additional 43 sponsors, representing 84 Medicare managed care plans (under the
Medicare Advantage program), received endorsement. Sponsors will begin enrolling
beneficiaries in May 2004 and begin offering access to discounts and transitional
assistance in June 2004.
This report provides an overview of the major features of the card program and
highlights some of the major implementation issues raised to date.
Key Program Features
Program Eligibility
Basic Requirements. Persons enrolled in Medicare Part A and/or Part B are
eligible to enroll in a discount card program. However, persons receiving any drug
coverage through Medicaid (including under a Section 1115 waiver program) are
1 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Services, Medicare Program; Medicare Prescription Drug Discount Card, Interim final rule
and notice; 68 Federal Register 69840, Dec. 15, 2003.

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ineligible to enroll in a drug card program.2 Conversely, an individual enrolled under
a state pharmaceutical assistance program could be eligible provided he or she meets
the other requirements.
It should be noted that not all persons eligible to enroll will actually enroll in the
card program. Many persons who currently have access to discount prices through
other sources will likely elect not to enroll in the temporary program.
Eligibility for Transitional Assistance. Certain low-income persons will
be eligible for transitional assistance. Individuals will not be eligible for this
assistance if they have drug coverage under a group health plan or other health
insurance coverage, TRICARE coverage, or Federal Employees Health Benefits
Program (FEHB) plan coverage. Persons qualifying for assistance are those with
incomes below 135% of the poverty line. Persons who meet the definition of
qualified Medicare beneficiary (QMB), specified low-income beneficiary (SLIMB),
or qualifying individual-1 (QI-1) will be deemed to meet the income requirements.3
An individual deemed eligible will be considered eligible for the duration of the
individual’s enrollment in an endorsed card program. There are no assets tests for
transitional assistance.
Transition Period to 2006 Prescription Drug Benefit. The new
Medicare prescription drug benefit under Part D becomes effective January 1, 2006.
Current Medicare beneficiaries will have a six-month open enrollment period,
beginning November 15, 2005, to decide whether they wish to enroll for the new
benefit. Beneficiaries who are enrolled in the endorsed drug card program can
continue their enrollment in the card program until the effective date of their
2 States are required to provide CMS with the necessary data to make this determination.
On Dec. 15, 2003, CMS sent a letter to state Medicaid directors advising them of the
information requirements; this requested information was designed with input from states
and pilot tested. The law specifies that state costs of this activity are reimbursable as
administrative expenses under Medicaid; the federal matching rate for these expenses is
50%.
3 QMBs are aged or disabled persons with incomes at or below the federal poverty level.
In 2004, the monthly level is $796 for an individual and $1,061 for a couple. They must also
have assets below $4,000 for an individual and $6,000 for a couple. Certain other assets
such as the home are excluded from this limit. QMBs are entitled to have their Medicare
cost-sharing charges, including the Part B premium, paid by the federal-state Medicaid
program. Medicaid protection is limited to payment of Medicare cost-sharing charges (i.e.,
the Medicare beneficiary is not entitled to coverage of Medicaid plan services) unless the
individual is otherwise entitled to Medicaid. SLIMBs are persons who meet the QMB
criteria, except that their income is over the QMB limit. The SLIMB limit is 120% of the
federal poverty level. In 2004, the monthly income limits are $951 for an individual and
$1,269 for a couple. Medicaid protection is limited to payment of the Medicare Part B
premium (i.e., the Medicare beneficiary is not entitled to coverage of Medicaid plan
services) unless the individual is otherwise entitled to Medicaid. QI-1s are persons who
meet the QMB criteria, except that their income is between 120% and 135% of poverty.
Further, they are not otherwise eligible for Medicaid. In 2004, the monthly income level for
QI-1 for an individual is $1,068 and for a couple $1,426. Medicaid protection for these
persons is limited to payment of the monthly Medicare Part B premiums.

