Medicare Part D Prescription Drug Benefit
December 18, 2020
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA;
P.L. 108-173) established a voluntary, outpatient prescription drug benefit under
Suzanne M. Kirchhoff
Medicare Part D, effective January 1, 2006. Medicare Part D provides coverage through
Analyst in Health Care
private prescription drug plans (PDPs) that offer only drug coverage, or through
Financing
Medicare Advantage (MA) prescription drug (MA-PD) plans that offer coverage as part

of broader, managed care plans. Private drug plans participating in Part D bear some

financial risk, although federal subsidies cover most program costs in an effort to
encourage participation and keep benefits affordable.
At a minimum, Medicare drug plans must offer a legislatively specified “standard” package of benefits or
alternative coverage that is actuarial y equivalent to a standard plan. Plans also may offer enhanced benefits.
Although al plans must meet certain minimum requirements, there can be significant differences among offerings
in terms of benefit design, specific drugs included in formularies (i.e., lists of covered drugs), cost sharing for
particular drugs, or the level of monthly premiums.
In general, beneficiaries can enroll in a plan, or change plan enrollment, when they first become eligible for
Medicare or during open enrollment periods each October 15 through December 7. Beneficiaries also have some
options to change enrollment during a plan year due to special circumstances. Because sponsors are al owed to
change plan offerings from year to year, beneficiaries annual y face the need for careful review of their choices to
select the plans that best meet their needs.
A key element of the Part D program is enhanced coverage for low -income individuals. Medicare beneficiaries
with incomes up to 150% of the federal poverty level (FPL) and assets below set limits are eligible for extra
assistance with Medicare Part D premiums and cost sharing. Individuals enrolled in both Medicare and Medicaid
(so-cal ed dual eligibles) and certain other low-income beneficiaries are automatical y enrolled in no-premium
plans, which are Part D plans that have premiums at or below specified levels.
Of the 61.3 mil ion Medicare beneficiaries in 2019 (the most recent data available) who were eligible for Part D,
45.4 mil ion (74% of beneficiaries) were enrolled in a Part D plan and another 1.4 mil ion (about 2% of
beneficiaries) had prescription drug coverage through a former employer that received a Part D subsidy for a
portion of the coverage. Of the remaining roughly 24% of Medicare beneficiaries, about half (12% of
beneficiaries) had drug coverage as generous as Part D through another source, such as the Federal Employees
Health Benefits program, TRICARE, or private coverage; the other half (about 12% of beneficiaries) had either
less generous coverage than Part D or no drug coverage at al .
Total Part D expenditures were approximately $97.6 bil ion in calendar year 2019. Medicare Part D has cost less
than original y forecasted, due in part to lower-than-predicted enrollment and increased use of less expensive
generic drugs. However, the Medicare Trustees project spending on Part D benefits wil accelerate over the next
10 years due to the expectation of further increases in the number of enrollees, costs associated with the
elimination of the out-of-pocket cost coverage gap in 2020, changes in the distribution of enrollees among
coverage categories, a slowing of the trend toward greater generic drug utilization, and an increase in the usage
and prices of specialty drugs.
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Overview
On January 1, 2021, the Medicare outpatient prescription drug benefit (Medicare Part D) begins
its 16th year of operation. Congress created Part D in the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA; P.L. 108-173), effective January 1, 2006.
The law also made Part D the primary source of drug coverage for individuals covered under both
Medicare and Medicaid (so-cal ed dual eligibles). Since the program’s enactment, Part D has
been modified by a series of statutes, including by the Patient Protection and Affordable Care Act
of 2010, as amended (ACA; P.L. 111-148; P.L. 111-152).1
Part D coverage is provided through stand-alone prescription drug plans (PDPs), which offer only
drug coverage, or through Medicare Advantage (MA) prescription drug (MA-PD) plans, which
offer drug coverage as part of a broader, Medicare Part C managed care benefit. Private drug
plans participating in Part D bear some financial risk, although federal subsidies cover most
program costs in an effort to encourage participation and keep benefits affordable.
Medicare provides plan sponsors a monthly subsidy for each non-low income subsidy (LIS)
enrollee in a Part D plan that is equal to 74.5% of average, standard coverage. The average
subsidy takes two forms: direct subsidy payments, which are adjusted for health conditions, and
reinsurance payments for enrollees with the highest drug spending. In addition, Medicare pays
most of the cost sharing and premiums for LIS beneficiaries enrolled in PDP or MA-PD plans.
Monthly payments are based on forecasted costs in sponsors’ annual bids and are reconciled with
actual costs at the end of each plan year. Medicare also establishes risk corridors to limit a plan’s
overal losses or profits. (See “Plan Payments.”)
A growing number of employers and unions are offering retirees (and their eligible spouses and
dependents) Part D benefits through employer-group waiver plans (EGWPs). (See “Employer
Group Waiver Plans.”) In addition, rather than enrolling in a Part D plan, beneficiaries may be
enrolled in commercial retiree prescription drug plans offered by their former employers. The
MMA provides employer subsidies for retiree drug plans as an incentive to continue such plans.
(See “Retiree Drug Subsidy.”)
As of October 2020, 47.7 mil ion Medicare beneficiaries were enrolled in Part D plans. Of that
total, about 25.1 mil ion were in PDPs, about 22.1 mil ion were in MA-PD plans, and about
500,000 were in other types of plans.2
A major focus of the Part D program is providing subsidized coverage to qualified, low -income
beneficiaries. Individuals with incomes up to 150% of the federal poverty level (FPL) and limited
assets are eligible for a low-income subsidy (LIS).3 The LIS reduces beneficiaries’ out-of-pocket

1 T he regulations governing the Part D program are set forth in 42 C.F.R. Part 423—Voluntary Medicare Prescription
Drug Benefit. T he Part D program has been amended in a series of laws including the ACA, the QI, T MA, and
Abstinence Programs Extension and Hurricane Katrina Unemployment Relief Act of 2005 ( P.L. 109-91); the Tax
Relief and Health Care Act of 2006 (T RHCA; P.L. 109-432), the Medicare Improvements for Patients and Providers
Act of 2008 (MIPPA; P.L. 110-275), the Comprehensive Addiction and Recovery Act of 2016 (CARA; P.L. 114-198),
the Medicare Access and CHIP Reauthorization Act (MACRA; P.L. 114-10), the Balanced Budget Act of 2018 (BBA
2018; P.L. 115-123) and the SUPPORT for Patients and Communities Act, (SUPPORT Act; P.L. 115-271).
2 CMS, “Monthly Contract Summary Report,” October 2020, at https://www.cms.gov/research-statistics-data-and-
systemsstatistics-trends-and-reportsmcradvpartdenroldatamonthly/contract-summary-2020-10. Figures are based on
enrollment data for the Part D component of Medicare plans including MA-PDs, the P ACE (Program of All-inclusive
Care for the Elderly), 1876 Cost Plans, and certain employer/union only group plans (EGWPS). Figures are updated
monthly and are the most recent available, so may vary from projected enrollment figures from other sources.
3 T he federal poverty guidelines, referred to as the federal poverty level, are issued annually by the Department of
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spending by paying for al , or some, of the Part D monthly premium and annual deductible, and
limiting co-payments or coinsurance. The LIS is progressive, meaning the lowest-income
beneficiaries receive the greatest assistance. An estimated 13.3 mil ion beneficiaries received the
LIS in 2020.4
The ACA made major changes to Part D in an effort to improve coverage and to make the
premium structure more progressive, including requiring higher-income beneficiaries to pay more
for coverage. Starting in 2011, the ACA required Part D enrollees with incomes above a certain
threshold to pay a monthly surcharge in addition to their regular plan premiums. (See “Premium
Surcharge for Higher-Income Enrollees.”)
In addition, the ACA phased out the Part D coverage gap (commonly referred to as the doughnut
hole) by requiring drug manufacturers to provide discounts for brand-name drugs purchased by
beneficiaries in the Part D coverage gap and gradual y phasing in Medicare subsidies to plans to
cover 75% of the cost of generic drugs and 25% of the cost of brand name drugs in the coverage
gap.5 (See “The Coverage Gap.”) The ACA provisions were further modified by subsequent laws,
including the Balanced Budget Act of 2018 (BBA 2018; P.L. 115-123), which, among other
things, accelerated the closing of the coverage gap, increased the required manufacturer discount,
and reduced the Medicare subsidy for brand-name drugs in the coverage gap. Although the
coverage gap was fully “closed” in 2020, it is stil referred to in this report for several reasons.
including (1) differences in the calculation of enrollee out-of-pocket spending in the coverage gap
as opposed to other portions of the benefit and (2) the application of manufacturer discounts for
coverage gap drugs.
Medicare Part D relies on participating private insurance plans to provide coverage and bear part
of the financial risk of the program. Al Part D plans must meet certain minimum requirements,
though there are significant variations among plans in terms of premiums and benefit design
including differences in drug formularies (i.e., lists of covered drugs), and cost sharing for
particular drugs. In 2021, a total of 996 PDPs are to be offered nationwide, a 5% increase from
2020. On average, Medicare beneficiaries are to have 30 PDPs and 27 MA-PD plans to choose
from in their geographic area.6
Eligibility
In general, anyone who is entitled to Medicare Part A and/or enrolled in Part B is eligible to enroll
in a Medicare Part D drug plan. In addition, an individual must be a U.S. citizen or qualified alien

