Order Code RL32902
CRS Report for Congress
Received through the CRS Web
Medicare Prescription Drug Benefit:
Low-Income Provisions
Updated June 1, 2006
Jennifer O’Sullivan
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Medicare Prescription Drug Benefit:
Low-Income Provisions
Summary
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(MMA, P.L. 108-173) established a new voluntary prescription drug benefit under
a new Part D, effective January 1, 2006. Medicare beneficiaries are able to purchase
drug coverage through private plans offered by prescription drug plan (PDP) sponsors
or managed care organizations offering Medicare Advantage prescription drug (MA-
PD) plans. These private plans bear some of the financial risk for drug costs.
Federal subsidies covering the bulk of the risk are provided to encourage
participation in these private plans.
MMA required PDP sponsors and MA-PDP plans to offer a minimum set of
benefits, referred to as “qualified coverage.” “Qualified coverage” is defined as
either “standard prescription drug coverage” or “alternative prescription drug
coverage” with actuarially equivalent benefits (i.e., having at least equivalent dollar
value). In both cases, access must be provided to negotiated prices for drugs.
Beneficiaries are required to pay a monthly premium for program coverage as well
as certain cost-sharing charges when they obtain benefits.
A major focus of MMA is the enhanced coverage provided to low-income
individuals who enroll in Part D. Low-income enrollees, including persons (known
as “dual eligibles”) who previously received drug benefits under Medicaid, have
their prescription drug costs paid under the new Part D. Persons with incomes below
150% of poverty have assistance with some portion of the premium and cost-sharing
charges. Persons with the lowest incomes have the highest level of assistance.
MMA represents the first time that the level of Medicare benefits is tied to income.
Implementation of the new program, particularly for the low-income population,
has proved challenging. Observers cited a number of problems that arose when the
dual eligible population was transferred from Medicaid to Medicare coverage on
January 1, 2006. The Centers for Medicare and Medicaid Services (CMS) took a
number of actions designed to address the problems that arose immediately after the
shift became effective. While some of the initial problems have been somewhat
mitigated, many administrative issues remain.
More recently, attention has also focused on other low-income persons eligible
for subsidy assistance. As of early May 2006, CMS estimated that 3.2 million out
of a total of 13.2 million persons eligible for low-income subsidies had neither signed
up for Part D nor had coverage through another source. The Administration therefore
took two major actions designed to increase enrollment among this target population.
First, it stated that persons deemed eligible for a low-income subsidy after the close
of the initial enrollment period on May 15, 2006, can still enroll in a Part D plan in
2006. Second, these late enrollees will not be subject to the late enrollment penalty
otherwise applicable to persons who miss the enrollment deadline.
This report provides background information on the MMA provisions, program
implementation, and related state issues. It will be updated as events warrant.

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Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
MMA Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Low-Income Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Eligibility Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Definition of Eligible Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Definition of Income and Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Low-Income Subsidy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Premium Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Cost-Sharing Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Uncovered Drug Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Territories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Early Program Implementation: Process and Issues . . . . . . . . . . . . . . . . . . . . . . . 9
Eligibility and Enrollment Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Eligibility for Low-Income Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . 10
Plan Enrollment Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Eligibility and Enrollment Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Dual Eligibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Enrollment for Other Low-Income Persons . . . . . . . . . . . . . . . . . . . . . 14
Plan Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Administrative Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Drug Formularies and Transition Coverage . . . . . . . . . . . . . . . . . . . . . . . . . 17
Scope of Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Transition Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Formulary Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Long-Term Care Facility (LTC) Residents . . . . . . . . . . . . . . . . . . . . . . . . . 20
Part D Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Interaction With Other Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Patient Assistance Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
State Pharmaceutical Assistance Programs . . . . . . . . . . . . . . . . . . . . . 23
Other Beneficiary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Drugs Not Covered Under Part D . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Cost-Sharing for the Dual Eligible Population . . . . . . . . . . . . . . . . . . 26
Value of Benefit over Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
State Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
State Contributions Toward Part D Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 27
“Clawback Requirement” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Clawback Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Other Budget Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Impact on Medicaid’s Drug Program . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Interaction Between Part D and Medicaid . . . . . . . . . . . . . . . . . . . . . . 30

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Estimated Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CBO Cost Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CMS Enrollment Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Concluding Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
List of Tables
Table 1. Part D Benefits, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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Medicare Prescription Drug Benefit:
Low-Income Provisions
Overview
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(MMA, P.L. 108-173) established a new voluntary prescription drug benefit under
a new Part D, effective January 1, 2006.1 Medicare beneficiaries are able to purchase
drug coverage through private plans offered by prescription drug plan (PDP) plan
sponsors or managed care organizations offering Medicare Advantage prescription
drug (MA-PD) plans. These private plans bear some of the financial risk for drug
costs. Federal subsidies covering the bulk of the risk are provided to encourage
participation.
MMA requires PDP sponsors and MA-PDP plans to offer a minimum set of
benefits, referred to as “qualified coverage.” “Qualified coverage” is defined as
either “standard prescription drug coverage” or “alternative prescription drug
coverage” with actuarially equivalent benefits (i.e., having at least equivalent dollar
value). In both cases, access must be provided to negotiated prices for drugs.
Beneficiaries are required to pay a monthly premium for program coverage as well
as certain cost-sharing charges when they obtain benefits.
A major focus of MMA is the enhanced coverage provided to low-income
individuals who enroll in Part D. Low-income enrollees, including those who
previously received drug benefits under Medicaid, have their prescription drug costs
paid under the new Part D. Persons with incomes below 150% of poverty have
assistance with some portion of the premium and cost-sharing charges. Persons with
the lowest incomes have the highest level of assistance. MMA represents the first
time that the level of Medicare benefits is tied to income.2
Effective January 1, 2006, Medicaid no longer covers drug costs for persons
eligible for both Medicare and Medicaid (i.e., the “full benefit dual eligible”
population). State Medicaid spending is reduced as a result of this transfer of
responsibility. However, the law contains a provision (labeled by some as the
1 For an overview of MMA, 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.
2 MMA also provided for higher Medicare Part B premiums for high-income enrollees,
beginning in 2007. The increase was to be phased in over five years. However, the Deficit
Reduction Act of 2005 (DRA) shortened the phase-in to three years. See CRS Report
RL32582, Medicare: Part B Premiums, by Jennifer O’Sullivan.

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CRS-2
“clawback provision”) which requires states to continue to assume a portion of these
costs.
The Centers for Medicare and Medicaid Services (CMS, the agency that
administers Medicare) issued final regulations implementing the MMA drug
provisions on January 28, 2005.3 Subsequently, CMS has issued a number of
guidance documents to further clarify a number of issues related to implementation
of the low-income provisions.
Implementation of the new program, particularly for the low-income population,
has proved challenging. Observers cited a number of problems that arose when the
dual eligible population was transferred from Medicaid to Medicare coverage on
January 1, 2006. CMS took a number of actions designed to address the problems
that arose immediately after the shift became effective.
More recently, attention has also focused on other low-income persons eligible
for subsidy assistance. Many observers were concerned that this population might
not be identified and enrolled on a timely basis. The Administration took two major
actions to address this concern. First, it stated that persons deemed eligible for a low-
income subsidy after the close of the initial enrollment period on May 15, 2006, can
still enroll in a Part D plan in 2006. Second, these late enrollees will not be subject
to the late enrollment penalty otherwise applicable to persons who miss the
enrollment deadline.
This report begins by providing an overview of MMA benefits, including
premium and cost-sharing liabilities for the general Medicare population. The
overview is followed by a discussion of the subsidy benefits available for low-income
individuals. The report then highlights some of the key implementation issues.
MMA Benefits
All Medicare beneficiaries are entitled to obtain qualified prescription drug
coverage through enrollment in a private prescription drug plan under the new
Medicare Part D.4 Persons enrolled in a Medicare Advantage (MA) plan providing
qualified prescription drug coverage obtain coverage through that plan. Other
individuals obtain coverage through enrollment in a plan offered by a PDP sponsor.
Beneficiaries who elect to enroll in a plan are responsible for a monthly premium,
which varies by the individual plan selected. At the time of enactment, the
Congressional Budget Office (CBO) estimated that in 2006, Part D plan premiums
would average $35. In March 2006, CMS estimated monthly plan premiums at $25
(about 25% of the total cost of the benefit).
3 Department of Health and Human Services, Centers for Medicare and Medicaid Services,
Medicare Program; Medicare Prescription Drug Benefit; Final rule, 70 Federal Register
4193, Jan. 25, 2005.
4 See CRS Report RL33136, Medicare: Enrollment in Medicare Drug Plans, by Jennifer
O’Sullivan.