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enrollment in Part D or May 14, 2006 (the end of the six-month Part D enrollment
period), whichever occurs first. Any such time occurring on or after January 1, 2006,
is considered as the individual’s transition period. During this transition period no
enrollment fee can be charged and any transitional assistance remaining on December
31, 2005 must be applied to the cost of covered discount card drugs purchased during
the transition period. The endorsed card enrollment program terminates no later than
May 14, 2006 for all enrollees.
Transitional Assistance
An individual determined eligible for transitional assistance in 2004 is entitled
to $600 in assistance in 2004 and $600 in 2005. For individuals determined eligible
in 2005, the amount available will be based on when the completed application is
received. If such application is received during the first quarter of 2005, the full $600
is available; the amount drops to $450 for applications received in the second quarter;
$300 for those received in the third quarter, and $150 for those received in the fourth
quarter. The available amounts are to be applied only toward the costs of “covered
discount card drugs” (i.e., all drugs that could be covered under a card program if
there were no formulary limitations.) This includes any drugs obtained through the
sponsor’s endorsed program, regardless of whether that drug is on the endorsed
sponsor’s formulary (if any) or whether a discount has been negotiated for that drug
.
Transitional assistance individuals are required to pay coinsurance charges.
Beneficiaries with incomes under 100% of poverty are liable for coinsurance charges
of 5% of the drug’s price; those with incomes between 100% and 135% of poverty
are liable for coinsurance charges of 10% of the price. Pharmacies are permitted to
waive these coinsurance charges; however they can not do so routinely, nor can they
advertise the fact.
Any transitional assistance remaining at the end of 2004 can be rolled over into
2005; any amount remaining at the end of 2005 can be rolled over into the
individual’s transition period, if any, at the start of 2006. These rollover provisions
only apply if the individual remains in the same endorsed card program, changes the
program during the annual coordinated election period in 2004 (for 2005), or is
eligible for a special election period and changes card enrollment during such period.
(See enrollment, below.)
CMS will reimburse endorsed sponsors for any transitional assistance applied
toward the cost of covered discount drugs obtained by transitional assistance
enrollees. Sponsors will submit requests to CMS to debit the enrollees balance.
CMS will only reimburse for those claims that are fully adjudicated for payment, not
for pending claims.
Card Sponsor Qualifications and Endorsement
Experience. An entity wishing to be a card sponsor must demonstrate certain
experience. It must be a nongovernmental single legal entity doing business in the
U.S. It must have three years private sector experience in pharmacy benefit
management including: (1) adjudicating and processing drug claims at the point of

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sale; (2) negotiating with prescription drug manufacturers and others for discounts,
rebates, and other price concessions on drugs; and (3) administering and tracking
individual subsidies or benefits in real time. At the time of application, the applicant
or subcontractor must operate a pharmacy benefit program, a prescription drug
discount card program, a low-income drug assistance program or similar program
that serves at least 1 million covered lives. In addition it (and any subcontractor the
applicant relies on to meet the three years experience and 1 million covered lives
requirements) must demonstrate a satisfactory record of financial stability and
business integrity. CMS notes that the three years and 1 million lives requirements
were included to ensure that the applicant (and subcontractors) are familiar with
federal laws and will be able to quickly establish endorsed programs. Entities that
could meet these requirements include pharmacy benefit management companies
(PBMs), wholesale or retail pharmacy delivery systems, and insurers.
Service Area. Card programs are required to meet certain requirements with
respect to service areas. Service areas must cover one or more states. The sponsor’s
program must be available to all eligible individuals residing in such state(s). It
should be noted that the statewide requirement does not apply to Medicare managed
care plans offering exclusive card programs (see discussion below).
Medicare Endorsement. CMS solicited applications from entities seeking
to become endorsed sponsors. The law permits the agency to limit the number of
endorsed sponsors in a state to two. However, the agency noted in the preamble to
the interim final rule that it intended to endorse all applicants that (together with their
subcontractors and other entities with which they have entered into a legal
arrangement) meet or exceed the requirements for endorsement. Applicants meeting
the requirements will enter into a contract with CMS. They will be able to use a
Medicare-Endorsed Prescription Drug Card emblem.
Card sponsors will not be able to begin enrollment activities until they have
completed certain activities including: finalizing pharmacy network contracts,
negotiating manufacturer rebates or discounts, entering into all subcontracts
necessary to assure full compliance with the conditions of endorsement, and
obtaining CMS approval of information and outreach materials.
Enrollment in an Endorsed Plan
Enrollment Process. Enrollment in the card program is voluntary.
Individuals must first select the card program they wish to enroll in. They will then
complete a standard enrollment form and submit it to the selected sponsor. If they
are applying for transitional assistance, they will need to certify, under penalty of
perjury, that the income information they are providing is accurate. An endorsed
sponsor cannot enroll a Medicare beneficiary in its program until CMS verifies the
beneficiary’s eligibility. If a beneficiary has applied for both the card program and
transitional assistance and is determined eligible for the card program, but not
transitional assistance, he/she has the option of deciding whether or not to enroll in
the card program.
CMS will verify that the applicant meets the eligibility requirements, including
income eligibility requirements in the case of transitional assistance. Every