Health and Human Services for administrative purposes such as determining eligibility for certain federal programs.
See “Poverty Guidelines,” at https://aspe.hhs.gov/poverty-guidelines.
4 CMS, “T he 2020 Annual Report of the Boards of T rustees of the Federal Hospital Insurance and Federal
Supplement ary Medical Insurance T rust Funds,” April 22, 2020, T able IV.B7, p. 140, at https://www.cms.gov/files/
document/2020-medicare-trustees-report.pdf. (Hereinafter, 2020 Medicare T rustees Report.)
5 T he coverage gap refers to the period when a Medicare beneficiary has exceeded a drug plan’s standard payment
threshold and faces higher out-of-pocket expenses until he or she reaches an annual catastrophic threshold. Once the
catastrophic threshold is reached, federal subsidies cover most prescription costs and enrollees pay a maximum of 5%
coinsurance.
6 Juliette Cubanski and Anthony Damico, “Medicare Part D: A First Look at Prescription Drug Plans in 2021,” Kaiser
Family Foundation, October 29, 2020, at https://www.kff.org/medicare/issue-brief/medicare-part -d-a-first-look-at-
medicare-prescription-drug-plans-in-2021/.
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and must permanently reside within one of the 34 designated PDP regions in the United States;
anyone who is living abroad or is incarcerated is not eligible.7
For most people, joining Part D is voluntary, although dual-eligible beneficiaries (see “Full-
Subsidy-Eligible Individuals“) are automatical y enrolled. Medicare beneficiaries cannot be
turned down for Part D coverage due to preexisting health conditions or high utilization of
prescription drugs.
Of the 61.3 mil ion Medicare beneficiaries in 2019 who were eligible for Part D, 45.4 mil ion
about 74% were enrolled in a Part D plan and another 1.4 mil ion (about 2%) had prescription
drug coverage through a former employer that received a Part D subsidy for a portion of the
coverage. Of the remaining roughly 24% of Medicare beneficiaries, about half (12% of
beneficiaries) had drug coverage as generous as Part D through another source, such as the
Federal Employees Health Benefits program, TRICARE, or private coverage; the other half
(about 12% of beneficiaries) had either less generous coverage than Part D or no drug coverage at
al .8 (See Table 1.)
Table 1. Total Medicare Beneficiaries with Prescription Drug Coverage, 2019
Number of Medicare
Beneficiaries
Percentage of Eligible
Description
(in millions)
Beneficiaries
Medicare Beneficiaries Eligible for Part D
61.3
100.0%
Medicare Part D
45.4
74.1%
Stand-Alone PDP
25.5
56.0%
MA with Drug Coverage
20.0
44.0%
Medicare Retiree Drug Subsidy (RDS)
1.4
2.3%
Other Creditable Drug Coverage
7.3
11.8%
Total Beneficiaries with Drug Coverage
55.5
88.2%
Beneficiaries Without Equivalent Coverage
7.3
11.8%
Source: Medicare Payment Advisory Commission (MedPAC), “Report to Congress, Medicare Payment Policy,”
March 2020, Tables 14-2 and 14-3. Based on monthly Part D enrol ment data.
Notes: Totals may not add due to rounding.
Eligibility for Low-Income Assistance
Beneficiaries with limited incomes and resources may qualify for assistance with their Part D
premiums, cost sharing, and other out-of-pocket expenses. In 2020, a forecast 13.3 mil ion
Medicare beneficiaries received low-income subsidies (LISs). (See Table 2 below.)
There are two categories of LIS beneficiaries, based on income and assets: (1) those with the
lowest income and assets who are eligible for the full LIS subsidy and (2) those with slightly
higher income and assets who qualify for a partial LIS subsidy. Individuals may be automatical y

7 In February 2015, CMS issued final rules for the Medicare Advantage and Part D programs for calendar year (CY)
2016. Under the rules, going forward, to be eligible for Medicare prescription drug benefits a potential enrollee must be
a U.S. citizen or qualified alien who is lawfully present in the United States. T he rules also require involuntary
disenrollment of individuals from Part D plans when they lose eligibility due to unlawful presence status. CMS, “ CMS
Finalizes Program Changes for Medicare Advantage and Prescription Drug Benefit Programs for Contract Year 2016 ,”
February 6, 2015, at https://www.cms.gov/newsroom/fact-sheets/cms-finalizes-program-changes-medicare-advantage-
and-prescription-drug-benefit -programs-contract.
8 Medicare Payment Advisory Commission (MedPAC), Report to the Congress: Medicare Payment Policy, March 13,
2020, Chapter 14, T able 14-2, p. 414, at http://medpac.gov/docs/default-source/reports/mar20_medpac_ch14_sec.pdf?
sfvrsn=0.
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deemed eligible for the full LIS if they are dual y eligible for Medicaid. In addition to financial
assistance, LIS beneficiaries have other added benefits, such as the right to change plans more
frequently than other Part D enrollees.
Table 2. Medicare Part D Low-Income Subsidy Enrollment
(in mil ions)
Medicaid,
Other, with
Full-Benefit
Other, with
Partial
Year
Dual Eligible
Full Subsidy
Subsidy
Total
2006
5.7
2.3
0.2
8.3
2007
5.9
3.0
0.3
9.2
2008
6.3
3.2
0.3
9.7
2009
6.4
3.3
0.3
10.0
2010
6.6
3.5
0.3
10.4
2011
6.6
3.7
0.3
10.6
2012
6.9
3.7
0.3
11.0
2013
7.2
4.0
0.3
11.5
2014
7.4
4.1
0.3
11.8
2015
7.5
4.2
0.3
12.1
2016
7.8
4.3
0.3
12.4
2017
8.0
4.5
0.3
12.7
2018
8.1
4.6
0.3
12.9
2019
8.2
4.6
0.3
13.1
2020
8.3
4.6
0.3
13.3
Source: 2016 and 2020 Medicare Trustees Reports, Table IV.B7.
Notes: Figures are for calendar years. Totals may not add due to rounding.
Full-Subsidy-Eligible Individuals
Certain groups of Medicare beneficiaries automatical y qualify and are deemed eligible for the
full LIS. So-cal ed full-benefit dual eligibles who qualify for Medicaid benefits based on income
and assets are automatical y deemed eligible for the full Medicare prescription drug LIS.
Additional y, those who receive Medicare premium and/or cost-sharing assistance from Medicaid
through the Medicare Savings Program (MSP),9 plus those eligible for Supplemental Security
Income (SSI) cash assistance,10 are automatical y deemed eligible for full LIS. These three

9 T he Medicare Savings Program includes the Qualified Medicare Beneficiary program (QMB), Specified Low-Income
Medicare Beneficiary program (SLMB), and Qualifying Individual program (QI). T hese programs help Medicare
beneficiaries of modest means pay all or some of Medicare’s cost -sharing amounts (i.e., premiums, deductibles, and co -
payments). T o qualify, an individual must be eligible for Medicare and must meet certain income limits which change
annually.
10 Supplemental Security Income (SSI) is a federal income supplement program funded by general tax revenues (not
Social Security taxes). It is designed to help aged, blind, and disabled people who have little or no income, and it
provides cash to meet basic needs for food, clothing, and shelter.
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categories include al eligible persons who (1) have incomes below 135% of the FPL, or $17,266
for an individual and $23,274 for a couple in 2020;11 and (2) have resources below $7,860 for an
individual and $11,800 for a couple in 2020.12 The limits are increased annual y by the percentage
increase in the Consumer Price Index for urban consumers (CPI-U) as of September of the
previous year.13 (See Figure 1.)
The Centers for Medicare & Medicaid Services (CMS) deems individuals automatical y eligible
for the LIS effective as of the first day of the month that they attain qualifying status (e.g.,
become eligible for Medicaid or SSI). The end date is, at a minimum, through the end of the
calendar year within which the individual becomes eligible. Beneficiaries who are deemed LIS-
eligible for any month during the period of July through December of one year are deemed
eligible through the end of the following calendar year. CMS changes an individual’s deemed
status in mid-year only when such a change qualifies the beneficiary for a reduced co-payment
obligation.
Eligibility for the LIS is not always continuous from year to year. For example, LIS beneficiaries
who lose eligibility for Medicaid or SSI during the year are not automatical y qualified to receive
the LIS the next year. Each September, CMS notifies such individuals that their LIS-deemed
status wil end on December 31 of that year. Such individuals may reapply for the LIS, as they
may qualify for the LIS through the application process. (See “LIS Enrollment.”)
At the end of each plan year, CMS reassigns LIS beneficiaries who are enrolled in Part D plans if
their plan is terminated. CMS also reassigns full LIS beneficiaries enrolled in PDPs if their plan
raises its monthly premium to a level above the LIS benchmark premium for the plan region.14
(See “Reassignment of Certain LIS Beneficiaries”)

11 Social Security benefits, veterans’ benefits, public and private pensions, annuities, and in-kind support are counted as
income. T he 2020 income limits apply for LIS beneficiaries who seek benefits on or after January 1, 2020. HHS sets
separate poverty levels for Alaska and Hawaii. See SSA Program Operations Manual, “ HI 03001.020 Eligibility for
Extra Help (Prescription Drug Low-Income Subsidy),” at https://secure.ssa.gov/poms.nsf/lnx/0603001020. See also
SSA,”HI 03001.005 Medicare Part D Extra Help (Low-Income Subsidy or LIS),” at https://secure.ssa.gov/poms.nsf/
lnx/0603001005; and SSA, “ Understanding the Extra Help with Your Medicare P rescription Drug Plan,” at
https://www.ssa.gov/pubs/EN-05-10508.pdf.
12 In addition, program resource limits provide for a $1,500 burial allowance. SSA, “HI 03030.025, Resource Limits for
Subsidy Eligibility,” at https://secure.ssa.gov/poms.nsf/lnx/0603030025.
13 42 C.F.R. §423.773(b)(2). T he CPI-U, published by the U.S. Department of Labor, is a measure of consumer
inflation for urban consumers.
14 T he low-income benchmark premium is the weighted average of monthly premiums for basic PDP plans, enhanced
PDP plans, and MA-PD plans in a Part D region. CMS, Medicare Part D Prescription Drug Manual, Chapter 13,
“Premium and Cost-Sharing Subsidies for Low-Income Individuals,” Section 50.2.1, Rev. October 1, 2018, at
https://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/Downloads/Chapter-13-
Premium-and-Cost-Sharing-Subsidies-for-Low-Income-Individuals-v09-14-2018.pdf. See also, Medicare Part D
Prescription Drug Manual, Chapter 3, “ Eligibility, Enrollment and Disenrollment ,” Section 40.1.4, Rev. August 12,
2020, at https://www.cms.gov/files/document/cy2021-pdp-enrollment-and-disenrollment-guidance.pdf. CMS will
attempt to reassign beneficiaries within the same organization wherever possible. If the organization does NOT offer
another qualifying PDP, CMS will randomly reassign affected beneficiaries to other PDP sponsors that have at least
one qualifying PDP in that region.
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Figure 1. Overview of How Medicare Beneficiaries Qualify for Low-Income Subsidy