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CRS-3
MMA requires PDP sponsors and MA-PD plans to offer a minimum set of
benefits, referred to as “qualified coverage.” “Qualified coverage” is defined as
either “standard prescription drug coverage” or “alternative prescription drug
coverage” with actuarially equivalent benefits (i.e., having at least equivalent dollar
value). In both cases, access must be provided to negotiated prices for drugs.
For 2006, the “standard prescription drug coverage” is defined as follows:
! $250 deductible paid by the beneficiary;
! 75% of costs paid by the program and 25% of costs paid by
beneficiary up to the initial coverage limit ($2,250, accounting for
$750 in total out-of pocket costs and $2,250 in total spending);
! 100% of costs paid by beneficiary for drug spending falling in the
coverage gap between $2,251 and $5,100 (accounting for total
beneficiary out-of-pocket spending of $3,600); and
! all costs paid by program over $5,100 in total spending (the
“catastrophic” trigger) except for nominal beneficiary cost-sharing
defined as the greater of: (1) a copayment of $2 for generic drug or
preferred multiple source drug and $5 for other drugs; or (2) 5%
coinsurance.
Beginning in 2007, the annual dollar amounts are to be increased by the annual
percentage increase in average per capita aggregate expenditures for covered
outpatient drugs for Medicare beneficiaries for the 12-month period ending in July
of the previous year.
MMA specifies that beneficiaries must incur a certain level of out-of-pocket
costs ($3,600 in 2006) before catastrophic protection begins. Costs are only
considered incurred if they are incurred for the deductible, cost-sharing, or benefits
not paid because they fall in the coverage gap (sometimes referred to as the
“doughnut hole”). Incurred costs do not include amounts for which no benefits are
provided because a drug is excluded under a particular plan’s formulary. Costs are
treated as incurred, and thus treated as true out-of-pocket (TROOP) costs only if they
are paid by the individual (or by another family member on behalf of the individual),
paid on behalf of a low-income individual under the subsidy provisions, or under a
state pharmaceutical assistance program. Any costs for which the individual is
reimbursed by insurance or otherwise do not count toward the TROOP amount.
Low-Income Provisions
MMA provides assistance to certain low-income persons to help them meet Part
D premium and cost-sharing charges. Specifically, such assistance is provided for
persons with incomes below 150% of the federal poverty level and assets below
specified amounts. The definitions of income and assets are linked directly or
indirectly to the definitions used under current Medicaid law. The law specifies
several low-income coverage groups and subgroups. Each low-income coverage
group specified by MMA receives a different level of assistance.

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CRS-4
The specified assistance for low-income groups is linked to “standard
prescription drug coverage.” Each low-income group receives assistance for
premium and cost-sharing charges otherwise applicable under standard coverage.
Persons with the lowest incomes have the highest level of assistance.5
The following specifies the requirements applicable for each low-income
eligibility group and outlines the assistance available for each group.
Eligibility Groups
Definition of Eligible Groups. Special premium and cost-sharing subsidies
are available for low-income persons. This population is divided into two main
groups with the first group divided into subgroups for purposes of determining cost-
sharing requirements. The two main groups are defined as follows:
Group 1, referred to as Full Subsidy Eligible Individuals. This group
includes all persons who: (1) are enrolled in a PDP plan or MA-PD plan; (2) have
incomes below 135% of the federal poverty level; and (3) have resources in 2006
below $6,000 for an individual and $9,000 for a couple (increased in future years by
the percentage increase in the consumer price index, or CPI).
The following groups of persons are also included in Group 1.
! Dual Eligibles. These are persons entitled to the full range of
benefits under their state’s Medicaid program. Prior to January 1,
2006, these persons received their drug benefits under Medicaid.
Effective January 1, 2006, their drug benefits are provided through
Part D. All full benefit dual eligible individuals are deemed to be in
Group 1, regardless of whether they meet the other eligibility
requirements.
! Recipients of Supplemental Security Income (SSI) benefits; or
! Enrollees in Medicare Savings Programs. MMA permitted the
Secretary to extend Group 1 coverage to enrollees in Medicare
Savings Programs. (Implementing regulations extended coverage to
this group). There are three Medicare Savings programs that provide
Medicaid assistance for Medicare premiums and cost-sharing
charges. The three groups are (1) qualified Medicare beneficiaries
5 It should be noted that the law permits plans to offer the general population “actuarially
equivalent” benefits. They are also permitted to impose tiered cost-sharing for the general
population, that is cost-sharing percentages which vary by whether the drug is generic or
brand or preferred or not preferred. Most plans offered in 2006 are for “actuarially
equivalent” benefits. However, cost-sharing for the low-income population can not exceed
the lower of: (1) the specific limits specified for the low-income under standard coverage
(as discussed later in this report), or (2) the amount otherwise charged to the general
population.

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CRS-5
(QMBs)6, (2) specified low-income Medicare beneficiaries
(SLIMBs)7, and (3) qualifying individuals (QI-1s).8,9
Group 2, referred to as Other Subsidy Eligible Individuals. Group 2
includes all other persons who (1) are enrolled in a PDP plan or MA-PD plan; (2)
have incomes below 150% of poverty; and (3) have resources in 2006 below $10,000
for an individual and $20,000 for a couple (increased in future years by the
percentage increase in the CPI).10
Definition of Income and Assets. The definitions of income and assets
generally follows that used for determining eligibility under the QMB, SLIMB, and
QI-1 programs (which in turn link back to the definitions used for purposes of the SSI
program). There are, however, a few items which should be noted:
! Family Size. Currently, the federal poverty level (FPL) used for
income determinations is that applicable for an individual or for a
couple. MMA specifies that the FPL is to be that for the family of
the size involved. Therefore, the regulations define the family size
to include, in addition to the applicant and spouse, additional
persons related to the applicant who live in the same residence and
depend on the applicant or spouse for at least one-half of their
financial support. The income of these additional persons would
not, however, be used in the determination of eligibility.
6 QMBs are aged or disabled persons with incomes at or below the federal poverty level.
In 2006, the monthly level is $837 for an individual and $1,120 for a couple (these levels
include a monthly $20 disregard for unearned income). Assets must be below $4,000 for
an individual and $6,000 for a couple. QMBs are entitled to have their Medicare cost-
sharing charges and the Medicare 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, such as long
term care) unless the individual is otherwise entitled to Medicaid.
7 SLIMBs meet the QMB criteria, except that their income is between 100% and 120% of
the federal poverty level. In 2006, the monthly income limits are $1,000 for an individual
and $1,340 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.
8 These 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 2006, the
monthly income limit for QI-1 for an individual is $1,123 and for a couple $1,505.
Medicaid protection for these persons is limited to payment of the monthly Medicare Part
B premium.
9 An additional Medicare savings group is Qualified Disabled and Working Individuals
(QDWIs); individuals in this group may have income up to 200% of the federal poverty
level. Unlike the other Medicare Savings groups, this group is entitled to no special
treatment under the low-income subsidy provisions of Part D.
10 It should be noted that some publications have cited assets levels of $11,500 and $23,000;
these number include a $1,500 per person burial allowance.

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CRS-6
! Resources. MMA provides for the development of a simplified
application in which applicants attest to their level of resources and
submit minimal documentation. Only liquid resources (or those that
could be converted to cash within 20 days) and real estate that is not
the applicant’s primary residence are considered. Liquid resources
include such things as checking and savings accounts, stocks, and
bonds. Vehicles are excluded because they are not considered liquid
assets.
! More Generous State Standards. The law (Section 1902(r)(2) of the
Social Security Act) allows states to use more generous income and
assets rules for determining eligibility for the QMB, SLIMB, and QI-
1 programs. A few states have elected this option. As noted above,
MMA permits the Secretary to include all persons meeting QMB,
SLIMB, and QI-1 criteria in Group 1; the Secretary elected to do so.
However, only persons on QMB, SLIMB, or QI-1 rolls are actually
included. States are not permitted to use the less restrictive
methodologies for other subsidy eligibility determinations; the
standards will be the same nationwide for these persons.
Low-Income Subsidy Benefits
MMA provides subsidies for both premiums and cost-sharing charges under Part
D.
Premium Subsidies. All persons in Group 1 (i.e., full subsidy-eligible
individuals) receive a premium subsidy equal to 100% of the low-income benchmark
premium amount (essentially a weighted average for the region), but in no case
higher than the actual premium amount for standard coverage under the plan selected
by the enrollee.
In addition, the premium subsidy amount can not be less than the premium for
the lowest-cost PDP plan in the region. Thus, all individuals in Group 1 are entitled
to a full premium subsidy for at least one plan in their region. However, if a
beneficiary selects a plan with a premium higher than the benchmark, the beneficiary
is liable for the additional costs.

All persons in Group 2 (i.e., other subsidy eligible individuals) have a sliding
scale premium subsidy ranging from 100% of the low-income benchmark at 135%
of poverty to 0% of such value at 150% of poverty. Specifically, the subsidy is 75%
for persons with incomes above 135% but at or below 140% of poverty, 50% for
persons with incomes above 140% but at or below 145% of poverty; and 25% for
persons with incomes above 145% but below 150% of poverty.
Persons in Group 1, but not Group 2, also have a premium subsidy for any Part
D late enrollment penalty equal to 80% for the first 60 months of delayed enrollment
and 100% thereafter.
Cost-Sharing Subsidies. Cost-sharing subsides are linked to “standard
prescription drug coverage.” Beneficiaries in Group 1 have no deductible, no

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CRS-7
coverage gap (i.e., no”doughnut hole”), and no cost-sharing over the catastrophic
threshold. Full benefit dual eligibles who are residents of a medical institution or
nursing facility have no cost-sharing. Other full benefit dual eligible individuals with
incomes up to 100% of poverty have cost-sharing, for all costs up to the out-of-
pocket threshold, of $1 for a generic drug prescription or preferred multiple source
drug prescription and $3 for any other drug prescription. All other persons in Group
1 have cost-sharing, for all costs up to the out-of-pocket threshold, of $2 for a generic
drug or preferred multiple source drug and $5 for any other drug.11 (See Table 1.)
Beneficiaries in Group 2 have a $50 deductible, 15% coinsurance for all costs
up to the out-of-pocket limit, and cost-sharing for costs above the out-of-pocket
threshold of $2 for a generic drug prescription or preferred multiple source drug
prescription and $5 for any other drug prescription. (See Table 1.)
Each year, beginning in 2007, the cost-sharing amounts for full benefit dual
eligibles below 100% of poverty will be increased by the increase in the CPI. The
cost-sharing amounts for all other persons, and the deductible amount for Group 2,
will be increased by the annual percentage increase in per capita beneficiary
expenditures for Part D covered drugs.
11 The preamble to the final CMS regulations notes that MA-PD plans can not choose to
eliminate the copayments for dual eligible individuals, except in the case of specialized MA
plans (under Section 231 of MMA) offering benefits only to dual eligible individuals.