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beneficiary determined ineligible for the program and/or transitional assistance can
request a reconsideration of the decision.
An individual can only be enrolled in one endorsed card program at a time. An
individual enrolling in 2004 may change the election for 2005 during the annual
coordinated election period (November 15, 2004-December 31, 2004). An individual
may voluntarily disenroll at any time. In general, an individual who disenrolls in
2004 must wait until the annual coordinated election period to enroll in another plan
for 2005. In general, an individual who disenrolls in 2005, will no longer be eligible.
However, under certain circumstances, individuals who disenroll from a program will
be entitled to a special enrollment period during which they can change their card
enrollment. The special enrollment period will apply for persons who move out of
the service area of the card sponsor, change residence to or from a long-term care
facility, enroll in or disenroll from a Medicare managed care plan, or are in a plan
which terminates or is terminated. A person eligible for transitional assistance, who
disenrolls other than for one of these specified reasons, forfeits any remaining
transitional assistance for the year.
CMS suggests that beneficiaries planning to change residence during the year
should enroll in a national program.
It should be noted that while beneficiaries can only enroll in one endorsed
program at a time, they may enroll in other card programs which are not Medicare-
endorsed programs.
Enrollment Fees. Sponsors may charge a uniform annual enrollment fee, not
to exceed $30. Card sponsors must assure that enrollees are not charged any
additional fees for products and services inside the scope of the endorsement.
Products and services inside the scope of a sponsor’s discount care program would
include covered discount drugs as well as discounted nonprescription drugs.
Enrollees will pay the fee directly to the card sponsor. CMS will pay the fee for
persons receiving transitional assistance. States may pay some or all of the
enrollment fees for some or all persons not eligible for transitional assistance;
payments are to be made directly to the sponsor. States may also pay some of the
coinsurance amounts for transitional assistance enrollees. No federal matching
payments would be available for these expenditures.
Program Design
Covered Discount Card Drugs. “Covered discount card drugs” are defined
as virtually all recognized prescription drugs. However, an individual plan does not
have to include all drugs on its formulary (see below) and not all formulary drugs
have to be discounted. Individuals will select a card program based on which
program will offer the discounted drugs they expect to use. Specifically, covered
discount card drugs are defined in the law as prescription drugs and biologicals
covered under Medicaid, vaccines licensed under Section 351 of the Public Health
Service Act, and insulin. Necessary supplies associated with the injection of insulin
are also included; syringes, needles, alcohol swabs, and gauze meet the definition
while test strips or lancets do not.

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The definition of covered discount drugs includes drugs when they are used for
a medically accepted indication. In general this means the use is approved under the
Federal Food Drug and Cosmetic Act or the use of which is supported by one or more
recognized compendia.
Specifically excluded from the definition of covered discount card drugs are
drugs excluded under Medicaid, except for smoking cessation. Thus, the following
categories are specifically excluded: (1) agents when used for anorexia, weight loss,
or weight gain; (2) agents when used to promote fertility; (3) agents when used for
cosmetic purposes or hair growth; (4) agents when used for the symptomatic relief
of coughs and colds; (5) prescription vitamins and mineral products, except prenatal
vitamins and fluoride preparations; (6) nonprescription drugs;4 (7) outpatient
prescription drugs for which the manufacturer seeks to require associated tests or
monitoring services be purchased exclusively from the manufacturer or its designee
as a condition of sale; (8) barbiturates; and (9) benzodiazepines (central nervous
system depressants).
Additionally, drugs which would otherwise be covered under the card program
are not covered if they can be covered under Medicare Part A (in connection with
covered inpatient services) or under Part B (which provides coverage for limited
categories of outpatient prescription drugs including drugs which cannot be self-
administered, immunosuppressive drugs under certain circumstances, and some
oncology drugs).
Formularies. Endorsed card programs may use formularies. For purposes of
the card program, a formulary is defined as the list of specific drugs from among
covered discount card drugs for which an endorsed sponsor offers negotiated prices
to Medicare beneficiaries enrolled in its card program. CMS expects that allowing
sponsors to use formularies will result in deeper discounts for card enrollees and
enhanced use of generic drugs. In the interim final regulation, CMS stated that it
wanted sponsors, when constructing their formularies, to include, at a minimum, the
types of drugs commonly needed by beneficiaries (both aged and disabled). It
developed a list of therapeutic classes and subclasses for medications frequently used
by Medicare beneficiaries. At a minimum, card programs will be required to offer
a negotiated price for at least one drug in each of the 209 categories identified in the
list. A drug can be used only once to satisfy this requirement. Further, sponsors
must provide at least one generic drug for a negotiated price in at least 55% of the
required categories.
CMS indicated that there are several key issues applicants should consider in
developing their formularies. These are: (1) evaluation of whether some drugs, not
widely recommended for use in the elderly but appropriate in individual cases, should
be included in the formulary; (2) importance of assuring discounted prices are
available to special populations for the specific medication combinations they require
(for example, for those persons who are HIV positive or those with mental illness);
4 However, MMA allows sponsors to offer discounts on nonprescription drugs through their
discount card program.