Source: CRS table based on Social Security Administration (SSA) and CMS data.
Partial-Subsidy-Eligible Individuals
Other individuals with limited incomes and resources who do not automatical y qualify may
apply for the LIS and have their eligibility determined by either the Social Security
Administration (SSA) or their state Medicaid agency. This group includes al other persons who
(1) are enrolled in a PDP plan or MA-PD plan; (2) have incomes below 150% of the FPL
($19,140 for an individual and $25,860 for a couple in 2020); and (3) have assets below $13,110
for an individual and $26,160 for a couple in 202015 (increased in future years by the percentage
increase in the CPI-U). An individual who applies, and is determined eligible for the LIS, is
al owed to begin receiving benefits on the first day of the month in which the application was
submitted. In most cases, this means that LIS status is applied retroactively. For example, if an
LIS beneficiary was enrolled in a Part D plan prior to a determination of LIS eligibility, the Part
D plan sponsor, general y the insurer that is offering the Part D benefit, must ensure that the
beneficiary is reimbursed for any premiums or cost sharing that should have been covered by the
subsidy. If a person was not already eligible for Medicare, the LIS subsidy takes effect on the first
day of the month when his or her Medicare eligibility begins.16

15 See SSA, “HI 03001.020 Eligibility for Extra Help (Prescription Drug Low-Income Subsidy),” at
https://secure.ssa.gov/poms.nsf/lnx/0603001020; SSA,”HI 03001.005 Medicare Part D Extra Help (Low-Income
Subsidy or LIS),” at https://secure.ssa.gov/poms.nsf/lnx/0603001005; and SSA, “ HI 03030.025, Resource Limits for
Subsidy Eligibility,” at https://secure.ssa.gov/poms.nsf/lnx/0603030025. See also SSA, “ Understanding the Extra Help
with Your Medicare Prescription Drug Plan,” hat ttps://www.ssa.gov/pubs/EN-05-10508.pdf.
16 CMS, Medicare Part D Prescription Drug Manual, Chapter 13, “Premium and Cost -Sharing Subsidies for Low-
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Initial LIS eligibility determinations are for no longer than 12 months. If the SSA or a state
Medicaid agency later decides that an individual is no longer eligible for the LIS, that same entity
also decides when the LIS benefits end. The end date is always the last day of a calendar month,
though it may occur in any month of the year.
Changes in LIS Status
LIS determinations are also reviewed in the case of certain developments that could affect the
amount of the subsidy. Throughout each plan year, CMS uses SSA data and state Medicare
Modernization Act files of individuals dual y eligible for Medicare and Medicaid to initiate the
LIS eligibility process for new recipients, and look for any changes in LIS eligibility status for
current, low-income beneficiaries.17
The ACA created new rules for LIS redeterminations subsequent to the death of a spouse.
Beginning in 2011, the surviving spouse of an LIS-eligible couple receives a grace period for the
determination or redetermination of benefits.18 For example, after the death of her spouse, a
widow would fil out and send a Part D redetermination form to CMS. After CMS reviews the
document,
 if the information indicates that the widow qualifies for a more generous subsidy
or has a more favorable resources level for purposes of LIS calculations, the
change would take effect in the month following the month when the
redetermination report was received;
 if the information indicates no change in status, the widow would not be sent a
redetermination form the following year (with some exceptions); and
 if the information indicates a need to reduce the LIS, or provides a less favorable
resources level, the redetermination would be postponed.
Enrollment in Part D
Enrollment Periods
A Medicare beneficiary who is signing up for Part D for the first time may do so in one of three
different enrollment periods,19 depending on the individual’s circumstances:

Income Individuals,” Rev. October 1, 2018, at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/Chapter-13-Premium-and-Cost-Sharing-Subsidies-for-Low-Income-
Individuals-v09-14-2018.pdf.
17 CMS Informational Bulletin, “Annual Redetermination of Medicare Part D Low-Income Subsidy Deemed Status
(Re-deeming),” July 25, 2017, at https://www.medicaid.gov/federal-policy-guidance/downloads/cib072517.pdf.
18 T he extension is for one year from the date upon which the couple’s next scheduled redetermination would have
occurred. CMS, Medicare Part D Prescription Drug Manual, Chapter 13, “ Premium and Cost -Sharing Subsidies for
Low-Income Individuals,” Section 40, Rev. October 1, 2018, at https://www.cms.gov/Medicare/Prescription-Drug-
Coverage/PrescriptionDrugCovContra/Downloads/Chapter-13-Premium-and-Cost -Sharing-Subsidies-for-Low-Income-
Individuals-v09-14-2018.pdf.
19 CMS, “Understanding Medicare Part C & D Enrollment Periods,” at https://www.medicare.gov/Pubs/pdf/11219-
Understanding-Medicare-Part-C-D.pdf.
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 Initial Enrollment Period for Part D;
 Annual Open Enrollment Period (or Annual Coordinated Election Period, AEP);
or
 Special Enrollment Period (SEP).
Individuals who qualify for LIS may enroll at any time.
Initial Enrollment Period
The initial enrollment period is the time during which an individual is first eligible to enroll in a
Part D plan.20 Beneficiaries not yet enrolled in Medicare may join a drug plan at any time during
their seven-month initial Medicare enrollment period. The Part D initial enrollment period is the
same as the initial enrollment period for Medicare Part B.21 Coverage for new enrollees begins on
the first day of the month following the month of enrollment, but no earlier than the first month
they are entitled to Medicare.
Individuals who become eligible for Medicare but have creditable coverage, which is prescription
drug coverage that CMS estimates wil provide at least the same level of benefits as Medicare’s
standard prescription drug package, may choose not to sign up for Part D during the initial
enrollment period. Sources of possible creditable coverage include some employer-based
prescription drug coverage, including the Federal Employees Health Benefits Program; qualified
State Pharmaceutical Assistance programs (SPAPs); and military-related coverage (e.g., VA,
TRICARE). However, these individuals could face a penalty if they let their creditable c overage
lapse before enrolling in Part D. (See “Late Enrollment Penalty.”)
Annual Open Enrollment Period
In general, an individual who does not sign up for Part D during his or her initial enrollment
period may enroll only during the annual open enrollment period, held from October 15 to
December 7 each year. Coverage then begins the following January 1. Beneficiaries already
enrolled in a Part D plan may change their plans during the annual open enrollment period.
Beneficiaries may wish to change plans for a variety of reasons, including changes in their health
status and prescription drug needs or in response to modifications by their plans. General y,
sponsors make changes to plan benefits effective at the beginning of each calendar year. After the
open enrollment period closes, most beneficiaries are locked into their Part D plans for the
upcoming benefit year.
Special Enrollment Periods
There are limited occasions besides the annual open enrollment period when an individual may
enroll in, or disenroll from, a Part D plan or switch from one Part D plan to another. These special
enrollment periods (SEPs) are open to individuals who (1) move to a new geographic area,22
(2) involuntarily lose creditable coverage, (3) receive inadequate information about their

20 CMS, Medicare & You 2021, Section 7, at https://www.medicare.gov/pub/medicare-you-handbook.
21 CRS Report R40082, Medicare Part B: Enrollment and Premiums.
22 T his includes being released from jail or out of an institution.
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creditable coverage status, (4) are subject to a federal error, or (5) are enrolled in a PDP that has
failed or has been terminated.23
Late Enrollment Penalty
A late enrollment penalty is assessed on persons who go without creditable drug coverage for 63
continuous days or more after the close of their initial enrollment period, and then sign up for
Part D. The penalty is intended to encourage wider enrollment and prevent adverse selection,
which can occur when healthy people put off buying insurance while those with a real or
perceived need immediately enroll. If Part D enrollees are mainly those who are il or have higher
prescription drug spending, per capita program costs can rise. Higher premiums and/or cost
sharing, in turn, may cause other enrollees (presumably healthier, less costly ones) to end
coverage. Over time, if more persons drop out, program costs could become prohibitive.
The Part D late penalty is based on the number of months an individual does not have creditable
coverage and is applied to premiums on a monthly basis thereafter.24 The penalty is calculated by
multiplying 1% of the national base premium ($33.06 for 2021)25 by the number of full months an
individual has been eligible but has gone without coverage. The final amount is rounded to the
nearest $0.10. For example, if a beneficiary was eligible for Part D in June 2018 but did not sign
up until the 2021 open enrollment period, (with coverage effective January 2021), and did not
have creditable coverage during the 30-month interim period, the individual would pay an
additional $9.90 per month.26
The late penalty is applied permanently to Part D premiums. Because the national base premium
is recalculated annual y, and the penalty is based on the base premium, the penalty amount wil
increase in subsequent years if the base premium rises. Dual-eligible and other LIS beneficiaries
are not subject to the late enrollment penalty.
Plan Selection
Sponsors can alter a plan benefit package at the beginning of a new program year, including
changing the mix of drugs in a formulary and/or modifying required cost sharing for certain
drugs. Sponsors must mail an Annual Notice of Change (ANOC) to plan enrollees each year, to
be delivered by September 30. The document describes any modifications to the plan’s
premiums, drug coverage, cost sharing, and other features for the coming benefit year. The
delivery deadline is designed to ensure that beneficiaries have at least two weeks to review the
information prior to October 15, the first day of the annual enrollment period.

23 CMS, “Understanding Medicare Part C & D Enrollment Periods,” at https://www.medicare.gov/Pubs/pdf/11219-
Understanding-Medicare-Part-C-D.pdf. T he publication includes other examples of SEPs. See also CMS, Medicare
Prescription Drug Benefit Manual, Chapter 3, “ Eligibility, Enrollment and Disenrollment ,” Section 30.3, Rev. August
12, 2020, at https://www.cms.gov/files/document/cy2021-pdp-enrollment -and-disenrollment-guidance.pdf.
24 T he late enrollment penalty is calculated based on the national base beneficiary premium, not the premium of the
enrollee’s plan. T herefore, the penalty is billed to applicable enrollees even if the plan’s Part D basic premium is $0.
25 CMS, “Annual Release of Part D National Average Bid Amount and other Part C & D Bid Information,” July 20,
2020, at https://www.cms.gov/files/document/2021-announcement.pdf.
26 CMS, “Part D Late Enrollment Penalty?,” at http://www.medicare.gov/part-d/costs/penalty/part-d-late-enrollment-
penalty.html. (T o calculate, 1% × 30 months equals 0.30, and $33.06 × 0.30 equals $9.918. T he amount is then rounded
to $9.90.)
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Sponsors are required to send plan enrollees other enrollment-related materials and information
such as the Summary of Benefits and Evidence of Coverage documents.27 These documents offer
information about a plan’s formulary, general utilization management and pricing policies,
information on beneficiary rights, and other information.
Each year, Medicare beneficiaries face the need to review the cost of their current drug and health
plans, (if in MA) including premiums, co-payments, and deductibles, and compare the cost and
coverage to other plans in their area. Additional y, beneficiaries can examine whether plans have
price tiers that increase or decrease the price of the drugs they use, whether the plans offer
preferred pharmacy options, and what, if any, utilization management requirements the plans
impose for drugs, such as prior authorization or step therapy. (See “Drug Utilization Management
Programs.”)
CMS posts information on its open enrollment web page to help beneficiaries compare Part D
plan information.28 Beneficiaries, and persons assisting them, can also use the Medicare drug plan
finder to search for information on individual drugs.29 After a beneficiary enters information into
the plan finder regarding medications being used, the dosages, and the pharmacy he or she plans
to use, the plan finder displays Part D plans in the area that cover those particular drugs.30 The
plan finder also provides information on quality ratings to make it easier to compare plans based
on cost, quality, and performance ratings.31 CMS wil send notices to beneficiaries in low-quality
plans encouraging them to look at other, higher rated plans. (See “Low-Quality Plans.”)
Information on plan availability and characteristics can be obtained from a number of additional
sources, including the Medicare toll-free information number (1-800-MEDICARE), State Health
Insurance Assistance Programs (SHIPs),32 and other local organizations.
Low-Quality Plans
CMS uses a star-rating system to assess the quality of Part D plans. MA-PD plan sponsors are
rated on up to 47 quality and performance measures, while PDP sponsors are assessed on up to 14