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CRS-8
Table 1. Part D Benefits, 2006
(by per capita drug spending category)
Low-income
All beneficiaries
Group 1
Group 2
Total drug spending
Paid by
Paid by
Paid by
Paid by
(dollar ranges)
Part D
enrollee
Paid by Part D
Paid by enrollee
Part D
enrollee
$0-$250
0
$250
$250
0
$200
$50
$250.01-$2,250
Institutionalized duals: $0
75%
25%
100% less enrollee cost-sharing
Duals under 100% of poverty: $1/$3b
85%
15%
Others: $2/$5c
$2,251-$5,100
Institutionalized duals: $0
0
100%
100% less enrollee cost-sharing
Duals under 100% of poverty: $1/$3b
85%
15%
Others: $2/$5c
$5,100.01 and over
100% less
enrollee
95%a
5%
100%
0
$2/$5c
cost-
sharing
Source: P.L. 108-173, §§ 1860D-2 and 1860D-14.
a. Assumes enrollee has met true out-of-pocket (TROOP) threshold of $3,600.
b. $1 per prescription for generic or preferred drugs that are multiple source drugs; $3 per prescription for other drugs.
c. $2 per prescription for generic or preferred drugs that are multiple source drugs; $5 per prescription for other drugs.

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Uncovered Drug Expenditures. It should be noted that low-income
individuals are entitled to cost-sharing subsidies only for drugs included on a plan’s
formulary. No subsidies are available for costs for drugs not on the formulary of the
individual’s plan unless such individual has successfully appealed to have coverage
granted for a particular drug. As is the case for all such appeals (for both the low-
income and other persons), an individual can make such an appeal only if the
prescribing physician determines that all covered Part D drugs on any tier of the
formulary for treatment of the same condition would not be as effective for the
individual as the nonformulary drug, would have adverse effects for the individual,
or both.
A state Medicaid program cannot “wrap around” the Part D benefit unless it
chooses to fund 100% of the costs. Federal matching is not available to cover the
costs of any drug which could be included under Part D but is excluded under a
particular plan’s formulary.
Medicaid can continue to provide coverage (and receive federal matching
payments) for drugs specifically excluded from coverage under Part D. Included in
this category are benzodiazepines and barbiturates.
Territories
The low-income subsidies are available for persons residing in the 50 states and
the District of Columbia. While residents of the territories12 may enroll in a PDP
under Part D, they are not entitled to the low-income subsidies. Instead, a territory
may submit a plan to the Secretary for providing drug coverage for its low-income
population. Each territory with an approved plan can receive a grant based on its
ratio of Medicare beneficiaries in the territory compared to the number in all
territories. The total amount of funding available is $28.125 million in the last three
quarters of FY2006, $37.5 million in FY2007, increasing in subsequent years by the
percentage increase in prescription drug spending for Medicare beneficiaries.
Early Program Implementation: Process and Issues
Eligibility and Enrollment Procedures
In order to take advantage of the low-income subsidies, an individual must be
determined eligible for the assistance and be enrolled in a Part D plan. A separate
process is established for each. In general, applications for the subsidy and
enrollment in a Part D plan can occur in any order. The procedures for establishing
eligibility and enrolling in a plan are outlined below. It should be noted that in
certain cases different rules apply for different subcategories of the low-income
population.
12 American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, Puerto
Rico, and the Virgin Islands.

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CRS-10
In general, current Medicare enrollees had to enroll with a Part D plan by the
close of the initial enrollment period on May 15, 2006. Failure to do so meant that
these individuals could not enroll until the open enrollment period for 2007
(November 15, 2006-December 31, 2006), with coverage beginning January 1, 2007.
Further, these persons would be subject to a late enrollment penalty if they went for
more than 63 days without creditable drug coverage (namely, coverage at least as
good as standard Part D coverage.
However, both the 2006 closing date and application of the late enrollment
penalty for persons deemed eligible for a low-income subsidy after May 15, 2006,
have been waived.
Eligibility for Low-Income Subsidies. Certain groups are automatically
deemed full subsidy-eligible individuals; other persons have to apply for assistance.
Deemed Individuals. Persons automatically deemed full subsidy-eligible
individuals are full benefit dual eligibles, QMBs, SLIMBs, QI-1s, and recipients of
SSI. These individuals must be notified that they are deemed eligible for a full
subsidy for a period up to one year. Further, they are to be informed that they do not
need to apply for the subsidy. Persons who were enrolled in one of these programs
in 2005 were to be notified prior to January 1, 2006, that they qualified for the
subsidy.
Other Persons. Other individuals (or their personal representatives) have to
apply for subsidy assistance. Applicants may apply either at state Medicaid offices
or Social Security offices. Applicants are required to provide information from
financial institutions, as requested, to support information in the application, and to
certify as to the accuracy of the information provided.
State Medicaid programs are required to make eligibility determinations for
persons applying to the state Medicaid agency. The Commissioner of the Social
Security Administration (SSA) is required to make such determinations for persons
applying at SSA offices. No specific time frame is established for these
determinations. Redeterminations and appeals are to be handled by the same agency
making the initial determination.
Applications to SSA may be filed in person, by mail, by phone, or over the
Internet. CMS encouraged states to use the SSA application form when assisting
beneficiaries and to forward these application forms to SSA. SSA processes these
applications and is responsible for associated redeterminations and appeals.
However, states are still required to have the ability to make such determinations for
individuals who request them to do so.
Plan Enrollment Process. In general, Medicare beneficiaries voluntarily
enroll in a PDP or MA-PDP plan during the initial enrollment period (November 15,
2005-May 15, 2006), during an initial seven-month enrollment period (for persons
becoming eligible on or after March 1, 2006), the annual open enrollment period
(November 15-December 31 each year), or, in certain exceptional cases (such as
involuntary loss of other drug coverage), during a special enrollment period. A new

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CRS-11
special enrollment period has been established for certain low-income persons. (See
below.)
Auto-enrollment for Dual Eligible Beneficiaries. Special provisions
apply for full benefit dual eligible individuals. Effective January 1, 2006, these
persons could no longer receive Medicaid coverage for drugs covered under Part D.
The law required automatic enrollment for dual eligibles who fail to enroll in a PDP
or MA-PDP plan. Individuals are to be enrolled with the plan in the region that has
a premium not exceeding the premium subsidy amount. If more than one such plan
is available, enrollment among these plans is made on a random basis. Individuals
are to be informed in advance of the selected plan. Nothing prevents an individual
from declining such enrollment or disenrolling from the plan in which they have been
enrolled and enrolling in a different plan. Further, dual eligibles can change plan
enrollment at any time, with enrollment in the new plan effective the following
month.
Auto-enrollment was to occur in the fall of 2005 for persons on the Medicaid
rolls at that time; enrollment was effective January 1, 2006.13 CMS randomly
assigned full benefit dual eligible beneficiaries in original Medicare to PDP plans
with premiums at or below the low-income premium subsidy amount. Special rules
applied in the case of MA enrollees. These persons were assigned to a MA-PD plan
with the lowest premium offered by the same MA organization, even if the plan’s
monthly prescription drug premium exceeded the low-income premium subsidy
amount. Beneficiaries were to be informed in advance of the assignment. If the
beneficiary failed to affirmatively select another plan or declined Part D enrollment,
he or she was to be considered to be enrolled in the assigned plan.
Other Enrollees. MMA limited the requirement for auto-enrollment to full
benefit dual eligibles. It did not apply to the Medicare Savings population or to other
persons eligible for low-income subsidies. However, CMS established a process,
labeled “facilitated enrollment” for enrollees in Medicare Savings programs (MSPs),
SSI enrollees, and persons who have applied for and been approved for low-income
subsidy assistance. The basic features applicable to auto-enrollment for dual
eligibles (i.e., random assignment, assignment to a plan with the lowest premium,
and assignment of MA enrollees to lowest cost MA-PD plan offered by the MA
organization) are extended to facilitated enrollment.
Facilitated Enrollment Process. Initially, CMS intended to conduct the
facilitated enrollment process after the close of the open enrollment period on May
15, 2006. If an individual did not select a plan during the open enrollment period,
the person would be enrolled in a plan, effective June 1, 2006. However, in March
2006, CMS announced that beneficiaries eligible for facilitated enrollment were
being sent notices in early April informing them of the plans they would be enrolled
in if they took no action before April 30, 2006. If the beneficiary failed to select
another plan (and did not decline Part D enrollment), he or she would be considered
13 For duals newly eligible for Part D after that date, enrollment is effective on the first day
of the month the individual becomes eligible for Part D.