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and (3) ensuring that there are appropriate selections and dosage forms within each
class or subclass (for example, long-acting versus short acting).
Pricing. Negotiated Prices; Price Concessions. Card sponsors are
required to provide beneficiaries access to negotiated prices. As a condition of
endorsement, sponsors must obtain discounts, rebates, subsidies, or other price
concessions on at least some covered discount card drugs. Any such price
concessions obtained by endorsed sponsors are to be taken into account in
determining negotiated prices.
The interim final regulation requires that a share of such price concessions
should be passed along in the form of lower prices; it does not specify what should
constitute a share. The preamble to the regulation states that CMS would not set a
minimum quantitative requirement either for the level of price concessions endorsed
sponsors must obtain or the share of such concessions that must be passed along to
card enrollees. Rather, CMS states that it will allow endorsed sponsors to determine
this in “light of their understanding of consumer preferences and the impact of
market forces on their business model.” CMS further notes that PBMs frequently
obtain and pass through substantial rebates for their commercial populations.
CMS states that establishing a minimum level for price concessions could
potentially undercut market competition, because manufacturers might tend to set
their prices around the minimum level. It states that the CMS price comparison web
site will enable beneficiaries to compare maximum negotiated prices for drugs under
different endorsed programs. (See discussion below.)
Price Variation. It is expected that the level of discounts offered to card
enrollees will vary across the spectrum of drugs offered. CMS is also allowing
sponsors to vary prices and formularies by enrollee characteristics. For example,
lower prices could be offered to transitional eligible enrollees or enrollees with a
particular disease.
Updates. CMS will allow pricing changes to be made. (Its fact sheet on the
program states that changes can be made on a weekly basis.) However, any increase
in negotiated price is not allowed to exceed an amount proportionate to the change
in the drug’s average wholesale price and/or an amount proportionate to the changes
in the endorsed sponsor’s cost structure, including any change in price concessions
received. An exception is provided for the week of November 15, 2004 (which
coincides with the beginning of the annual enrollment period for 2005.)
Guarantees; Information. Card sponsors are required to guarantee that
network and mail order pharmacies provide the lower of the customary price or the
negotiated price.
They are also required to guarantee that a network pharmacy inform an enrollee
at the point of sale of any difference between the price of a prescribed drug and the
lowest price covered generic drug that is therapeutically equivalent and bioequivalent
and available at the pharmacy. Mail order pharmacies are required to provide the
information at the time of delivery of the drug.

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Card sponsors are to synchronize changes in the list of and negotiated prices for
drugs included in the formulary with those published on the CMS price comparison
website.
Pharmacy Network Access. The sponsor must contract with a sufficient
number of pharmacies (other than mail-order) in its service area to ensure that the
following access requirements are met:
! On average, 90% of beneficiaries in urban areas are within two miles
of a network pharmacy; urban areas are defined as zip codes with a
population density over 3,000 persons per square mile.
! On average, 90% of beneficiaries in suburban areas are within five
miles of a network pharmacy; suburban areas are defined as zip
codes with a population density between 1,000 and 3,000 persons
per square mile.
! On average, 70% of beneficiaries in rural areas are within 15 miles
of a network pharmacy; rural areas are defined as zip codes with a
population density less than 1,000 persons per square mile.
As required by law, these are the same standards established for use by the
Department of Defense under the TRICARE Retail Pharmacy program.
The sponsor’s network may be supplemented by mail order pharmacies.
Other Requirements
Information and Outreach Activities; Customer Service. Sponsors
will be required to provide specified information (through the Internet and some
other tangible medium, such as a mailing) to Medicare beneficiaries. The stated
purpose is to promote informed choice among endorsed card programs. Information
to be provided includes: the enrollment fee, negotiated prices for covered discount
card drugs, discounts (if offered) on nonprescription drugs, and any other products
or services offered under the endorsement program. The information and outreach
materials may not describe services outside the scope of the endorsement. Sponsors
must also provide information on a website (which is to include information on when
the site was last updated and a disclaimer that the information may not be the most
current). In general, CMS must approve outreach materials prior to distribution. The
sponsor must also maintain a toll-free customer call center open during normal
business hours.
Transitional Assistance. Card sponsors are required to administer
transitional assistance funds received from CMS for transitional assistance enrollees.
They are required to establish accounting procedures to manage the funds for each
enrollee.

Medical Errors; Drug Interactions. An endorsed sponsor must provide a
system to reduce the likelihood of medical errors and adverse drug interactions and
to improve medication use. The preamble to the regulations states that sponsors have
the flexibility to design their own individual systems. However, published scientific