27 Starting in 2019, the time frame for delivery of the annual Evidence of Coverage (EOC) information was moved to
the first day of the Annual Election Period (AEP), rat her than fifteen days prior to that date. In addition, Part D plans
are allowed to deliver more documents, including the EOC, by notifying enrollees that the documents have been posted
on the Internet. Enrollees have the right to request hard copies. CMS, “ Medicare Program: Contract Year 2019 Policy
and T echnical Changes to Medicare Advantage, Medicare Cost Plan, Medicare Fee -for-Service, Medicare Prescription
Drug Benefit Programs, and PACE Program,” 83 Federal Register, April 16, 2018, p. 16621; at https://www.gpo.gov/
fdsys/pkg/FR-2018-04-16/pdf/2018-07179.pdf.
28 CMS, “Medicare Open Enrollment,” at http://www.cms.gov/Center/Special-T opic/Open-Enrollment-Center.html.
29 Medicare Plan Finder, at http://www.medicare.gov/find-a-plan/questions/home.aspx.
30 For example, a plan with the lowest premium and/or no deductible may end up not being the lowest -cost plan for the
beneficiary if the total cost sharing (including any deductible, co-payments, or coinsurance) for the beneficiary’s
specific drugs is more than under a different plan.
31 T he plans are rated on how well they perform in different categories, including (1) drug plan customer service, (e.g.,
how long members wait on hold and how frequently they meet deadlines for timely appeals); (2) member complaints
and number of beneficiaries staying with the same drug plan; (3) member satisfaction with drug plans; and (4) drug
pricing and patient safety, including how often drug plans update their prices and formulary information on the
Medicare website and how similar a drug plan’s estimated prices on the Medicare website are to prices members pay at
the pharmacy.
32 SHIPs are state-based programs that use community-based networks to provide Medicare beneficiaries with local
personalized assistance on a wide variety of Medicare and health insurance topics and receive federal funding for their
activities. See http://www.medicare.gov/contacts.
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measures.33 For each measure, plans are ranked on a scale of one to five stars, with five stars
considered excel ent. By CMS practice, Part D sponsors must provide star rating information to
beneficiaries through a standard document that must be distributed with enrollment information
and prominently posted on plan websites.
CMS has determined that three stars is the lowest acceptable quality rating for a plan. Plans must
display a special icon if they have an aggregate star rating of 2.5 or lower for three years of data.34
Plans with star ratings of less than three stars for three consecutive years may be terminated by
CMS. In addition, CMS may disable the online enrollment function for plans with a low -rating
icon and beneficiaries wil be directed to contact the plan directly to enroll in the low-performing
plan.35 Plans that receive five-star ratings may display a special icon recognizing them as high-
performing plans. Part D enrollees are provided with a special enrollment period during which
they can switch to a five-star plan, provided they meet other enrollment requirements.36
Plan Marketing
Plan sponsors are required to provide timely and accurate information in their marketing
materials.37 With the implementation of Part D in 2006, plans were required to submit all
marketing materials to CMS for review. Starting in 2019, a smal er share of annual plan materials
provided to enrollees and prospective enrollees have been subject to CMS prior review. Under
revised rules, CMS classifies activities and materials used to provide information to enrollees and
prospective enrollees as communications. Marketing is a subset of plan communications and is
defined, in part, as activities and the use of materials that are likely to lead a beneficiary to make
an enrollment decision.38 For example, communications materials issued by a plan sponsor that
simply describe a Part D sponsor organization but do not include information about a plan’s
benefit structure, costs, or star ratings are not marketing information and are not subject to prior
review. A brochure issued by a plan sponsor that touted the benefits of joining a specific Part D

33 CMS, “ Medicare 2021 Part C & D Star Ratings T echnical Notes,” p. 12. Available at https://www.cms.gov/
Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovGenIn/PerformanceData. Only a portion of the 47 quality
measures for MA-PD plans are directly targeted at the administration of the prescription drug benefit. Other me asures
are targeted at other non-drug related health care quality and delivery performance.
34 A contract receives a low performing icon as a result of its performance on Part C or Part D ratings. T he low
performing icon is calculated by evaluating the Part C and Part D summary ratings for the current year and the past two
years. If the contract had any combination of Part C or Part D summary ratings of 2.5 or lower in all three years of data,
it is marked with a low performing icon.
35 Beginning with plan year 2016, CMS began to exercise its authority to terminate Part D plans that had received three
years of low ratings. CMS issues contract nonrenewal notices for the affected plans each February, with an effective
date of December 31 of the same year. See CMS, “ Advance Notice of Methodological Changes for Calendar Year
(CY) 2017 for Medicare Advantage (MA) Capitation Rates, Part C and Part D Payment Policies and Call Letter ,”
February 19, 2016, p.101, at https://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/
Advance2017.pdf. For definitions see 42 C.F.R. §423.186 and 42 C.F.R. §423.509.
36 Medicare Part D Prescription Drug Manual, Chapter 3, “ Eligibility, Enrollment and Disenrollment ,” Section 30.3.8,
subsection 12, Rev. August 12, 2020, at https://www.cms.gov/files/document/cy2021-pdp-enrollment-and-
disenrollment -guidance.pdf.
37 CMS, “FY 2019 Medicare Communication and Marketing Guidelines,” Rev. September 5, 2018, at
https://www.cms.gov/Medicare/Health-Plans/ManagedCareMarketing/Downloads/CY2019-Medicare-
Communications-and-Marketing-Guidelines_Updated-090518.pdf.
38 CMS, “ Medicare Program: Contract Year 2019 Policy and T echnical Changes to Medicare Advantage, Medicare
Cost Plan, Medicare Fee-for-Service, Medicare Prescription Drug Benefit Programs, and PACE Program,” 83 Federal
Register, April 16, 2018, p. 16624, at https://www.gpo.gov/fdsys/pkg/FR-2018-04-16/pdf/2018-07179.pdf. For
definitions see 42 C.F.R. §423.2260.
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plan and spel ed out benefits and cost sharing would be considered marketing material and
subject to review.
In general, Medicare rules are designed to ensure that beneficiaries have complete and accurate
information when making decisions about drug plans. For example, a plan that has received a
four-star rating for one of the categories on which it is assessed, but has an aggregate three-star
quality rating across al the CMS measures, cannot create promotional material stating that the
plan is a four-star plan. Plans must use standardized names and materials across their service
region and must receive prior agreement from plan enrollees to provide certain information in a
format other than a mailing.39 Plans are not al owed to market via unsolicited contacts, such as
door-to-door sales. There are also limits on marketing and sales events. Al plan sponsors must
have interpreters in their cal centers to translate for people who are not proficient in English.40
Plans are required to provide certain documents upon request or enrollment, such as a summary
of benefits, the plan formulary, and a directory of contracting pharmacies. Plan sponsors may
offer nominal gifts (worth $15 or less) to potential enrollees, though they may not take the form
of cash or rebates.41
Enrollment Process
Beneficiaries can join a Part D plan in a variety of ways,42 including (1) fil ing out a paper
application; (2) visiting a plan’s website and enrolling online; (3) using the Medicare online
information site and enrollment center at http://www.medicare.gov;43 (4) cal ing the company
offering the drug plan; or (5) cal ing 1-800-MEDICARE. In general, a PDP sponsor may not deny
a valid enrollment request from any Part D-eligible individual residing in its service area.
An individual (or his/her legal representative) must complete an enrollment request, and include
al the information required to process the enrollment. Upon receiving an enrollment request, a
PDP sponsor must provide, within 10 calendar days, (1) a notice of acknowledgement of receipt
of the beneficiary’s application, (2) a request for more information in cases of incomplete
applications, or (3) a notice that the application has been denied, along with an explanation of the
reasons why.
Prior to the effective date of enrollment, under CMS rules, a plan sponsor must provide necessary
information about being a member of the PDP, including the PDP rules and the member’s rights
and responsibilities. In addition, the PDP sponsor must provide the following: a copy of the
completed enrollment form, if needed; a notice acknowledging receipt of the enrollment request
providing the expected effective date of enrollment; and proof of health insurance coverage so