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CRS-12
to be enrolled in the assigned plan. The effective date of plan enrollment would be
May 1, 2006.
One notice was to be sent to persons identified as qualifying for a full subsidy,
while a different notice was to be sent to those qualifying for a partial subsidy. Those
qualifying for a partial subsidy are liable for a portion of the plan’s premium; the plan
is to bill the beneficiary directly for the amount.
CMS stated that some persons would not be sent a facilitation notice. Included
were persons whose former employer or union plan sponsor was claiming the retiree
drug subsidy on their behalf.14 In addition, CMS worked with state pharmacy
assistance programs in five states (New York, New Jersey, Connecticut,
Pennsylvania, and Illinois) to make sure that any persons the state planed to enroll
in a Medicare drug plan would also not have facilitated enrollment by CMS.
Special Enrollment Periods. The law and regulations establish special
enrollment periods (SEPs) outside of the general enrollment periods, during which
an individual can disenroll from one PDP or MA-PD and enroll in another one.
In General. Generally, an individual can only take advantage of a SEP under
special circumstances, such as moving from one part of the country to another.
However, low-income enrollees who have been auto-enrolled or whose eligibility
into a plan has been facilitated can have additional SEPs. Full benefit dual eligibles,
as well as MSP enrollees, can change enrollment at any time, with the coverage
change effective the following month. Other persons whose eligibility into a plan has
been facilitated may change their enrollment once prior to the annual open enrollment
period, with enrollment effective the following month.15
Special Enrollment Period for Low-Income Subsidy Eligible Individuals.
Recently, CMS established a special enrollment period for persons eligible for a low-
income subsidy.16 (It characterized the change in status resulting from a low-income
subsidy determination made after May 15 as an exceptional circumstance warranting
a special enrollment period.)17 Specifically, persons deemed eligible for a low-
income subsidy after the close of the initial enrollment period on May 15, 2006, can
still enroll in a Part D plan in 2006. The President subsequently stated that these
late enrollees will not be subject to the late enrollment penalty otherwise applicable
to persons who miss the 2006 enrollment deadline.18
14 See CRS Report RL33041, Medicare Drug Benefit: Retiree Provisions, by Jennifer
O’Sullivan.
15 Originally only full benefit dual eligibles were to be allowed to switch plans monthly.
Recently this policy was extended to all MSP enrollees.
16 CMS, Center for Beneficiary Choices, Instructions for 2007 Contract Year, memorandum
to Medicare Prescription Drug Plan (PDP) Sponsors, Apr. 3, 2006.
17 U.S. Congress, House Committee on Ways and Means, Subcommittee on Health,
Statement of Mark McClellan, Administrator of CMS, May 3, 2006.
18 The White House, President Bush Discusses Medicare Prescription Drug Benefit,
(continued...)

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CRS-13
Eligibility and Enrollment Issues
Dual Eligibles.19 On January 1, 2006, more than 6 million dual eligibles were
to be transitioned from Medicaid to Medicare drug coverage. The auto-enrollment
process was intended to prevent any coverage gap.
Initial Start-Up. Prior to January 1, 2006, many observers were concerned that
the auto-enrollment process might not go smoothly. They noted that not all
beneficiaries were correctly identified and enrolled in a plan. They also were
concerned that many individuals might not be aware of the transition and/or might
not know which plan they were enrolled in.
In December 2005, CMS established a backup process for any dual eligible
arriving at a pharmacy without necessary documentation. The process included
establishing several contractual relationships for the following activities: (1)
establishing a new electronic eligibility inquiry (E1) system for pharmacists; (2)
providing a point-of-sale (POS) contractor to pay claims for dual eligibles who were
not immediately identified as enrolled in a PDP; and (3) hiring an enrollment
contractor to work with drug plans and pharmacists to follow up on dual eligibles
who were not enrolled in a plan, and to ensure that claims were billed to the
appropriate parties. CMS also required Part D plans to develop and implement
transition policies for individuals whose previously covered drugs were not on the
plan’s formulary. (See the discussion below).
Despite the establishment of the auto-enrollment and backup processes, the
program experienced a number of problems during the initial days of operation —
particularly related to the transition of dual eligibles. There were a number of reports
about individuals who were unable to fill prescriptions because eligibility could not
be verified or the drug plan’s transition policies were not applied. Pharmacists also
reported difficulty in getting timely and accurate information from the Medicare
toll-free line, the PDP customer service representatives, and the newly established E1
system. Subsequently, CMS released additional guidance for drug plans and
pharmacists, and dedicated additional resources to try and resolve these issues.
State and Federal Transition Funding. During the first weeks of 2006,
32 states stepped in temporarily to pay for drugs for dual eligibles who would
otherwise have had a gap in coverage due to transition problems. CMS announced
that the federal government would reimburse states for costs incurred prior to March
8, 2006;20 with some states receiving extensions to March 31, 2006; CMS extended
18 (...continued)
transcript, Kings Point Clubhouse, Sun City Center, Florida, May 9, 2006.
19 See CRS Report RL33268, Medicare Prescription Drug Benefit: An Overview of
Implementation for Dual Eligibles, by Jennifer O’Sullivan and Karen Tritz, and CRS Report
RS21837, Implications of the Medicare Prescription Drug Benefit for Dual Eligibles and
State Medicaid Programs, by Karen Tritz.
20 CMS used Section 402 demonstration authority; this is Section 402 of the Social Security
(continued...)

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CRS-14
the deadline for associated administrative costs to May 5, 2006. As of that date,
CMS reported that it was working with a contractor to process claims and reconcile
with plan sponsors in order to begin reimbursing states.21 Some states have
complained about the reimbursement delay. In addition, California, which has a
large dual eligible population, has extended stop-gap coverage through the end of the
year (with state-only funding) to address continuing problems encountered by
beneficiaries.
Ongoing Issues. Reportedly, the number of dual eligibles experiencing
difficulties with Part D has been reduced. However, some individuals continue to
encounter problems. Some dual eligibles were enrolled in more than one plan. In
many cases, this occurred when a beneficiary who had been auto-enrolled in one plan
switched to another plan; in many cases the first plan still had the individuals on its
rolls. CMS issued guidance to plans on March 21, 2006, on what was labeled the
enrollment reconciliation process. This multi-step process was intended to assure
that beneficiaries are enrolled in only one plan, that the plan they are enrolled in is
their chosen plan, and that no beneficiary has a gap in coverage due to the
reconciliation process. Part of the reconciliation process involves sending letters to
beneficiaries who continue to have claim activity against the first plan.
(Beneficiaries who have no claim activity against the original plan will be disenrolled
from the plan, but will not be sent the letters.) The letters inform the individual that
they are being disenrolled from the first plan unless they declare their intent to stay
with that plan.
Enrollment for Other Low-Income Persons. As noted above, CMS
moved the facilitated enrollment process up by a month. The goal was to try to avoid
some of the problems that occurred in the auto-enrollment process and to correct any
problems that might occur prior to the May 15, 2006 deadline. Subsequently, CMS
waived the enrollment deadline for this population group.
A key concern is the identification of low-income persons eligible for subsidy
assistance who are not enrolled in Medicare Savings Programs or SSI. SSA sent out
letters to persons it identified as being possibly eligible for assistance. However,
beneficiary advocates are concerned that many persons who should apply are either
not aware of the benefit, do not understand the application process, or think they will
not qualify.
On the other hand, the fact that an individual has received a letter from SSA
does not automatically mean that an individual is eligible for a subsidy. SSA
reported that as of April 30, 2006, it had received applications from 4.9 million
beneficiaries; of these, almost 850,000 were unnecessary because either the
applicants were automatically eligible or because they had filed more than one
20 (...continued)
Act of 1967 (P.L. 90-248), as amended.
21 U.S. Congress, House Committee on Ways and Means, Subcommittee on Health,
Statement of Mark McClellan, Administrator of CMS, May 3, 2006.

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CRS-15
application. The agency had made more than 3.9 million determinations; 1.7 million
of these were deemed to be subsidy-eligible.22
Many observers contend that the relatively low percentage of eligibles reflects
the program’s assets limitations.23 A number of persons have therefore suggested
that the assets requirements should be eliminated. This would expand the pool of
persons eligible for federal assistance. At the time of enactment, CBO estimated that
1.8 million otherwise eligible persons would not qualify for the subsidy because of
the assets limitations. A report prepared for the Kaiser Family Foundation in April
2005 estimated that 2.37 million persons would not be eligible due to assets tests.24
Of course, eliminating the assets test would also increase federal costs for the low-
income subsidy.
Complicating the issue is the fact that individuals in a few states might be
subsidy-eligible if they applied through their state’s Medicaid office rather than
through SSA. Both the states and SSA can make subsidy eligibility determinations;
however, CMS encouraged states to both use the SSA application forms and to
forward such forms to the SSA for action. States and SSA are to apply the same
criteria for determining eligibility for low-income subsidies. However, some states
use more generous methodologies for determining eligibility for Medicare Savings
programs. As noted earlier, Medicare Savings recipients are automatically deemed
eligible for full subsidy benefit. In the preamble to the final regulations, CMS
acknowledged that there might be cases where an individual applies to the SSA for
a low-income subsidy, is denied coverage because of excess income and assets, and
is unaware that he or she might qualify for a full subsidy because of meeting the more
generous Medicare Savings program requirements in the person’s state.
The law and regulations provide that individuals can request that the state
Medicaid office make the determination. When states make eligibility
determinations they are also required to screen for eligibility for Medicare Savings
programs. A separate section of the law (added before passage of MMA) requires
SSA to annually identify individuals potentially eligible for Medicare Savings
programs and transmit the information to the states.
22 U.S. Congress, House Committee on Ways and Means, Subcommittee on Health,
Statement of Beatrice Disman, Chairman Medicare Planning and Implementation Task
Force, Social Security Administration, May 3, 2006.
23 MMA established a temporary drug discount card program as a stop gap measure before
the drug benefit was implemented on January 1, 2006. One feature of the discount card was
a transitional $600 annual benefit in 2004 and 2005 for low-income persons. There were
no assets tests for the $600 subsidy. It is therefore possible that some persons that were
eligible for the drug card subsidy are not eligible for the low-income subsidy.
24 Thomas Rice and Katherine Desmond, “Low-Income Subsidies for the Medicare
Prescription Drug Benefit: The Impact of the Asset Test,” The Henry J. Kaiser Family
Foundation, Apr. 2005.