CRS-9
and clinical literature (as well as the experience, if any, of the sponsor) should
support the proposed approaches.
Grievance Procedures. Sponsors are required to establish and maintain a
grievance process to handle a card enrollees’s complaint or dispute regarding the
manner in which he or she has received services under the endorsed program. The
subject of a grievance may include such items as timeliness, appropriateness, access
to and/or setting of services; failure to offer discounts on particular drugs; and
incorrect administration of transitional assistance. The CMS application solicitation
states that card sponsors must make enrollees aware of the process, accept grievances
filed within 60 days of the event, respond within 30 days, and provide CMS, on a
monthly basis, aggregate information on the number and disposition of grievances.
Reporting. Endorsed sponsors must report to CMS, on a periodic basis,
information on key features of the endorsed card program including information on:
! Savings from pharmacies and manufacturers obtained through
rebates, discounts, and other price concessions;
! Savings shared with enrollees by manufacturers, by all retail
pharmacies, by all mail order pharmacies, and by all brand name and
all generic covered discount card drugs;
! Dispensing fees;
! Certified financial records on transitional assistance used by
transitional assistance enrollees;
! Utilization and spending for selected drugs;
! Performance on customer service measures;
! Grievance logs;
! Compliance with pharmacy network access standards.
Further, the sponsor must provide notice of and the rationale for negotiated price
increases due to reasons other than changes in the average wholesale price. (This
requirement does not apply during the week of November 15, 2004.)
Privacy. Sponsors are covered by the requirements of the Health Insurance
Portability and Accountability Act (HIPAA) including the privacy requirements. A
beneficiary’s individually identifiable health information can only be used for health
care operations and marketing of products and services covered under the
endorsement. A sponsor may not request an enrollee to authorize the sponsor to use
such information for purposes of marketing products and services not covered under
the endorsement. Further, the sponsor is prohibited from using or disclosing any
individually identifiable information for marketing purposes following termination
of the sponsors’s endorsement or termination of the drug discount card program.

CRS-10
Special Endorsements
Special Endorsement for Managed Care Plans. A Medicare managed
care organization (i.e., Medicare Advantage organization)5 may apply to become an
exclusive card sponsor by limiting drug card enrollment to eligible persons enrolled
in any (but not necessarily all) of its managed care plans. Although many managed
care plans already offer drug coverage, not all do so and most offer limited coverage.
The discount card would be used in situations of no coverage or limited coverage
under the plans.
Plans may limit their service area to the Medicare managed care plan’s service
area. If the plan uses a pharmacy network for its Medicare managed care plan, that
network may be used for its endorsed program provided it is not limited to mail order
pharmacies. If the managed care plan does not use a pharmacy network for its
managed care plan, the Secretary must determine that the network for the card
program provides sufficient access to covered discount card drugs at negotiated
prices. Certain requirements otherwise applicable for drug card sponsors are deemed
to be met or waived for Medicare Advantage plans.
Exclusive card sponsors are required to apply transitional assistance funds only
to the cost to transitional enrollees of any discount card drugs obtained from a
network or mail order pharmacy included in the sponsor’s pharmacy network. The
plan may wrap around the managed care plan’s drug benefit (if any) by applying the
$600 toward the plan’s copayments and deductibles as well as toward additional
drugs not included under the plan’s benefit or when the plan’s benefit cap is reached.
Discount card eligible individuals enrolled in a Medicare managed care plan
offering an exclusive card program may only enroll in that program. They are not
permitted to enroll in another endorsed sponsor’s program. The exclusive card
sponsor may conduct group enrollment, i e., enroll all or a subset of eligible persons.
The sponsor must give all individuals it is enrolling in the group the opportunity to
decline enrollment and the opportunity to apply for transitional assistance.
Special Endorsements. An applicant for endorsement may submit an
application to become a special endorsement sponsor to provide transitional
assistance to residents of long term care facilities through long-term care
pharmacies.6 Similarly, an applicant for endorsement may submit an application to
5 MMA renamed Medicare+Choice plans as Medicare Advantage plans. Medicare
Advantage plans receive monthly capitation payments for services provided to their
Medicare enrollees. Certain other managed care plans continue to be reimbursed under cost
contracts; they may also apply for special endorsement.
6 CMS estimates that about 1.3 million Medicare beneficiaries are residents of extended stay
skilled nursing facilities and nursing facilities. An estimated 72% of these individuals are
eligible for both Medicare and Medicaid and will be ineligible for the card program if they
have Medicaid drug coverage. CMS estimates that up to 200,000 of the remaining
population could be eligible for transitional assistance. Approximately 3,000 pharmacies
serve the facilities’ residents. Provision of drug benefits is generally coordinated through
(continued...)