39 CMS, “FY 2019 Medicare Communication and Marketing Guidelines,” Rev. September 5, 2018, at
https://www.cms.gov/Medicare/Health-Plans/ManagedCareMarketing/Downloads/CY2019-Medicare-
Communications-and-Marketing-Guidelines_Updated-090518.pdf. See Section 100. Plans may provide provider and/or
pharmacy directories electronically without prior consent from an enrollee. Part D plans may (1) send enrollees the plan
formulary in hard copy, which may be abridged, or (2) send a distinct and separate notice (in hard copy) describing
where enrollees can find the formulary online and how enrollees can request a hard copy formulary.
40 Ibid, Section 80.1. T he interpreters should be available within eight minutes of reaching a call center.
41 Ibid, Section 40.4.
42 CMS, Medicare Prescription Drug Benefit Manual, Chapter 3, “Eligibility, Enrollment and Disenrollment ,” Section
40.1 and 40.4.1., Rev. August 12, 2020, at https://www.cms.gov/files/document/cy2021-pdp-enrollment-and-
disenrollment -guidance.pdf.
43 Medicare drug plan participation in Medicare’s online enrollment center is voluntary, so not all Medicare drug plans
will offer this option.
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that a beneficiary may begin using the plan services as of the effective date. For al enrollment
requests, the PDP sponsor must submit the information necessary for CMS to add the beneficiary
to its records as an enrollee of the PDP sponsor within seven calendar days of receipt of the
completed enrollment request.
LIS Enrollment
Special enrollment rules apply to low-income individuals. General y, there is a two-step process
for low-income persons to gain Part D coverage. First, a determination must be made that they
qualify for the assistance; second, they must enroll, or be enrolled, in a specific Part D plan.44
LIS enrollees had once been al owed to change plans at any time during the plan year, unlike
other Part D enrollees who general y may switch plans only during the annual enrollment period
at the end of the year. Since 2019, LIS enrollees have no longer been al owed an open-ended,
monthly SEP. Instead, LIS enrollees are al owed a SEP once per calendar quarter during the first
nine months of the year and also are eligible for SEPs (1) within three months after the start of
coverage or notification that they have been enrolled by CMS or a state in a Part D plan and (2)
within three months after a change to their LIS or Medicaid status.45 The rules also place limits on
SEPs for LIS enrollees who are identified by CMS as at risk of opioid abuse. (See “Part D Opioid
Overutilization Monitoring.”)
Auto-Enrollment
Full-benefit, dual-eligible individuals who have not elected a Part D plan are automatical y
enrolled into one by CMS.46 CMS first uses data provided by state Medicaid agencies to identify
full-benefit, dual-eligible individuals. CMS then identifies plan sponsors that offer at least one
Part D plan in the region offering basic prescription drug coverage with a premium at or below
the low-income premium subsidy amount. If more than one sponsor in a region meets the criteria,
CMS auto-enrolls beneficiaries on a random basis among available PDP sponsors. CMS next
identifies individual plans offered by the sponsor that include basic drug coverage with premiums
at or below the low-income premium subsidy amount. The beneficiary is then randomly assigned
among the sponsor’s plans meeting the criteria.
If an individual is not eligible to enroll in a PDP because he or she is enrolled in a Medicare
Advantage plan (other than a MA private-fee-for-service plan [MA-PFFS] that does not offer Part
D, or a medical savings account [MSA] plan), CMS is to direct the MA organizations to facilitate
the enrollment of these individuals into an MA-PD plan offered by the same MA organization.
Some dual-eligible beneficiaries may find that they have been auto-enrolled in a plan that may
not best meet their needs. For this reason, they are provided with more opportunities to change
enrollment, with the new coverage effective the following month. (See “LIS Enrollment.”) If an

44 CMS, Medicare Part D Prescription Drug Manual, Chapter 13, “Premium and Cost -Sharing Subsidies for Low-
Income Individuals,” Section 40, Rev. October 1, 2018, at https://www.cms.gov/Medicare/Prescription-Drug-
Coverage/PrescriptionDrugCovContra/Downloads/Chapter-13-Premium-and-Cost -Sharing-Subsidies-for-Low-Income-
Individuals-v09-14-2018.pdf.
45 CMS, “Medicare Program: Contract Year 2019 Policy and T echnical Changes to Medicare Advantage, Medicare
Cost Plan, Medicare Fee-for-Service, Medicare Prescription Drug Benefit Programs, and PACE Program,” 83 Federal
Register, April 16, 2018, p. 16514, at https://www.gpo.gov/fdsys/pkg/FR-2018-04-16/pdf/2018-07179.pdf.
46 Full-benefit duals who live in another country, live in one of the five U.S. territories, are inmates in a correctional
facility, have already enrolled in a Part D plan, or have opted out of auto -enrollment into a Part D plan, are excepted
from this process.
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enrollee selects a plan with a premium above the low-income benchmark, however, he or she is
required to pay the difference.
Facilitated Enrollment
CMS established a process labeled “facilitated enrollment” for enrollees in Medicare Savings
programs (MSPs), SSI enrollees, and persons who applied for and were approved for low -income
subsidy assistance. The basic features applicable to auto-enrollment for dual eligibles (i.e.,
identification of eligibility through SSA and/or Medicaid data, random assignment to plans with
premiums below the low-income benchmark, and assignment of MA enrollees to the lowest-cost
MA-PD plan offered by the MA organization) are the same for facilitated enrollment.
Reassignment of Certain LIS Beneficiaries
Drug plans may increase premiums at the beginning of a plan year, in some cases raising them
above the benchmark for LIS beneficiaries. When that is the case, CMS is to reassign full LIS
recipients to different plans so they can continue to receive benefits without paying Part D
premiums (or continue paying only a minimal amount). CMS may also automatical y reassign
LIS recipients if their current plan terminates operations. LIS beneficiaries who have voluntarily
changed plans in previous years are not automatical y reassigned by CMS, even if their plans
charge premiums above the benchmark. LIS beneficiaries in MA-PD plans are automatical y
reassigned to PDPs if their current plan ceases operations or they are affected by a reduction in
the plan’s service area.
About 433,473 LIS beneficiaries were enrolled in benchmark PDPs in 2019 that did not qualify as
benchmark plans in 2020. CMS randomly reassigned 100,334 beneficiaries to different PDPs, and
333,139 were assigned to the same plan despite a premium increase. Another 700,499 mil ion LIS
beneficiaries were not reassigned because they had previously switched plans voluntarily.47 The
ACA made changes to Part D in an effort to reduce the need for automatic reassignment of LIS
beneficiaries. For instance, the law changed the methodology for calculating the benchmark
premium for some plans. In addition, PDPs with premiums above LIS-eligible levels no longer
have LIS beneficiaries reassigned if they voluntarily agree to waive a de minimis portion of the
premium above the benchmark. However, such plans would not qualify to receive other LIS
beneficiaries who are automatical y reassigned from their current plans.48
Part D Benefit Structure
The MMA set out a standard prescription drug benefit structure. Plan sponsors may, and often do,
offer different benefit designs and cost-sharing requirements, so long as they meet certain
specifications. Under the standard benefit structure, with some exceptions, over the course of a
year a beneficiary is responsible for paying (1) a monthly premium, (2) an annual deductible, and
(3) co-payments or coinsurance for drug purchases. Additional y, for a certain portion in the
annual benefit cal ed the coverage gap (also known as the doughnut hole), beneficiaries initial y
faced 100% out-of-pocket costs. However, provisions in subsequent legislation resulted in closure
of the coverage gap as of 2020. (See “The Coverage Gap.”)

47 Data on 2019 Reassignment for 2020 PDPs are available at https://www.cms.gov/Medicare/Eligibility-and-
Enrollment/LowIncSubMedicarePresCov/Reassignment.html.
48 CMS, Medicare Prescription Drug Benefit Manual, Chapter 3, “Eligibility, Enrollment and Disenrollment ,” Section
40.1.5, Rev. August 12, 2020, at https://www.cms.gov/files/document/cy2021-pdp-enrollment-and-disenrollment-
guidance.pdf. T he de minimis amount is announced annually along with plan benchmarks.
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Actual costs to Part D beneficiaries vary from plan to plan depending on the benefit structure and
coverage offered, the costs and amount of drugs they use, and the level of any additional
assistance such as through a low-income subsidy.
Premiums
The majority of beneficiaries enrolled in Part D pay monthly premiums for Part D coverage. On
average, beneficiary premiums represent about 25.5% of the cost of a standard Part D plan, as
determined through annual bids submitted by insurers. (See “Standard Prescription Drug
Coverage.”)49 The actual dollar amount of Part D premiums wil vary by plan.
Figure 2. Annual Part D Base Beneficiary Monthly Premium
In dol ars

Source: CMS, “Annual Release of Part D National Average Bid Amount and other Part C & D Bid Information.”
Notes: Amounts reflect 25.5% of the annual average of participating drug plan bids to provide basic Part D
benefits.

49 Base Part D premiums are based on annual sponsor bids for providing standard coverage. Bids do not include
expected reinsurance payments, which are direct Medicare subsidies for 80% of each plan’s costs above a set
catastrophic threshold. (See “ Reinsurance Subsidies.”) (However, plan sponsors provide estimates of projected
reinsurance subsidies, which are used by CMS to make monthly prospective payments to the plans.) In 2005 rules to
implement the Part D program, CMS noted that congressional intent was that average monthly premiums were to be
based on total estimated standard benefits, including benefits subject to reinsurance. T o ensure premiums cover a
portion of the cost of reinsurance, CMS adjusts th e base premium accordingly. T he base premium is a fraction, with a
numerator of 25.5% and a denominator equal to 100% of the average bid minus a percentage equal to (i) the total
reinsurance payments estimated to be paid to plans in the coverage year, divided by (ii) that amount plus the total
payments that CMS estimates will be paid to Part D plans based on the standardized bid amount during the year, taking
into account amounts paid by both CMS and plan enrollees. See CMS, “ Medicare Program: Medicare Prescription
Drug Benefit; Final Rule,” 70 Federal Register, 4303, January 28, 2005, at https://www.govinfo.gov/content/pkg/FR-
2005-01-28/pdf/05-1321.pdf.
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As noted, beneficiary premiums are based on the average of bids submitted by participating
sponsors for standard benefits (the base beneficiary premium) each year and are adjusted to
reflect the difference between the standardized bid amount of the plan the beneficiary enrolls in
and the nationwide average bid. For 2021, the base beneficiary monthly premium, 25.5% of the
average adjusted bid amount, is $33.06.50 Base premiums from 2006 through 2021 are shown in
Figure 2.
Beneficiaries in plans with higher costs for standard coverage face higher-than-average
premiums, while enrollees in lower-cost plans pay lower-than-average premiums for such
coverage. (Plans that offer supplemental benefits may set higher premiums but do not receive
Medicare subsidies for the supplemental benefits.) Additional y, enrollees in MA-PD plans may
have lower premiums if their sponsors choose to buy down, or reduce, the Part D premium.51 The
monthly premium is applied evenly to al persons enrolled in a specific plan, except those who
are receiving low-income subsidies or are subject to a late enrollment penalty (LIS beneficiaries
have lower or zero premiums, and late enrollees pay a monthly penalty in addition to their plan
premium). There are special rules for employer-sponsored Part D plans. Beneficiaries may pay
plans directly or have premiums deducted from their Social Security benefits.52 Higher-income
beneficiaries pay a monthly premium surcharge.
Premium Surcharge for Higher-Income Enrollees
When Part D began in 2006, al beneficiaries enrolled in the same plan (except those receiving
the low-income subsidy) were subject to the same premium. Beginning in 2011, as required by
the ACA, Part D enrollees with higher incomes pay higher premiums. (The Part D high-income
requirements are similar to the income-based premium structure under Medicare Part B.)53 Part D
beneficiaries who have a modified adjusted gross income (MAGI)54 above set thresholds55 are
assessed a special surcharge, referred to as an income-related monthly adjustment amount
(IRMMA), in addition to their regular PDP or MA-PD plan premiums. According to the SSA,
fewer than 5% of Medicare enrollees are subject to the IRMMA.56