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CRS-16
Plan Assignment
CMS assigned full benefit dual eligible beneficiaries to plans with premiums at
or below the low-income premium subsidy amount. Similar assignments were made
for other subsidy eligible enrollees who did not select a plan. The assignment
process had the effect of directing the low-income population into the lower cost
plans. Some observers contend that such plans may not in all cases be the ones the
low-income individual would prefer based on the plan’s formulary, pharmacy
network, or other factors.
Some persons have suggested that the auto-enrollment and facilitated enrollment
process should not be completely random, since low-income individuals often
represent a more medically fragile population than Medicare beneficiaries as a whole.
Some persons had recommended that enrollments be targeted toward an individual
beneficiary’s particular circumstances. However, CMS did not attempt to assign
beneficiaries to a particular plan based on the individual’s particular drug needs,
pharmacy affiliation, or on their classification as a special needs population. CMS
cited both data limitations and its inability to make individual selections, given the
varied reasons for choosing a plan. Further, CMS had noted that full benefit dual
eligibles and MSP enrollees may change plan enrollment at any time, while other
low-income subsidy eligibles may change enrollment once before the end of the year.
Other Administrative Issues
Technology issues and data transfer lag times have been to blame for many of
the problems facing the program’s early implementation. Some of the problems
included discrepancies between state and CMS files on the dual eligible population,
delays in tracking which plan a beneficiary was enrolled in, and not making available
on a timely basis the low-income subsidy status of enrollees, which led pharmacies
to charge beneficiaries incorrect cost-sharing charges. While some of the problems
have eased, many data transmission issues remain. One issue of particular concern
for the low-income population is that when beneficiaries switch plans, their
enrollment in the new plan is not recorded on a timely basis. CMS is encouraging
plan switches to be made at the beginning of the month to allow more time for the
change to be processed for the first day of the following month.
CMS also issued a memorandum on May 5, 2006, acknowledging “numerous
complaints concerning full benefit dual eligible beneficiaries being charged incorrect
copayments at the pharmacy.” CMS outlined the following approaches to plans to
correct this problem. First, plans are to use the best available data when they have
knowledge that the beneficiary’s cost-sharing level is not correct. Second, they must
update their systems on a timely basis to reflect new information. Finally, plans are
encouraged to reimburse pharmacies directly (rather than beneficiaries) when
implementing retroactive subsidy changes, since is unlikely that the pharmacies had
actually billed the beneficiaries for the charges.25
25 CMS, Center for Beneficiary Choices, Incorrect Cost Sharing Charges to Dual Eligible
Beneficiaries, memorandum to Part D Plan sponsors, May 5, 2006.

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CRS-17
Drug Formularies and Transition Coverage
PDs and MA-PDs have drug formularies. Formularies are lists of drugs that the
plans will cover. Within broad guidelines, plans have considerable flexibility in
designing their formularies. MMA required formularies to cover at least two drugs
in each therapeutic category and class. The law also requested the United States
Pharmacopeia (USP) to develop a list of categories and classes which could be used
by plans in developing these formularies. The USP developed model guidelines,
though not all PDs and MA-PDs follow the model. Plans may also incorporate
utilization management tools such as prior authorization or step therapy (where a
lower cost drug is first tried before a higher-cost drug may be approved).
Any individual enrolled in a plan may appeal to obtain coverage for a drug not
on the formulary only if the prescribing physician determines that all covered Part D
drugs on any tier of the formulary for the treatment of the same condition would not
be as effective for the individual, would have adverse effects for the individual, or
both.
The scope of a plan’s formulary is particularly important for low-income
beneficiaries who are generally unable to afford drugs not covered by the plan. A key
implementation issue was what would happen to dual eligibles who previously had
their drugs paid for by Medicaid. Many of these individuals were likely to be
enrolled in plans that did not cover all of the drugs on their existing drug regimen.
In response to these concerns, CMS developed policies relating both to the scope of
plan formularies and transition rules.
Scope of Coverage. Many of the dual eligibles fall into one or more
population subgroups, such as the mentally ill, the disabled, and those with
HIV/AIDS. The drug regimens for these individuals are often very finely tuned to
meet the needs of individual patients. Advocates for these populations note that
successful treatments are often arrived at only after trying several different kinds of
medications. They suggest that shifting individuals who have stabilized on one
medication to another medication could have negative consequences, both medical
and emotional. For example, advocates for the mentally ill stated that psychotropic
drugs are not interchangeable. In addition, they note that if persons are forced to
change regimens, some may experience increased hospitalizations and emergency
room visits, thereby driving up overall medical costs.
CMS responded to this concern by requiring plan formularies to cover all or
substantially all of the drugs in the following six categories: antidepressant,
antipsychotic, anticonvulsant, anticancer, immunosuppressant, and HIV/AIDS.
Further, CMS stated that its review of plan formularies includes a review of actual
drugs to assure no discrimination against certain populations.
However, many dual eligibles were enrolled in plans that did not cover all of the
drugs on their existing drug regimen. In January 2006, the Office of the Inspector
General (OIG) of the Department of Health and Human services conducted a review

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CRS-18
of drug plan formularies.26 Of the top 200 drugs most commonly used by the dual
eligible population in 2005, 178 are eligible for PDP coverage and 22 are excluded
(see below). The OIG noted that this population group was being assigned to 409
PDPs that use 37 unique formularies. Nineteen percent of the formularies included
all 178 of the Part D eligible drugs, while an equal proportion included less than
85%.
The OIG noted that under the random assignment process, 18% of dual eligibles
were assigned to plans that included all 178 drugs, while 30% were assigned to plans
that covered less than 85% of such drugs. However, every PDP region had at least
one plan using a formulary that included all 178 drugs. Therefore, all dual eligibles
have the opportunity to switch to plans including all of these drugs.
The OIG report was based on its analysis of the random enrollment process.
Reportedly, many dual eligibles have subsequently switched plan enrollment. It is
not known at this time what percentage of enrollees switched to plans with broader
formulary coverage.
Transition Policies. CMS established transition policies intended to assure
that new plan enrollees did not abruptly lose coverage for their drugs when they
switched from Medicaid to Medicare. The regulations and initial CMS guidance
documents required all plans to establish a transition process for new enrollees whose
current drug therapies were not included in the plan’s formulary. Based on this
guidance, PDPs developed various transition policies. Generally, a minimum 30-day
period was established, with many plans providing a 90-day period for long-term care
facility residents. During this period, plans were to provide a temporary supply of
non-formulary drugs.
During the initial start-up period, there were reports of many dual eligibles being
unable to fill their prescriptions. CMS responded by requiring all PDPs to extend the
transition period for all of these individuals through March 2006. During this period,
PDPs were to help beneficiaries work with their health care providers to switch to a
therapeutically appropriate formulary alternative or to request a formulary exception
if medically necessary. As the extended transition period ended, CMS reminded
plans that they must provide beneficiaries with the appropriate assistance.
Reportedly, many plans were responding to the end of the March transition period by
phasing in their formularies gradually, thereby enabling them to manage their
exceptions and appeals requests.
CMS stated that it was holding plans accountable for meeting their contractual
requirements for resolving exceptions and appeals. It noted that it was monitoring
plan performance, and stated its expectation that plans would provide a temporary
supply when they were unable to meet established time frames. CMS further noted
26 U.S. Department of Health and Human Services, Office of Inspector General, Dual
Eligibles’ Transition: Part D Formularies’ Inclusion of Commonly Used Drugs, Report
OEI-05-06-00090, Jan. 2006.

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CRS-19
that it would be imposing corrective actions, including sanctions, if enrollees were
unable to obtain needed drugs on a timely basis.27
In April 2006, CMS announced the transition process requirements for 2007,
which include the minimum standards plans are required to meet. Specifically, plans
will be required to provide a temporary supply fill anytime within the first 90 days
of a beneficiary’s enrollment in a plan. The supply must be for 30 days (unless the
prescription is written for less than 30 days) for any nonformulary drug. The
requirement also applies to drugs that are on a plan’s formulary, but that require prior
authorization or step therapy. In long-term care facilities, the transition policy
provides for a 31-day fill, with multiple fills as necessary, during the first 90 days of
a beneficiary’s enrollment in a plan. After the 90-day period, the plan must provide
a 31-day emergency supply while an exception is being processed. (CMS has
specified 31 days because many long-term care pharmacies dispense medications in
31-day increments.)28
Formulary Changes. Many observers had expressed concerns that plans
could change their formularies during the year, provided they gave 60 days’ notice.
Beneficiaries might have selected an individual plan based on its coverage of a
particular drug, which might be subsequently dropped from the list.
On April 26, 2006, CMS provided a guidance document to Part D plan sponsors
outlining its approach to formulary plan changes during a plan year.29 The guidance
document noted that both industry best practices and the best interests of Medicare
beneficiaries call for limited formulary changes during the plan year. Generally,
plans could expand formularies, modify therapeutic categories and classes only to
account for new therapeutic uses and newly approved drugs, and make formulary
maintenance changes.
The guidance document stated that plans could make other formulary changes,
such as removing drugs from the formulary, moving drugs to a less preferred tier
status, or adding utilization management requirements only in accordance with
specified procedures. The document further stated that plans should make such
formulary changes during the year only if enrollees currently taking the affected
drugs are exempted from the change for the remainder of the plan year. CMS stated
its expectation that plans would continue to comply with this policy in 2007 and
subsequent years, and would include such assurances in plans’ future bids and
contracts. This policy applies to all Part D enrollees, not just those receiving a low-
income subsidy.
27 CMS, Transition Fact Sheet, Mar. 31, 2006, at [http://www.cms.hhs.gov/apps/media/
press/release.asp?Counter=1817. ].
28 CMS, Transition Process Requirements for Part D Sponsors, Apr. 2006, at
[http://www.cms.hhs.gov/PrescriptionDrugCovcontra/Downloads/CY07Transition
Guidance.pdf].
29 CMS, Centers for Beneficiary Choices, Formulary Changes During the Plan Year,
memorandum to Part D sponsors, Apr. 26, 2006.