CRS-11
become a special endorsement sponsor to provide transitional assistance to American
Indians/Alaskan Natives (AI/ANs) who use Indian Health Service, Indian Tribe and
Tribal Organization, and Urban Indian Organization (I/T/U) pharmacies.7 The
Secretary is to select at least two of the best qualified applicants for special
endorsement for each category. Certain requirements otherwise applicable for drug
card sponsors are deemed to be met or waived for these plans.
Territories. Residents of the territories (including those receiving drug
coverage under Medicaid or Section 1115 waivers) are eligible for the endorsed drug
card program.8 However, individuals in territories are not eligible for transitional
assistance under the Medicare drug discount card program. Instead, territories
choosing to provide low-income assistance are required to submit plans to the
Secretary detailing how they intend to use their allotment (totaling $35 million across
the territories for the duration of the card program) to provide such assistance to
some or all Medicare beneficiaries with incomes below 135% of poverty.
An applicant for endorsement may submit an application to become a special
endorsement sponsor for all of the territories to provide access to negotiated prices.
The Secretary will select at least one qualified applicant. The endorsed sponsor must
provide access to negotiated prices.
CMS Activities
Beneficiary Education
CMS will disseminate basic information on the drug card to enrollees. In
addition, it plans to disseminate specific comparison information to promote
informed consumer choice among card programs including information on:
enrollment fees; customer service hours; contact information; program website; and
negotiated prices including dispensing fees. The law requires that the information
should, to the extent practicable, be disseminated 30 days prior to the initial
enrollment date. CMS stated in the preamble to the regulations that the comparison
information made available 30 days prior to the initial enrollment date would not
6 (...continued)
the facility and may be specially packaged.
7 CMS estimates that there are approximately 87,000 AI/ANs over the age of 65 and 20,000
disabled enrollees using the services of the Indian Health Service (IHS). Of the total
approximately 36,000 are covered by Medicaid. An estimated 18,000 may be eligible for
transitional assistance. There are 201 I/T/U pharmacies in 27 states (with eight states having
11 or more, and three states having 20 or more). CMS reports that these pharmacies
generally provide access to drugs off the Federal Supply Schedule (FSS) to AI/ANs. CMS
states that the special endorsement provisions will provide an opportunity to provide
prescriptions at the low FSS rate; coverage of costs would come in part from the IHS and
in part from transitional assistance.
8 CMS reports that there are close to 600,000 Medicare beneficiaries in the territories with
over 95% of those in Puerto Rico.

CRS-12
include information on negotiated prices. However, CMS subsequently announced
that this information will be available April 29, 2004.
Both general and comparative information is to be made available on the
Medicare website at [http://www.medicare.gov] and through the toll-free Medicare
number (1-800-MEDICARE). CMS also plans to use paid advertising to distribute
information.
Oversight and Monitoring
CMS will develop an oversight system to assure compliance with program
requirements, including those relating to marketing and enrollment policies and
implementation of transitional assistance payments. It will develop a complaint
tracking system to monitor and manage complaints not satisfactorily resolved through
the sponsor’s customer complaint process.
Sponsors who violate program requirements could be subject to sanctions,
penalties or termination.
Impact
Beneficiaries
As noted earlier, not all persons eligible for the drug card program will elect to
enroll.9 Some of these persons already have access to drug discounts either through
their health insurance or through an existing card program. Further, transitional
assistance is not available for persons who have other drug coverage. CMS estimates
that 15.4 million beneficiaries (slightly over one-third of the total) will be both
eligible for and could benefit from the discount card program. It estimates that 7.3
million persons will enroll in an endorsed card program in 2004 and 7.4 million will
enroll in 2005; of these it estimates that 4.7 million persons each year will be eligible
for transitional assistance.
Beneficiary savings attributable to lower negotiated prices will range from $1.4
to $1.8 billion in 2004 and $2.0 to $2.7 billion in 2005.10 This estimate is based on
two main assumptions. First, the program will result in average drug savings of
10%-15% over costs that would be incurred in the absence of the card program.11
Second, the effects of beneficiary education will lead to a greater use of generic drugs
9 CMS notes that because 2004 is the first year of the program, it does not have the benefit
of prior experience. It also notes a number of limitations in the assumptions used in the
impact analysis, for example, it is difficult to determine precisely how many persons will
enroll in the program. Further, the estimate does not assume any increase in utilization
stemming from the drug program.
10 CMS estimates the 2004 (Apr.-Dec.) savings at 0.88-1.18% of total national aggregate
drug spending in that period; 2005 savings are estimated at 0.89-1.18% of such spending.
11 The CMS estimate is based on the 15% figure.

CRS-13
and more effective management of expenses. Estimated beneficiary savings
attributable to transitional assistance are $2.4 billion in 2004 and $2.6 billion in 2005.
The savings estimates do not reflect the annual enrollment fees which can range
up to $30 per year. Factoring in the enrollment fees could reduce beneficiary savings
by up to $80 million each year.
Medicare
Program costs for persons eligible for transitional assistance are funded through
general revenues which are credited to a separate account in the Medicare Part B trust
fund; payments are made from this account. CMS estimates that Medicare program
spending will increase by $2.5 billion in CY2004, $2.7 billion in CY2005, and $0.1
billion in CY2006 (for those costs incurred during an individual’s transition period).
The vast majority of these costs is associated with transitional assistance ($2.4 billion
in 2004, $2.6 billion in CY2005, and $0.1 billion in 2006) with the remaining costs
attributable to payment of enrollment fees for this population group. In addition,
CMS administrative expenses will total an estimated $134 million.
Costs for Sponsors
Card sponsors will incur a number of costs in setting up their programs. These
include activities related to: program implementation, information and outreach,
eligibility determination and enrollment processing, customer service operations,
claims processing and claims adjudication, account maintenance, and logging and
responding to grievances. Costs will vary by sponsor, though all will have had
experience in running large programs. CMS estimates that sponsors with low costs
would be able to recover their costs through enrollment fees in both 2004 and 2005
and will have a sufficient revenue stream to carry them through the transition period.
For those with the highest costs, enrollment revenues will not exceed such costs until
2005 (though they may be able to cover any losses through rebate revenues); they
will however, have revenues greater than costs over the entire period.
Issues
Implementation of the drug card raises a number of issues. Some are unique to
the card program itself while others have implications for the Medicare drug benefit
which will be put in place in 2006.
Eligibility
There are several differences between the eligibility requirements and
determination procedures applicable for transitional assistance under the drug card
program and the requirements and procedures applicable for low-income subsides
under the new Medicare drug benefit which begins in 2006. This could lead to
potential confusion for beneficiaries.