50 CMS, “Annual Release of Part D National Average Bid Amount and other Part C & D Bid Information,” July 20,
2020, at https://www.cms.gov/files/document/2021-announcement.pdf. Includes an adjustment for projected
reinsurance.
51 Medicare Advantage plans that earn a Part C rebate (by having estimated costs for providing benefits that are less
than the maximum possible Medicare payment) must spend that rebate on supplemental benefits, reduced cost sha ring
or reduced Part B or D premiums.
52 Social Security deductions are limited to $300 per month, the harm limit. SSA, HI 03001.001, “Description of the
Medicare Part D Prescription Drug Program,” at https://secure.ssa.gov/poms.nsf/lnx/0603001001.
53 See CRS Report R40082, Medicare Part B: Enrollment and Premiums.
54 T he definition of modified adjusted gross income (MAGI) used for the calculation is the total of adjusted gross
income and tax-exempt interest income. T he income data is based on the most recent tax information that the Internal
Revenue Service is able to provide the Social Security Administration. Generally, the tax information is from two years
prior to the year for which the premium is being determined but not more than three years prior. Social Security
Administration, “ Medicare Premiums: Rules for Higher-Income Beneficiaries,” at https://www.ssa.gov/benefits/
medicare/medicare-premiums.html. MAGI has more than one definition in federal tax law, with the definition varying
based on the program or provision utilizing the con cept. See CRS Report R43861, The Use of Modified Adjusted Gross
Incom e (MAGI) in Federal Health Program s.
55 T he income thresholds are the same as those used for calculating Medicare Part B premiums.
56 SSA, “Medicare Premiums: Rules for Higher-Income Beneficiaries,” at https://www.ssa.gov/benefits/medicare/
medicare-premiums.html.
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The higher-income surcharge is calculated as the difference between the Medicare Part D base
beneficiary premium (which represents 25.5% of the average national bid amount) and 35%,
50%, 65%, 80%, or 85% of the national average cost for providing Part D benefits,57 excluding
federal reinsurance or subsidies. The surcharge is based on beneficiary income, with higher-
income beneficiaries facing a larger surcharge. Because individual plan premiums vary, the law
specifies that CMS calculate the Part D surcharge using the base premium, rather than each
beneficiary’s individual premium amount.58 (See Table 3.)
Table 3. 2021 Monthly Medicare Part D High-Income Surcharge
If Annual Income in 2019 Was

Married and File Separate
2021
File Individual Tax Return
File Joint Tax Return
Tax Returns
Payment Is
$88,000 or less
$176,000 or less
$88,000 or less
Plan Premium
Above $88,000 to $111,000
Above $176,000 to $222,000
Not applicable
$12.30 + Plan
Premium
Above $111,000 to $138,000
Above $222,000 to $276,000
Not applicable
$31.80 + Plan
Premium
Above $138,000 to $165,000
Above $276,000 to $330,000
Not applicable
$51.20 + Plan
Premium
Above $165,000 and less than Above $330,000 and less than Above $88,000 and less than
$70.70 + Plan
$500,000
$750,000
$412,000
Premium
$500,00 and above
$750,000 and above
$412,000 and above
$77.10 + Plan
Premium
Source: Medicare.gov, “Monthly Premium for Drug Plans.”
Notes: Income figures refer to modified adjusted gross income.
At the time the ACA was enacted, high-income Part D enrollees could be placed into one of four
high-income adjustment categories, depending on their level of income. Section 53114 of BBA
2018 added a fifth high-income category beginning in 2019 for individuals with annual income of
$500,000 or more or couples filing jointly with income of $750,000 or more. Enrollees with
income equal to or exceeding these thresholds pay premiums that cover 85% of the average per
capita cost of the Part D benefits (instead of 80%, as they would have prior to this change). The
threshold for couples filing jointly in this new income tier is calculated as 150% of the individual
income level rather than 200%, as in the other income tiers. The bottom four high-income
categories are adjusted annual y for inflation based on the CPI-U; however, the new top high-
income threshold wil be frozen through 2027 and then adjusted annual y for inflation starting in
2028.59
The surcharge is calculated using a statutory formula that multiplies the base Part D premium by
a set ratio.60 For 2021, the ratios are (35% − 25.5%)/25.5%; (50% − 25.5%)/25.5%; (65% −
25.5%)/25.5%, (80% − 25.5%)/25.5%, or (85%-25.5%)/25.5%. For example, for 2021 (with a

57 CMS, “ 2021 Part D Income-Related Monthly Premium Adjustment,” November 6, 2020, at https://www.cms.gov/
files/document/2021-part -d-income-related-monthly-premium-adjustment.pdf.
58 Social Security Act §1860D-13(a)(7). See also SSA, “Medicare Premiums: Rules for Higher-Income Beneficiaries,”
at https://www.ssa.gov/benefits/medicare/medicare-premiums.html.
59 T hese threshold changes also apply to Part B income-related monthly adjustments. See CRS Report R40082,
Medicare Part B: Enrollm ent and Prem ium s.
60 Social Security Act §1860D-13(a)(7).
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base premium of $33.06) the surcharge for an individual with a 2019 adjusted gross income
between $138,000 and $165,000 would be calculated as
IRMMA = $33.06 x ((65% − 25.5%)/25.5%)
IRMMA = $33.06 x 1.549
IRMMA = $51.21, rounded down to the nearest dime = $51.20.
Beneficiaries pay the surcharge directly to the federal government, rather than to Part D plans.
When applicable, IRMMA wil be withheld from an enrollee’s monthly Social Security check,
Railroad Retirement benefit, or federal pension payment, unless the benefit check is not sufficient
for the purpose.61 If a beneficiary is directly bil ed for IRMAA, he or she has the option of paying
through an electronic funds transfer or by other means.62
Qualified Drug Coverage
Part D plan designs may vary, but al PDPs and MA-PD plans must offer at least a minimum
package of benefits. This minimum benefit, referred to as qualified prescription drug coverage,
may include either a standard package of prescription drug coverage established by Medicare or
an alternative package that is actuarial y equivalent.63 Plans may also offer enhanced coverage
that exceeds the value of standard coverage. Premiums for these enhanced plans are general y
higher than for standard plans. MA organizations offering MA-coordinated care plans are
required to offer at least one plan for the service area that includes drug coverage. The drug
coverage can be either basic or enhanced.64
Standard Prescription Drug Coverage
Under the standard Part D benefit, a beneficiary first pays a deductible ($445 in 2021). After the
deductible has been met, the beneficiary is responsible for 25% of the cost of prescription drugs
(with the plan covering the remaining 75%) up to the initial coverage limit ($4,130 in 2021).65
(See Figure 3.)
To reach the initial coverage limit in a 2021 standard plan, a beneficiary would pay the $445
deductible plus $921.25 in prescription costs, for total out-of-pocket costs of $1,366.25. The plan
would pay the remaining $ 2,763.75
After the initial coverage threshold has been reached, a beneficiary enters the coverage gap or
“doughnut hole” where he or she remains until accumulating $6,550 in total out-of-pocket

61 In cases where an enrollee’s benefit payment check is not sufficient to have the IRMMA withheld, or if an enrollee is
not receiving such benefits, the beneficiary must be billed directly for the IRMMA. See 42 C.F.R. §423.293.
62 See CRS Report R43962, The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA; P.L. 114 -10).
63 Social Security Act, §1860D-2.
64 CMS, Medicare Prescription Drug Benefit Manual, Chapter 5, “Benefits and Beneficiary Protection,” Section
20.4.4, Rev. September 20, 2011, at http://www.cms.gov/Medicare/Prescription-Drug-Coverage/
Prescript ionDrugCovContra/Downloads/MemoPDBManualChapter5_093011.pdf.
65 T he thresholds for 2021 were published in the 2021 Call Letter. CMS, “Announcement of Calendar Year (CY) 2021
Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Po licies and Final Call Letter,”
April 6, 2020, p.71, at https://www.cms.gov/files/document/2021-announcement.pdf. T he standard plan annual
deductible, initial coverage limit, out -of-pocket threshold, and beneficiary cost sharing are adjusted annually under a set
formula. See 42 C.F.R. §423.104(d). T he standard plan deductible is the maximum deductible that can be charged for
Part D plans.
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spending in 2021 (for those not receiving the LIS) and reaches the catastrophic threshold.66 Total
drug spending needed to move through the deductible, the initial coverage limit, and the coverage
gap to the catastrophic threshold is estimated at about $10,048.39,67 with a portion paid by the
beneficiary, a portion covered by the plan, and a portion offset by manufacturer discounts for
brand-name drugs. (See “The Coverage Gap.”)
Figure 3. 2021 Standard Medicare Prescription Drug Benefit

Source: Figure created by CRS based on data from CMS, “Announcement of Calendar Year (CY) 2021Medicare
Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies and Final Cal Letter,”
Attachments IV and V.
Note: Beneficiaries above the catastrophic threshold pay the greater of a $3.70 co-payment for generic drugs
and a $9.20 co-payment for brand-name drugs or 5% cost sharing in 2021. LIS beneficiaries pay less out of
pocket than other beneficiaries. For example, ful benefit dual eligibles pay no deductible, minimal cost sharing in
the coverage gap, and no cost sharing above the catastrophic threshold. (See Table 6.)
Actual spending per beneficiary wil vary depending on plan design and purchases of brand-name
vs. generic drugs. After the catastrophic threshold has been reached, plans charge a beneficiary
the greater of a nominal set co-payment for drugs or 5% coinsurance.68 Medicare subsidizes 80%
of each plan’s costs for this catastrophic coverage, which is cal ed Part D reinsurance.
CMS uses a set formula to update annual Part D coverage parameters, including the standard
deductible, initial coverage limit, and amount of beneficiary true out-of-pocket spending (TrOOP)
required to reach the catastrophic threshold.69 There is no annual cap on out-of-pocket spending
in Part D, except for full subsidy LIS beneficiaries. Annual percentage increases are based on