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CRS-20
Long-Term Care Facility (LTC) Residents
Many dual eligibles are residents of long-term care (LTC) facilities. LTC
residents are on average older and frailer than non-LTC residents; many also have
cognitive impairments. These individuals do not access their prescriptions directly.
In the past, the facility generally contracted with a single pharmacy to provide
prescription supplies. The pharmacy dispensed drugs in special packaging to the
facility; a nurse in the facility administered the drug to the patient. LTC facilities
typically provided an open formulary to prescribing physicians that allowed
immediate access to a variety of medications in different dosage forms and strengths.
Part D Requirements. The transition to the new Part D benefit resulted in
significant changes. Long-term care residents now receive their drug coverage
through Part D plans, not Medicaid. MMA required Part D plans to provide
convenient access to prescription drugs for institutional residents. The regulations
required Part D plans to offer standard contracting terms and conditions, including
performance and service criteria, to all long-term care pharmacies in their service
areas. Individuals in LTC facilities need to be sure that their plan contracts with a
pharmacy serving the facility.
In the preamble to the final regulations, CMS outlined a process that was
described as balancing the special needs of LTC enrollees with the need to inject
competition into the long-term care pharmacy market. In March 2005, CMS issued
a guidance document,30 which outlined minimum criteria that plans must meet in four
key areas: performance and service, convenient access, formulary, and exceptions
and appeals.
The guidance document requires Part D plans to offer a contract to any
pharmacy willing to participate in its LTC network so long as the pharmacy is
capable of meeting minimum performance and service criteria (and relevant state
laws) and other terms established by the plan for its network pharmacies. The
performance and service criteria are based on widely used best practices in the market
today. They include criteria relating to: comprehensive inventory and inventory
capacity; requirements for a dispensing pharmacist including those related to drug
utilization review; capacity to provide special packaging; provision of 24/7 on-call
service with a qualified pharmacist; and delivery services, including emergency
delivery services.31
The Part D plan must demonstrate that it has a network of participating
pharmacies that provide convenient access for LTC residents that are Part D
enrollees. It must also attest that it will assure that all future Part D enrollees who are
institutionalized can routinely receive their benefits through the plan’s network of
pharmacies.
30 CMS, Long-Term Care Guidance, Mar. 16, 2005, at [http://www.com.hhs.gov/States/
Downloads/Longtermcareguidance.pdf].
31 CMS notes that these items would be legitimate costs to reflect in the dispensing fee.
Specialized services provided in the administration of the drugs after they are dispensed and
delivered from the LTC pharmacy are not covered under the Part D benefit.

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CRS-21
Plans cannot have a different formulary for LTC residents (though some
observers had recommended this). They are required to provide coverage for all
medically necessary drugs. CMS notes that this can be achieved through inclusion
of the drugs in the formulary, utilization management tools, or an exceptions process.
Finally, the exceptions and appeals process established by Part D sponsors is
expected to consider the special circumstances of LTC enrollees. Sponsors are
required to have procedures in place where there is a disparity between Part D
requirements and Medicare conditions of participation for long-term care facilities.
On May 11, 2006, CMS issued a memo to state survey agency directors intended
to clarify residents’ rights regarding choice of a drug plan and pharmacy provider,
and the facilities’ responsibility to provide drugs to residents. The document noted
that residents are guaranteed the right to choose a Part D plan, but do not have
“unbridled freedom” to choose a pharmacy. The document cited a number of
examples of situations that would frustrate a beneficiary’s ability to receive drugs
under his or her preferred Part D plan. CMS noted its expectation that nursing homes
work with pharmacies to make sure that a resident’s choices are honored.
Specifically, CMS expects nursing homes to work with current pharmacies to assure
that they recognize the plans chosen by the facility’s beneficiaries, or alternatively to
add pharmacies to achieve that objective. At its option, the facility could contract
exclusively with another pharmacy that contracts more broadly with Part D plans.
Since nursing homes are responsible for the safety and efficacy of medication
delivery, they have the responsibility for selecting a pharmacy or pharmacies that are
willing and able to accommodate the plans chosen by all the residents of the facility.
Nursing homes may not coach, steer, or otherwise encourage a resident to select or
change a plan. State surveyors are to continue to monitor compliance with
regulations and guidelines.32
Implementation. MMA, together with the implementing regulations and
guidance material, represented a major shift for LTC facilities and their dual eligible
patients. While the initial stages of the transition apparently went somewhat more
smoothly than some individuals had expected, several problem areas have been
identified. (These are in addition to the enrollment issues and transition issues
discussed above). Some identified by a March 2006 focus group of state Medicaid
directors included the following: incorrect premium assessments were billed to dual
eligibles; unit dose packaging was not provided for beneficiaries in residential care
homes;33 dispensing guidelines are significantly different from those applicable under
Medicaid; and some long-term pharmacies had large Part D accounts receivable.34
32 CMS, Center for Medicaid and State Operations/Survey and Certification Group, Nursing
Homes and Medicare Part D, memorandum to State Survey Agency Directors, May 11,
2006.
33 Unit dose packaging systems are often used in nursing homes, group homes and similar
facilities. Each dose is dispensed in individual packages and labeled with patient identifiers
and administration instructions. This is intended to streamline procedures for staff and cut
administration errors.
34 Vernon Smith et al., Observations on the Initial Implementation of the Medicare
(continued...)

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CRS-22
Some observers feel that it would be helpful if nursing homes could help
beneficiaries select a plan. However, this runs counter to CMS policy, which is
based on the premise that if nursing homes are allowed to make recommendations,
they could inappropriately influence plan selection.
Interaction With Other Programs
Patient Assistance Programs. A number of drug manufacturers have
offered prescription drugs to low-income Medicare beneficiaries, as well as to other
low-income persons with high drug costs. These pharmaceutical assistance programs
(PAPs) are not connected with federal programs. PAPs operate in various ways.
They may offer cash subsidies, free or reduced-priced drugs, or both. They may offer
assistance directly to patients or replenish drugs furnished by pharmacies, clinics, and
other entities.
Questions have been raised about the potential interaction between PAPs and
Part D. In particular, observers questioned whether federal anti-kickback statutes
would be implicated if PAPs continued to provide assistance to Medicare
beneficiaries by subsidizing their Part D cost-sharing obligations. A special advisory
bulletin issued by the Office of Inspector General on November 7, 2005, 35 stated that
such arrangements would present heightened risk under the anti-kickback statute.
This was based on the observation that subsidies would be prohibited by the statute
because the manufacturer would be giving something of value (i.e., the cost-sharing
subsidy) to beneficiaries to use its product. It further outlined several types of abuse
that could occur, including steering beneficiaries to particular drugs, providing a
financial advantage over competing drugs, reducing beneficiaries’ incentives to
locate and use less expensive drugs, and increasing costs to the program by
shortening the time period before the beneficiary hit the catastrophic trigger.
The OIG did state, however, that there were other options drug manufacturers
could consider. These included making cash donations to bona fide independent
charity PAPs not affiliated with a manufacturer and operated without regard to donor
interests. The OIG Bulletin also stated that PAPs entirely outside the Part D benefit
could pose a reduced risk under the anti-kickback statute. In these cases, no claims
could be made against the Part D plan for the drugs, and any cost-sharing could not
count toward the beneficiaries TROOP. The bulletin stated that these programs
would have to meet a number of conditions.
In response to the OIG Bulletin, many manufacturers announced that they would
cease to provide PAP assistance to any Medicare beneficiary enrolled in Part D. In
some cases, a beneficiary who did not enroll in Part D could continue to receive
assistance through the PAP. However, there would be no guarantee that the PAP
program would continue to offer the drugs indefinitely, nor would the individual have
34 (...continued)
Prescription Drug Program, Perspectives of State Medicaid Directors Through a Focus
Group Discussion, Kaiser Family Foundation, May 2006.
35 HHS, OIG, Special Advisory Bulletin Provides Guidance On Patient Assistance Programs
for Medicare Part D Enrollees, Nov. 7, 2005.

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CRS-23
help with the costs of drugs not covered under a PAP program. Further, a beneficiary
delaying enrollment in Part D after the May 15, 2006 enrollment deadline would be
subject to a delayed enrollment penalty.
The OIG Bulletin and the subsequent response by drug manufacturers raised the
concern that some beneficiaries would be faced with significantly higher out-of-
pocket costs. Members of the Senate Finance Committee, as well as other observers,
asked the OIG to further clarify its position. In April 2006, the OIG issued an
advisory opinion36 that two PAPs proposed by one company would not subject it to
sanctions. Under the arrangements, free drugs would not count toward TROOP.
Once a beneficiary began receiving drugs through either of the PAPs, neither the Part
D plan not the beneficiary would be charged for the drug for the remainder of the
year. The company also entered into a data-sharing arrangement with CMS that
would enable PAPs to notify Part D plans regarding beneficiary participation in the
PAPs.
While the OIG Guidance applied to a specific approach offered by one
company, it was seen as a roadmap for other companies. At the same time, the
Senate Finance Committee was encouraging manufacturers to continue offering
PAPs. Recent reports suggest that other companies are rethinking their position and
will offer such programs.
State Pharmaceutical Assistance Programs. A number of states have
had state pharmaceutical assistance programs (SPAPs) in place for a number of years.
These programs were set up to offer prescription drug benefits to low-income
individuals who did not have Medicaid drug coverage. Many persons enrolled in
SPAPs are eligible for low-income subsidies under Part D. Other persons enrolled
in state programs are not eligible for low-income subsidies because their incomes
and/or assets exceed the requisite limits. However, SPAP payments made on their
behalf to cover Part D cost-sharing charges will count toward the individual’s true
out-of-pocket (TROOP) costs trigger.37
Coordination With Part D — Initial Concerns. The enrollment of SPAP
participants became a key issue for a number of states. MMA defines an SPAP as
one that provides assistance to persons in all Part D plans and does not discriminate
based on the Part D plan in which the individual is enrolled. In its January 2005
regulations, CMS interpreted the Part D language to mean that if an SPAP offers Part
D premium assistance or supplemental Part D cost-sharing assistance, it must offer
equal assistance for all PDP and MA-PD plans available in the region, and may not
steer beneficiaries to one plan or another through benefit design or otherwise.
Violation of this nondiscrimination rule would violate the SPAP’s status with respect
36 HHS, OIG, OIG Advisory Opinion No. 06-03, Apr. 18, 2006
37 Prior to the implementation of Part D, several states had established pharmacy plus waiver
programs. These programs provided drugs and primary care services under a Medicaid
waiver. In the regulations, CMS stated that these programs could not qualify as SPAPs (in
part because program expenditures were federally matched). Therefore, any pharmacy plus
program expenditures could not count toward a beneficiary’s TROOP. Currently, only
Wisconsin has such a program for its Medicare population.