CRS-14
CMS adopted streamlined procedures for the card program both because of the
short lead time for the program and the fact that it is temporary. For the drug card,
individuals will attest that their income falls below the threshold and CMS will verify
the eligibility. Under the permanent program, states will make eligibility
determinations using procedures currently in place for Medicaid.
Another difference involves assets tests. There are no assets tests for the drug
card, while there are assets tests for low-income subsidies under the Medicare drug
benefit. It is therefore possible that some persons will qualify for low-income
assistance under the card program but not under the permanent drug benefit.
Formularies
As noted, each plan is required to offer a discount on at least one drug in each
of 209 identified therapeutic categories; a single drug can not be used to satisfy the
requirement for more than one category. CMS established these groupings in order
to promote timely implementation of the temporary program and to provide access
to discounts on drugs used most often by beneficiaries. Manufacturers have
suggested that the minimum standard be expanded to include more than one drug in
each class or a special endorsement for sponsors that follow this approach.12 Other
observers, have suggested that a more flexible framework, generally with fewer
categories and/or allowing one drug to meet the requirement for more than one
category, would be more appropriate. They are also concerned that the categorization
may set a precedent for required coverage in 2006.13
Beneficiary Selection of Plan
As noted, beneficiaries are expected to make a selection from endorsed drug
card programs available in their area. (An exception will be MA plan enrollees who
will get their card through the MA plan if the plan offers an exclusive card program.)
Questions have been raised about the ability of seniors, particularly those in frail
condition, to make effective comparisons between card programs. As of this writing,
it is difficult to determine how many choices the average beneficiary will have or
how difficult it will be to make a comparison between the available options.
Presumably, two key factors in making these decisions will be differences in
formularies and the amount of the discounts.
As noted, each plan is required to cover at least one drug in each of 209
identified therapeutic categories. At this point it is difficult to assess the degree of
variation in formularies that will be offered by different programs. It is likely that
potential enrollees will identify those drugs they use on a regular basis and determine
which of the various programs cover these drugs. It is possible that some
beneficiaries will be unable to find an endorsed program which covers all of the
12 PhRMA, Comments on Medicare Prescription Drug Program; Medicare Prescription
Drug Discount Program
, letter to CMS, Jan. 14, 2004.
13 AAHP-HIAA, letter to CMS, Jan. 14, 2004; and Academy of Managed Care Pharmacy,
Medicare Prescription Drug Discount Card, letter to CMS, Jan. 14, 2004.

CRS-15
drugs they use. However, in all cases, there will be another drug, frequently a
generic, that is covered in the same therapeutic class. While the drug may be on the
formulary it may not necessarily have a discounted price.
Beneficiaries can elect to use a drug off the formulary, but they will not be able
to take advantage of any negotiated price for the drug. However, if a beneficiary is
entitled to transitional assistance, payment may be made for a drug, even if it is off
the formulary.
Price Negotiation
A related issue is the price that will be negotiated for the drugs. CMS will
provide comparison information on its website beginning April 29, 2004. Some
observers are concerned that while card sponsors can change both formularies and
negotiated prices after a beneficiary enrolls in a sponsor’s program, beneficiaries are
essentially locked into their choice for the remainder of the calendar year.
Another concern is the price information that is published. When CMS
published its interim final regulation, it stated that the comparison site will show the
maximum price that the beneficiary would face. The Pharmaceutical Research and
Manufacturers Association (PhRMA) recommended that the comparison should
show the actual price for a specific drug that an enrollee would face at each pharmacy
under each card plan in their area.14 Conversely, other observers objected to the
publication of the information. The AAHP-HIAA (the national trade association
representing health plans and private insurers) and the Blue-Cross Blue Shield
Association (BCBSA) objected to the publication of pricing information on the Web
on the grounds that making drug-specific price information publically available is
potentially confusing and has the potential to damage the ability of sponsors to
negotiate effectively on behalf of beneficiaries. They recommended instead that
CMS include on the site the range of reductions offered by sponsors, and provide that
specific information be provided to beneficiaries on request through a toll-free
hotline.15
On April 29, 2004, seniors will be able to obtain, by zip code, information on
plans available in the area, plan prices for drugs specified by a senior, and pharmacies
associated with the available card programs.
Measuring Negotiated Discounts
CMS has estimated savings attributable to the discount program in the range of
10-15%, though savings will vary by sponsor and across the range of drugs offered.
It is unclear how actual savings will be measured. Establishing a base for price
comparisons may be difficult. The difficulties may be compounded since card
sponsors are allowed to make pricing changes as frequently as once a week.
14 PhRMA, ibid.
15 AAHP-HIAA, letter to CMS, Jan. 14, 2004; and Blue Cross Blue Shield Association,
letter to CMS, Jan. 14, 2004.