66 For those receiving a low-income subsidy (who are not eligible for manufacturer discounts in the doughnut hole
because they have set, lower cost sharing throughout the benefit), the catastrophic threshold is $9,313.75. For
beneficiaries eligible for the manufacturer discount, the threshold depends on the mix of brand name and generic drugs
used; the average non-LIS threshold is about $10,048.39
67 T otal reflects catastrophic limit of about $10,048.39 minus initial coverage limit of $4,130. T otal spending per
beneficiary will vary depending on plan design and purchases of brand-name vs. generic drugs. CMS thresholds are
based on average spending data across all plans.
68 Nominal cost sharing is defined as the greater of (1) a co-payment of $3.70 in 2021 for a generic drug or preferred
multiple source drug and $9.20 in 2021 for other drugs, or (2) 5% coinsurance.
69 Social Security Act, §1860D-2.
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average per capita spending for covered outpatient drugs for Medicare beneficiaries during the
12-month period ending in July of the previous year.
Actuarially Equivalent Plans
Plan sponsors have a number of options when designing pricing and benefits. Insurers may offer
basic plans that provide the same level of coverage as the Part D standard plan, but may modify
certain parameters and cost sharing such as reducing the maximum $445 deductible, while also
imposing cost-sharing requirements that are higher than 25%. For example, nearly al plans use a
tiered cost-sharing structure, where beneficiaries have a lower co-payment for generic drugs, and
higher cost sharing for more expensive brand-name drugs. (See “Tiered Formularies.”)
In 2020, 42% of Part D enrollees in PDPs were in plans offering enhanced benefits, and 58%
were in plans that were actuarial y equivalent to the standard benefit. No PDP enrollees were in
defined standard benefit plans.70
Enhanced Plans
Insurers may also offer enhanced coverage that exceeds the value of defined standard coverage.
Enhanced coverage includes basic coverage and supplemental benefits such as reductions in cost
sharing, including reductions in cost sharing in the coverage gap. A PDP sponsor may not offer an
enhanced plan unless it also offers a standard or actuarial y equivalent plan in the same region.
The requirement is designed to ensure that Medicare beneficiaries have options for lower-cost
plans.
The structure of the Part D program, including the large number of plans available in each region,
can make it complicated for beneficiaries to compare plans. The ACA required CMS to
streamline the number of Part D plans in each region and simplify the enrollment process.
Starting in the 2011 plan year, CMS required Part D sponsors that offer more than one plan per
region to demonstrate meaningful differences between their plans, in terms of premiums, cost
sharing, formulary design, or other benefits.71 Plan sponsors were al owed to offer only one basic
plan benefit design in a service area and no more than two enhanced alternative plans in each
service area. Beginning in 2019, CMS no longer required Part D sponsors offering two enhanced
plans in a region to demonstrate meaningful differences between the enhanced plans. The sponsor
stil must demonstrate that the enhanced plans have meaningful differences from the basic plan,
however. The change is designed to give Part D sponsors more flexibility in plan design. CMS
continues to limit Part D sponsors to offering no more than two enhanced plans in each region.72
Enrollee cost sharing for prescriptions can vary widely during the course of a plan year for
enrollees that accumulate sufficient spending to move through the various phases of the Part D
benefit. For example, in 2021, an enrollee could be in a plan where he or she pays 100% of the
plan’s negotiated price for a drug until meeting the $445 deductible; a flat co-payment in the

70 MedPAC, (MedPAC), Report to the Congress: Medicare Payment Policy, March 13, 2020, Chapter 14, T able 14-5,
p. 418 at http://medpac.gov/docs/default-source/reports/mar20_medpac_ch14_sec.pdf?sfvrsn=0.
71 CMS, Medicare Prescription Drug Benefit Manual, Chapter 5, “Benefits and Beneficiary Protection,” Rev.
September 20, 2011, at http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/
Downloads/MemoPDBManualChapter5_093011.pdf.
72 CMS, “Medicare Program: Contract Year 2019 Policy and T echnical Changes to Medicare Advantage, Medicare
Cost Plan, Medicare Fee-for-Service, Medicare Prescription Drug Benefit Programs, and PACE Program,” 83 Federal
Register, April 16, 2018, p. 16613, at https://www.gpo.gov/fdsys/pkg/FR-2018-04-16/pdf/2018-07179.pdf.
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initial coverage period; 25% coinsurance in the coverage gap; and 5% coinsurance in the
catastrophic portion of the benefit.
The Coverage Gap
One unique feature of the Medicare Part D drug benefit is the coverage gap (also referred to as
the doughnut hole)—the period in which Part D enrollees initial y were required to pay 100% of
total drug costs until they reached the catastrophic coverage level. Congress included the
coverage gap in the benefit structure when the MMA was enacted in 2003 because the cost of
continuous coverage would have exceeded goals for total spending.
As original y enacted, Part D provided a basic level of coverage for al beneficiaries, and extra
protection for those with the highest drug costs (above the catastrophic limit). Part D enrollees
who did not receive a low-income subsidy general y paid the full cost of drugs while in the
coverage gap. (See original Part D in Figure 4.) The ACA, as amended,73 included provisions to
gradual y phase out the coverage gap by 2020, meaning that by 2020 enrollees in standard plans
would have a 25% cost share from the time they meet a standard plan deductible until they
reached the catastrophic threshold, after which cost sharing is reduced. (See “Phaseout of the
Coverage Gap.”) Congress included provisions in BBA 2018 that closed the Part D coverage gap
for brand-name drugs in 2019, a year earlier than required by the ACA.74 However, even though
the coverage gap has been closed (in the sense that the Part D standard benefit now has 25% cost
sharing from the deductible to the catastrophic threshold), the coverage gap is stil an important
part of the benefit structure for purposes of (1) calculating mandatory manufacturer discounts for
certain drugs; and (2) determining the required level of enrollee cost sharing and out-of-pocket
spending.75
Beneficiaries may have different levels of actual out-of-pocket spending in the coverage gap
depending on how their specific plans are structured and the percentage of brand-name and
generic drugs that they use.76
In 2018, about 21% of Medicare Part D enrollees reached the coverage gap.77 CMS offers
enrol ees suggestions for avoiding or delaying the coverage gap and for saving money while in

73 Section 3301 of the ACA created the coverage gap manufacturer discount program. Section 1101 of the Health Care
and Education Reconciliation Act of 2010 (P.L. 111-152 ) added the phase-in of government subsidies to close the
coverage gap by 2020.
74 Balanced Budget Act of 2018 (BBA 2018; P.L. 115-123), Section 53116.
75 Non-LIS beneficiaries are allowed count manufacturer on brand-name drugs in the coverage gap as their own out -of-
pocket spending. See “Phase Out of the Coverage Gap.”
76 For example, the Part D required 70% manufacturer discount on brand-name, biologics, and biosmilar drugs in the
coverage gap is counted as enrollee out of pocket spending, in addition to an enrollee’s 25% cost share. However, the
Medicare 75% contribution to the cost of generic drugs in the coverage gap does not count against enrollee out -of-
pocket spending. An individual using only generic drugs is likely to accumulate T rOOP more slowly than an individual
taking brand-name drugs. In addition, Part D plan sponsors have the option of providing supplemental coverage in the
coverage gap, which could affect enrollee T rOOP. Although few sponsors currently offer coverage gap supplemental
benefits, CMS is beginning a pilot program for insulin in 2021 that limits cost sharing to $35 and is designed in part to
reduce enrollee spending in the coverage gap. See textbox “Supplemental Cost Sharing in the Coverage Gap.”
77 MedPAC, July 2020 Data Book, Health Care Spending and the Medicare Program , Chart 10-19. Available at
http://www.medpac.gov/-documents-/data-book. T he data are the most recent available.
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the gap.78 Strategies for minimizing out-of-pocket spending include switching to generic,79 over-
the-counter, mail-order, or other lower-cost drugs when possible; exploring national and
community-based charitable programs or State Pharmacy Assistance Programs (SPAPs) that
might offer assistance;80 and looking into Pharmaceutical Assistance Programs (also cal ed
Patient Assistance Programs, or PAPs) offered by pharmaceutical manufacturers or independent
charities.81
Phaseout of the Coverage Gap
As noted, the ACA gradual y closed the coverage gap by 2020 through a combination of
manufacturer discounts and government subsidies. Under the ACA, pharmaceutical
manufacturers that choose to participate in Medicare Part D must sign agreements to take part in
the Medicare Coverage Gap Discount Program.82 The ACA required companies to provide a 50%
discount on brand-name and biologic drugs for non-LIS Part D participants in the coverage gap.
Drug makers began providing the brand-name drug discount in 2011. The ACA also gradual y
phased in additional federal subsidies for brand-name drugs purchased in the coverage gap, so
that by 2020 a beneficiary would have 25% cost sharing in the coverage gap, Medicare would
cover 25% of the cost of the drug, and the manufacturer discount would defray 50%. For generic
drugs, the ACA phased in a 75% federal subsidy by 2020. Enrollees are al owed to count the
manufacturer discounts as part of their own out-of-pocket spending. The ACA did not impose a
manufacturer discount on the less expensive generic drugs. (Those enrollees who reached the
coverage gap in 2010 received a $250 discount, in the form of a check.) (See Table 4.)
BBA 2018 included provisions to close the coverage gap for brand-name drugs one year early, in
2019. Beginning in 2019 and continuing forward, BBA 2018 (1) increased the manufacturer
discount for brand-name drugs in the coverage gap to 70% from 50%; (2) expanded the
manufacturer discount to include biosimilar drugs,83 (3) set the federal subsidy for brand-name
drugs in the coverage gap at 5%, and (4) set beneficiary cost sharing at 25%.