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CRS-24
to counting TROOP. Supporters of this approach contend that the definition of
SPAP, which includes the nondiscrimination provision, is important for MA
organizations and PDP sponsors.
The inability to steer beneficiaries to a selected plan or plans effectively means
that an SPAP can not auto-enroll its participants in preferred Part D plans. This
proved to be a concern for some states who argued they should be able to enroll their
beneficiaries in preferred plans if they gave individuals the option to switch to other
plans if they wanted to. States suggested that allowing auto-enrollment in preferred
plans would allow them to leverage the potential of a large number of enrollees
during the negotiation process. They stated that if they were not permitted to enroll
individuals in preferred plans, they will be faced with potentially providing different
wraparound benefits for different plans based on variations in formulary and cost-
sharing structures.38
Coordination With Part D-CMS Policy. CMS established policies
intended to balance the need to adhere to the nondiscrimination requirement with
state concerns.
Coordination of Benefits. In July 2005, CMS issued its coordination of
benefit guidance for Part D.39 This guidance outlined the following four approaches
that SPAPs could choose to provide their wraparound benefits: (1) paying premiums
for basic and/or supplemental benefits; (2) wrapping around benefits at the point-of-
sale; (3) contracting with Part D plans on a risk- or non-risk-based lump sum per
capita method; or (4) some combination of these.
Under option 3, SPAPs would solicit lump sum per capita bids from Part D
plans in exchange for the provision of wraparound benefits. The guidance document
outlined steps SPAPs could adopt when paying lump sum per capita payments to Part
D plans on a risk basis in order to be deemed nondiscriminatory with respect to the
plan the individual was enrolled in. In brief, the process involves the following steps:
(1) States wishing to adopt a lump sum per capita approach would define a uniform
benefit package; (2) all Part D plans in the region would be invited by the state to
submit a quote; (3) plans not wishing to participate would not be required to submit
quotes and states would not be obligated to provide wraparound benefits to
beneficiaries choosing such plans; (4) based on the submitted quotes, states would
determine what it would pay based on either the actual quote of each plan or an
amount equal to the 75th percentile of all quotes (with plans with higher quotes
permitted to withdraw); (5) states would have to assure equal access to enrollment
in and comparable information on all Part D plans participating in the chosen
38 The CMS approach runs counter to a key recommendation of the State Pharmaceutical
Assistance Transition Commission which was established by MMA to provide advice on
coordination and transition issues. The Commission’s report, issued in December 2004,
recommended that SPAPs should be allowed to endorse one or more preferred drug plans
for their enrollees.
39 CMS, Part D Coordination of Benefits Guidance, July 1, 2005, at [http://www.cms.
hhs.gov/PrescriptionDrugCovContra/Downloads/CobGuidance_07.01.05.pdf].

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CRS-25
approach without any steering to individual plans; (6) states would be required to
report the results of the bidding process; (7) Part D plans would be required to
provide information identifying the SPAP as the co-provider of benefits; and (8)
plans would be required to periodically provide claims data to the state. States
selecting to pay non-risk-based lump sum per capita payments could do so as long
as an equal subsidy amount was offered to each individual in each Part D plan; Part
D plans would be required to provide claims data to SPAPs.
Authorized Representative.40 CMS guidance also established a process for
facilitated enrollment in cases where SPAPs are their members’ legal representative
under state law. SPAPs serving as authorized representatives could identify objective
criteria (subject to CMS approval) that could narrow the range of options an SPAP
would use to enroll a member in a plan. SPAPs with individualized data could use
this to facilitate enrollment of certain groups of individuals into plans best suited to
them in terms of pharmacy networks or specific drug needs.
State Actions. States have been revising their programs in light of the
implementation of Part D. The National Conference of State Legislatures (NCSL)
reports that states responded to the MMA changes in a variety of ways. In 2005
(before PDP plan design, formularies, or premium structures were known), many
states enacted legislation to restructure their programs to wrap around Part D.
Typically, this means that for persons eligible for both programs, SPAPS pay some
portion of Part D premiums and/or cost-sharing and may cover some drugs excluded
under the Part D benefit. At least five states established new SPAP programs, while
another five are dropping their programs. Additional modifications are expected
during 2006.41
Other Beneficiary Issues
Drugs Not Covered Under Part D. Several categories of drugs are
specifically excluded by law from coverage under Part D. These include
benzodiazepines (used to treat anxiety disorders) and barbiturates (used for treatment
of some seizures), weight loss drugs, and over-the-counter medications. States will
continue to be able to cover these drugs under Medicaid (and receive federal
matching for these expenditures). However, some observers are concerned that
beneficiaries may lose access to these drugs.
An HHS survey of 47 state Medicaid programs in December 2005 showed that
45 Medicaid programs would continue to cover non-prescription drugs, 46 states
would cover benzodiazepines, 45 states would cover barbiturates, 35 would cover
40 [http://www.cms.hhs.gov/States/Downloads/QualifiedSPAPGuidelines.pdf].
41 For an overview of current state programs see, NCSL, National State Pharmaceutical
Assistance Programs in 2006: Helping to Make Medicare Part D Easier and More
Affordable, at [http://www.ncsl.org/programs/health/SPAPCoordination.htm#Summary].

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CRS-26
prescription vitamins and mineral products, and 32 states would cover drugs for
symptomatic relief of cough and colds.42
Cost-Sharing for the Dual Eligible Population. Some non-
institutionalized dual eligibles may see an increase in their cost-sharing charges. A
2004 comparison of Part D cost-sharing charges with those applicable under the low-
income subsidy provisions showed that 11 states imposed no copayments on drugs,
13 states imposed charges that would always fall below Part D levels, five states had
charges that were the same or higher than those under Part D, and 14 states had
copayments that might be higher or lower than Part D levels, depending on the
circumstances.43
An additional concern for some is that persons in assisted living facilities or
under a home and community-based services waiver are not considered
institutionalized for purposes of the cost-sharing waiver. It may be difficult for some
of these individuals to afford the requisite copayments.
Value of Benefit over Time. The standard benefit described earlier, is the
2006 benefit. Under the 2006 benefit, the deductible is $250, the initial coverage
limit is $2,250, the out-of-pocket amount is $3,600, and the total spending amount
triggering catastrophic coverage is $5,100. (See Table 1.) All of these amounts are
slated to increase each year. The Office of the Actuary of CMS has announced that
in 2007, the deductible will be $265, the initial coverage limit will be $2,400, the out-
of-pocket amount will be $3,850,44 and the total spending amount triggering
catastrophic coverage will be $5,451.25. By 2015, it estimates that the deductible
will be $475, the initial coverage limit will be $4,290, the out-of-pocket amount will
be $6,850, and the total spending amount triggering catastrophic coverage will be
$8,282.50.
In large measure the low-income population in Group 1 will be protected from
these cost-sharing increases, as well as any increases in the Part D premium
(provided the individual elects a plan with a premium at or below the low-income
benchmark). Dual eligible persons in Group 1 subject to the $1/$3 cost-sharing
charges per prescription in 2006 will see these amounts increase each year by the
percentage increase in the CPI (the 2007 amounts are $1/$3.10). Other persons
subject to the $2/$5 cost-sharing charges per prescription in 2006 will see these
amounts increase each year by the percentage increase in the per capita expenditures
for Part D drugs. The 2007 amounts are $2.15/$5.35. Over time, these dollar
amounts may increase at a faster rate than beneficiaries’ incomes.
42 HHS, Office of the Inspector General, Dual Eligibles’ Transition: Part D Formularies’
Inclusion of Commonly Used Drugs, OEI-05-06-00090, Jan. 2006.
43 The Kaiser Commission on Medicaid and the Uninsured, Implications of the New
Medicare Law for Dual Eligibles: 10 Key Questions and Answers, The Henry J. Kaiser
Family Foundation, Jan. 9, 2004.
44 The Boards of Trustees of the Federal Hospital Insurance and the Federal Supplementary
Insurance Trust Funds, 2006 Annual Report of the Boards of Trustees of the Federal
Hospital Insurance and the Federal Supplementary Insurance Trust Funds, May 2006.

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CRS-27
The annual updates in the standard benefit amounts will have larger implications
for persons in Group 2. The $50 deductible applicable in 2006 will increase each
year by the percentage increase in the per capita expenditures for Part D drugs; in
2007 it will be $53; by 2015 it will be an estimated $95. The 15% coinsurance
applies to total drug spending between $50 and $5,100 in 2006. In 2015, it will apply
to drug spending between approximately $95 and $8,282.50.
Persons in Group 2 are also subject to a sliding scale premium ranging from
zero at 135% of poverty to 100% at 150% of poverty. Actual premium amounts are
expected to go up each year. CMS actuaries estimate that the average Part D
premium amount for all beneficiaries will rise from about $32.20 in 2006 to $59.88
in 2015. Individuals in Group 2 will be liable for some portion of the increase.
Some persons in both groups may receive assistance with Part D cost-sharing
through their state pharmaceutical assistance programs.
State Issues
State Contributions Toward Part D Costs
“Clawback Requirement”. Effective January 1, 2006, states are no longer
providing coverage for Part D drugs for their dual eligible population. They could
be expected to see a reduction in their Medicaid spending as a result of this transfer.
However, the law contains a provision (labeled by some as the “clawback provision”)
that requires states to continue to assume a portion of these costs. The formula
specified in law is based on a proxy for what states would otherwise be spending on
drugs for the dual eligibles in the absence of MMA. Initially, states would assume
90% of these costs; over the next nine years the states’ contribution would gradually
decline to 75%.45
Below is the formula for the clawback:
45 See also CRS Report RS21837, Implications of the Medicare Prescription Drug Benefit
for Dual Eligibles and State Medicaid Programs, by Karen Tritz.