CRS-16
Under the regulations, any increase in negotiated price can not exceed an
amount proportionate to the change in the drug’s average wholesale price (AWP)
and/or an amount proportionate to the changes in the endorsed sponsor’s cost
structure. AWP has been used for paying for the limited number of drugs Medicare
Part B currently covers. However, it is not a perfect measure. It is generally agreed
that the AWP is only a published figure and bears relatively little relationship to
actual prices. In fact, MMA includes a provision which specifies that Medicare Part
B will no longer use AWP and will, instead, use the average sales price (ASP) to
calculate payments. ASP information, to be calculated by the manufacturer, will only
be provided for these drugs.
Transition to Permanent Drug Benefit
As noted, the Medicare endorsed drug card program is temporary and will be
replaced by a permanent drug benefit under Medicare Part D in 2006. Under the Part
D benefit, each Medicare beneficiary will be entitled to obtain qualified prescription
drug coverage through enrollment in a prescription drug plan (PDP), or in the case
of a MA enrollee, through enrollment in a MA-PDP plan.16
CMS has received a large number of applications from entities wishing to
become drug card sponsors. It is likely that many of the applicants for endorsement
are also intending to become PDPs. Many may view this as an opportunity to
position themselves in the market and make themselves known to beneficiaries prior
to the roll out of the new benefit in 2006. Presumably, the experience entities gain
in administering the drug card, including dealing with the Medicare population, will
prove useful when they take on the responsibilities for the new benefit. At the same
time, CMS expects that information provided through the card program will assist
it in further understanding the pharmaceutical industry.
It may be more difficult for some seniors to adjust to the changes between the
card program and the new permanent benefit. As noted, there are differences
between the two programs with respect to eligibility requirements and the process for
determining eligibility.
There are also likely to be differences between the formularies and negotiated
prices established under the endorsed card program and those made available by PDP
plans, even if offered by the same entity. The consequences of individual choices
between plans will become more important in 2006. As is the case with the drug
card, negotiated prices will only be available for drugs on the plan’s formulary. In
addition, beginning in 2006, beneficiaries will receive federal subsidies for costs
incurred with respect to drugs on a plan’s formulary, but will not receive such
subsidies (except in the case of successful appeals) for drugs not on a plan’s
formulary. Further, since beneficiaries will be paying premiums estimated at $35 a
month (rather than a maximum of $30 a year for the card), they will want to select
a program that best meets their needs.
16 For information on the new drug benefit, see: CRS Report RL31966, Overview of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
, by Jennifer
O’Sullivan, Hinda Chaikind, Sibyl Tilson, Jennifer Boulanger and Paulette Morgan.

CRS-17
These concerns highlight the necessity for beneficiary education on both the
card program and the permanent drug benefit as well as the differences between
them. CMS has begun this process. However, the material issued to date has proved
controversial. CMS has stated that it is highlighting what new benefits will be
available. However, some observers have charged that the material does not provide
enough detail to give beneficiaries an understanding of the new choices.
Current Status
On February 5, 2004, CMS announced that it had received 106 applications for
endorsement. Approximately half of the applications were from managed care plans.
One quarter were from those proposing to offer coverage for any qualifying
beneficiary living in the service area covered by the plan. The remaining quarter
were from entities proposing to offer a national plan.
On March 25, 2004, CMS announced the endorsement of 28 private plan
sponsors; since sponsors can offer more than one plan, this results in 28 national
approved programs and 19 regional programs. An additional 43 sponsors,
representing 84 Medicare Advantage plans, received endorsement. Special approval
was given to three programs to provide access to transitional assistance through long-
term care pharmacies; two to provide discounts to residents in the territories, and one
to serve federally recognized Indian tribe and tribal organization pharmacies. A
listing of these plans is available from the press release issued on that date and
available on the CMS website at [http://www.cms.gov]. A listing of card programs
available by zip code is available at [http://www.medicare.gov].
Beginning April 29, 2004, seniors will be able to obtain, by zip code,
information on plans available in the area, plan prices for drugs specified by a senior,
and pharmacies associated with the available card programs. Sponsors will begin
enrolling beneficiaries on May 3, 2004 and begin offering access to discounts and
transitional assistance June 1, 2004.