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CRS-28
State Payments: “Clawback”
States are required to pay the Secretary each month an amount equal to the product of:
A. 1. Projected per capita monthly drug payment equal to the product of:
Base year (2003) state Medicaid per capita expenditures for covered Part D
drugs for full benefit dual eligible persons (reduced by any rebates received);
and
Current state matching rate.
A. 2. Increased for each year by the applicable growth factor.
For 2004, 2005, and 2006, the national health expenditure estimates of
percentage increases in drug spending, in subsequent years the per capita
percentage increase in Part D expenditures.
B. Total number of full benefit dual eligibles for the state for the month.
C. The factor for the month:
2006 — 90%
2007 — 88 1/3%
2008 — 86 2/3%
2009 — 85%
2010 — 83 1/3%
2011 — 81 2/3%
2012 — 80%
2013 — 78 1/3%
2014 — 76 2/3%
2015 and later — 75%.
The final regulations provided an illustrative calculation of the “clawback” and
provided a data source for each item. Generally, state Medicaid Statistical
Information System (MSIS) and information reported on the form CMS-64 are used.
In October 2005, each state Medicaid Director was notified by CMS of the per
capita monthly payment amount that would be assessed for each full benefit dual
eligible enrolled in the state’s Medicaid program in 2006. These figures were revised
downward in February 2006, based on revised estimates of the national health
expenditures growth rate.
Clawback Issues. The MMA has been described as providing states some
relief for expenditures they would otherwise incur for their dual eligible populations.
However, with both the implementation of the “clawback provision” and the
additional administrative responsibilities, many observers have suggested that the
states will actually spend more than they would in the absence of MMA.46 Others,
46 Robert Pear, “Cost-Cutting Medicare Law is a Money Loser for States,” New York Times,
Mar. 25, 2005.

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CRS-29
however, contend that the states will see savings, particularly over time, as their share
of expenditures (as measured under the clawback formula) declines.
One of the key components of the clawback formula is actual drug expenditures
in 2003. Many contend that the data base for 2003 is flawed. Further, states point
out that while they have been implementing significant cost control mechanisms, any
measures implemented since 2003 are not factored into the calculation. An
additional concern is that clawback payments are required monthly, rather than
quarterly which is the case for other Medicaid reporting activities.
On March 3, 2006, five states filed suit with the U.S. Supreme Court. The suit
alleges that the clawback provision is unconstitutional because it requires states to
pay for a federal program over which they have no control. The states took the case
to the Supreme Court, arguing that first, the claims are of great constitutional
importance because they are aimed at preserving the states’ rights as independent
sovereigns, and second, that there was no adequate alternative forum for a timely and
final resolution of the states’ claims. The states sought a preliminary injunction to
block the clawback payments. On May 15, 2006, the Department of Justice filed a
brief for the Secretary of the Department of Health and Human Services, stating that
the motion for leave to file a bill of complaint and the motion for a preliminary
injunction should be denied. As of this writing, the Court has not acted.
Other Budget Issues
The clawback requirement has significant implications for state budgets. Other
aspects of MMA will also affect state spending. For example, outreach for the drug
benefit is expected to result in a “woodwork” effect, with an expansion in the
population enrolling in Medicaid and Medicaid savings programs.
Additionally, new enrollees who are full dual eligibles will be included in the
formula for the calculation of the clawback obligation. Some persons have raised
concerns about the longer term implications for state programs facing fiscal
challenges. In an effort to control costs, states might limit the number of dual
eligibles by cutting back or limiting the number or types of optional eligibility
groups, limiting benefits, or cutting outreach activities.47
Other Issues
Impact on Medicaid’s Drug Program. The transition of drug coverage for
the dual eligibles to Part D was expected to result in a drop of about 50% in Medicaid
drug spending. This represents a loss in market share for Medicaid. As a result,
some persons have questioned whether states will have the same leverage to
negotiate lower prices for the remainder of their Medicaid population receiving drug
benefits.
47 National Health Policy Forum, Implementing the New Medicare Drug Benefit: Challenges
and Opportunities for States, NHPF Meeting Report, Aug. 31, 2004.

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Interaction Between Part D and Medicaid. States are concerned about
their ability to track drug utilization for the dually eligible population. Pharmacy data
are one of fastest ways to pick up clinical problems, as well as potential fraud.
Another concern is that state Medicaid programs will not have control over the
drugs used by the dual eligible population. They will no longer be able to achieve
savings through their own cost control mechanisms. They will, however, be
responsible, through Medicaid, for any increases in other medical spending resulting
from inappropriate drug use.
Estimated Impact
CBO and CMS have estimated the impact of the Part D provisions.
CBO Cost Estimates
In March 2006, CBO provided updated estimates of the drug benefit, including
its estimates relating to low-income participation. It estimated Part D Medicare
spending at $29.1 billion in FY2006, $57.8 billion in FY2007, and rising to $116.5
billion in FY2011; and that spending under the low-income subsidy provisions would
total $9.9 billion in FY2006, $14.6 billion in FY2007, and rise to $25.7 billion in
FY2011. It estimated that there would be 8.7 million low-income subsidy enrollees
in FY2006, 9.5 million in FY2007, and rise to 10.8 million by FY2011. It also
estimated that payments by the states under the “clawback” provision would total
$3.8 billion in FY2006, $7.0 billion in FY2007, $7.7 billion in FY2008, $8.5 billion
in FY2009, $9.2 billion in FY2010, and $10.0 billion in FY2011.48
CMS Enrollment Estimates
Enrollment. When CMS published its final Part D regulations in January
2005, it estimated that 14.4 million beneficiaries would be eligible for the low-
income subsidy in 2006; of these, it expected 10.9 million persons would actually
receive assistance.49 These estimates were subsequently revised.50
On May 10, 2006, CMS estimated that as of May 7, 2006, 13.2 million persons
were eligible for the low-income subsidy. Of these, 9.0 million persons were getting
subsidy benefits, and 1.0 million had drug coverage through other sources; the
remaining 3.2 million persons remained subsidy-eligible but had not signed up. Dual
eligibles represented approximately 6.4 million of the 9.0 million subsidy
48 CBO, Fact Sheet for CBO’s March 2006 Baseline: Medicare, Mar. 2006.
49 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Services, Medicare Program; Medicare Prescription Drug Benefit; Final rule, 70 Federal
Register 4460, Jan. 25, 2005.
50 When CMS issued its final regulations in January 2005, it provided cost estimates for
spending on various categories of persons eligible for the low income subsidy. CMS has not
published updated estimates.

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CRS-31
beneficiaries. Of these, 5.9 million were automatically enrolled in stand-alone PDPs,
with the remaining 0.5 million receiving coverage through MA-PD plans. Of the
remaining 2.6 million subsidy-eligible enrollees, 2.1 million were enrolled in stand-
alone PDPs, and 0.5 million were enrolled in MA-PD plans. Further, 7.3 million of
9.0 million subsidy-eligible enrollees had been deemed eligible for benefits, with the
remaining 1.7 million determined eligible by SSA.
These numbers do not reflect persons signing up during the last week of the
initial general enrollment period. Further, the May 15, 2006 deadline and the late
enrollment penalty do not apply for persons subsequently determined eligible for a
low-income subsidy. Therefore, the number of covered persons can be expected to
increase over the coming months.
Concluding Observations
MMA established a new prescription drug benefit for the Medicare population.
MMA represented a major change for the Medicare program. For the first time,
specified program benefits, namely coverage for prescription drugs, vary based an
individual’s income level. Further, beneficiaries wishing to access the drug benefit
are only able to do so through enrollment in a private stand-alone drug plan or a
managed care plan with a drug benefit.
Implementation of the new program, particularly for the low-income population,
proved challenging. While some of the initial problems have been somewhat
mitigated, many administrative issues remain. Further, not all of the population
potentially eligible for low-income subsidies has enrolled in the program. It is hoped
that the waiver of both the enrollment deadline and the enrollment penalty for this
population in 2006 will encourage more persons to enroll during the remainder of the
year.
It should be noted that some low-income enrollees may face unanticipated
changes in plan enrollment in 2007. One reason is because there is likely to be
changes in plan offerings. PDP sponsors are likely to consolidate plans, thereby
resulting in a smaller number of plans overall. A second reason is that some plans
with 2006 premiums at or below the low-income benchmark may have 2007
premiums above the benchmark. In such cases, beneficiaries will need to change
plans if they are to continue to have the same premium subsidy in 2007 (100% for
those under 135% of poverty, and a sliding scale for those over 100% and up to
150% of poverty). CMS has stated that if the PDP sponsor offers another plan in the
same area with a premium at or below the subsidy amount, the PDP sponsor will
reassign full benefit dual eligibles to that plan. If the PDP sponsor does not offer
such a plan, CMS will randomly auto-assign these dual eligibles to another plan in
the service area. As of this writing, CMS has not stated whether this approach will
be applied to other low-income individuals.
It is expected that the Congress will continue to monitor program
implementation, particularly as it affects the low-income population.

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