78 For more information on the coverage gap see CMS, “Costs in the Coverage Gap,” https://www.medicare.gov/drug-
coverage-part-d/costs-for-medicare-drug-coverage/costs-in-the-coverage-gap.
79 Part D sponsors are required to ensure that their network pharmacies inform enrollees of any price differential
between a covered drug and the lowest -price generic version of the drug that is therapeutically equivalent,
bioequivalent, on the plan’s formulary, and available at that pharmacy. In addition, under the 2018 Know the Lowest
Price Act, (P.L. 115-262), Part D plans may not restrict or penalize network pharmacies from informing enrollees of
any difference between the price/cost sharing for a drug using the Part D benefit and a lower cash price an enrollee
could pay by purchasing the drug outside the Part D benefit.
80 Some states offer payment assistance for drug plan premiums and/or other drug costs for individuals who have
trouble affording their medication but do not qualify for LIS. For example, a state may offer assistance to individuals
with incomes between 150% and 300% of the FPL. T o learn which states offer this assistance and for details on the
state programs, see http://www.medicare.gov/pharmaceutical-assistance-program/state-programs.aspx.
81 Many major drug manufacturers offer assistance programs for the drugs they manufacture. Manufacturer patient
assistance programs may be used outside the Part D benefit, and the value of benefits received under these programs
does not count toward true out -of-pocket expenses. Independent charity patient assistance programs may provide
assistance with Part D cost sharing, which does count toward true out -of-pocket expenses. T o learn which
manufacturers offer assistance, see http://www.medicare.gov/pharmaceutical-assistance-program/index.aspx. See also
CRS Report R44264, Prescription Drug Discount Coupons and Patient Assistance Program s (PAPs).
82 CMS, “Part D Information for Pharmaceutical Manufacturers,” at http://www.cms.gov/Medicare/Prescription-Drug-
Coverage/PrescriptionDrugCovGenIn/Pharma.html.
83Beginning in 2019, Section 53113 of BBA 2018 expanded the manufacturer discount to biosimilars, which are lower -
cost versions of biologic drugs. Biologics and biosimilars are drugs produced from living organisms, rather than
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BBA 2018 did not alter ACA requirements for generic drugs purchased in the coverage gap. For
generic drugs, the coverage gap closed in 2020, as scheduled under the ACA. (See Table 4).
Table 4. Closing the Coverage Gap Between 2011 and 2020
(phase-in of subsidies and reduction in beneficiary cost sharing)

Brand Name Drugs
Generic Drugs

Manufacturer
Medicare
Beneficiary
Medicare
Beneficiary
Discount
Subsidy
Cost Share
Subsidy
Cost Share
2011
50%
0
50%
7%
93%
2012
50%
0
50%
14%
86%
2013
50%
2.5%
47.5%
21%
79%
2014
50%
2.5%
47.5%
28%
72%
2015
50%
5%
45%
35%
65%
2016
50%
5%
45%
42%
58%
2017
50%
10%
40%
49%
51%
2018
50%
15%
35%
56%
44%
2019
70%
5%
25%
63%
37%
2020 on
70%
5%
25%
75%
25%
Source: CRS analysis of ACA, as amended by BBA 2018.
Notes: The federal government provides the generic drug subsidy.
From 2020 onward, Medicare wil subsidize 75% of Part D plan costs for generic drugs in the
coverage gap and enrollees wil pay 25%.84 (See Figure 4.)
Based on the latest CMS data available, in 2016 more than 4.9 mil ion beneficiaries who were in
the coverage gap received manufacturer discounts on brand-name drugs they purchased. Overal ,
2016 discounts totaled about $5.65 bil ion, with an average discount per beneficiary of $1,149.85
(Note that the manufacturer discount was set at 50% in 2016, compared to the current 70% level.)

through a chemical process. T he ACA originally excluded biosimilars from the manufacturer discount. In a separate
2018 rulemaking, CMS applied generic drug cost -sharing requirements to biosimilars purchased by LIS beneficiaries in
all phases of the Part D benefit. T he change made biosimilars more affordable for LIS beneficiaries. See CMS,
“Medicare Program: Contract Year 2019 Policy and T echnical Changes to Medicare Advantage, Medicare Cost Plan,
Medicare Fee-for-Service, Medicare Prescription Drug Benefit Programs, and PACE Program,” 83 Federal Register,
April 16, 2018, p. 16610, at https://www.gpo.gov/fdsys/pkg/FR-2018-04-16/pdf/2018-07179.pdf.
84 CMS, “Costs in the Coverage Gap,” at https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-
coverage/costs-in-the-coverage-gap. Medicare subsidies are based on projected costs in annual plan bids. Medicare
reconciles plans’ projected and actual costs at the end of each plan year.
85 CMS, “ Coverage Gap Discount Program,” at http://www.cms.gov/Medicare/Medicare-Advantage/Plan-Payment/
CGDP.html. T he data are the most recent available on the website.
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Figure 4. Closure of the Coverage Gap for Brand and Generic Drugs
(the ACA, as amended by BBA 2018, closed the doughnut hole for al drugs in 2020)

Source: CRS analysis of the ACA and BBA 2018.
Note: Beneficiaries above the catastrophic threshold pay the greater of a specified co-payment or 5%
coinsurance. LIS beneficiaries pay less out of pocket than other beneficiaries. For example, ful benefit dual
eligibles pay no deductible, minimal cost sharing in the coverage gap, and no cost sharing above the catastrophic
threshold. (See Table 6 for beneficiary cost sharing in 2021.) Non-LIS beneficiaries are al owed to count
manufacturer discounts on brand-name drugs in the coverage gap drugs as out of pocket spending.
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Supplemental Cost Sharing in the Coverage Gap
Part D plan sponsors may offer plans with supplemental coverage, such as lower deductibles or cost sharing than
in the standard benefit. Under Part D legislation and regulations, if a plan sponsor offers a supplemental benefit in
the coverage gap (such as a low, set co-payment rather than 25% coinsurance) the “the applicable beneficiary shal
not be provided a discounted price for an applicable drug under this section until after such supplemental benefits
have been applied with respect to the applicable drug.”86
For example, if a sponsor offered a plan with a $10 co-payment on a $100 drug in the coverage gap, the plan
sponsor’s liability would be calculated as ($100 - $10) or $90. The manufacturer discount would be applied to the
$10 co-payment ($10 x 0.70 =$7). The enrol ee would pay the remaining share ($100 – ($90 + $7) = $3).
If the plan sponsor did not offer an enhanced benefit in the coverage gap, the manufacturer discount would be
70% of the negotiated price of $100 ($100 x 0.70 =$70). The enrol ee would pay 25% coinsurance on the $100
negotiated price ($100 x 0.25 = $25); and the plan sponsor would be liable for the remaining $5 ($100 - ($70 +
$25.)
For the 2021 plan year, CMS is offering a pilot program (for non-LIS beneficiaries) that modifies supplemental cost
sharing for insulin, which is one of the most widely used drugs in Medicare Part D. Under the pilot, participating
Part D plan sponsors would charge no more than a $35 co-payment for a 30-day supply of insulin from the plan
deductible through the coverage gap. The 70% manufacturer discount in the coverage gap would be based on the
plan’s negotiated price for insulin rather than on the $35 co-payment.87
CMS noted that because of the current financial disincentives, Part D sponsors general y do not offer supplemental
benefits in the coverage gap. According to CMS, one in every three Medicare beneficiaries has diabetes, and over
3.3 mil ion use one or more of the common forms of insulin.
True Out-of-Pocket Costs
Before catastrophic protection begins, Part D enrollees must incur a certain level of out-of-pocket
costs.88 True out-of-pocket costs (TrOOP) are costs that are incurred by a beneficiary or are
counted by CMS as incurred by a beneficiary, including a plan deductible, cost sharing up to the
initial coverage limit, and the cost of certain drugs while in the doughnut hole, including the
manufacturer subsidy.
Enrollee spending for Part D covered drugs is treated as TrOOP89 if paid by the enrollee
(including through a Medical Savings Account, Health Savings Account or Flexible Spending
Account); paid by family members or friends; paid by a Qualified State Pharmacy Assistance
Program; covered by a low-income subsidy; paid by most charities; covered by a drug
manufacturer discount under the Medicare Coverage Gap Discount Program; covered by the
Indian Health Service;90 or paid by an AIDS Drug Assistance Program.91
Incurred costs do not include Part D premiums; costs for drugs that are not on the enrollee’s plan
formulary; coverage by other insurance, including group health plans, workers’ compensation,
Part D plans’ supplemental or enhanced benefits, or other third parties; or Patient Assistance
Programs operating outside of Part D. Additional y, while the manufacturer drug discounts count

86 SSA Section 1860D-14(A)(c)(2).
87 CMS, “Part D Senior Savings Model,” https://innovation.cms.gov/innovation-models/part-d-savings-model. T ext box
is based on CMS payment example in Webinar slide link.
88 T rue out-of-pocket costs are the payments that count toward an enrollee’s Part D out -of-pocket threshold of $6,550
for 2021.
89 CMS, Medicare Prescription Drug Benefit Manual, Chapter 5, “Benefits and Beneficiary Protection,” Section 30,
Rev. September 20, 2011, at http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/
Downloads/MemoPDBManualChapter5_093011.pdf.
90 Added by §3314 of the ACA.
91 Added by §3314 of the ACA.
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toward the TrOOP, federal subsidies for brand-name or generic drugs in the doughnut hole do not
count.
Examples of TrOOP Spending
Consider a non-LIS enrol ee in a 2021 standard plan. To reach the initial coverage limit, the enrol ee would need
to incur TrOOP spending consisting of the $445 deductible and 25% coinsurance or co-payments on total drug
spending up to $4,130 ($921.25 + $445 = $1,366.25). While beneficiaries move into the coverage gap on the basis
of plan plus enrol ee spending, beneficiaries move out of the coverage gap and into the catastrophic portion of the
benefit based on enrol ee out-of-pocket spending (which includes the value of manufacturer discounts.) The
beneficiary would now face about $5,183.75 of additional out-of-pocket spending in the doughnut hole before he
or she would reach the catastrophic threshold (a total of $6,550 in out-of-pocket spending).
While in the coverage gap in 2021, a beneficiary would pay 25% of the cost of brand-name drugs, including any
pharmacy dispensing fees. The manufacturer provides a 70% discount on the negotiated price of brand-name drugs
and biologic and biosimilar products, which under law counts toward TrOOP. The federal government provides a
subsidy of 5% of the cost of the brand-name drug, which would not count toward TrOOP.
A beneficiary who purchases generic drugs in the coverage gap in 2021 would pay 25% of the cost of drugs,
including pharmacy dispensing fees, which would count toward TrOOP. The federal government provides a 75%
coverage subsidy that does not count toward TrOOP.
In one example,92 the beneficiary buys a brand-name drug that has a negotiated price of $60 and a $2 pharmacy
dispensing fee. The total cost is $62. The beneficiary wil pay 25% of the cost of the drug and dispensing fee ($62 ×
0.25 = $15.50). The manufacturer discount reduces the price of the drug by $42 (70% of the $60 negotiated
price). In this case, TrOOP wil be $57.50 (the $15.50 beneficiary price, including a portion of the dispensing fee,
plus the $42 manufacturer discount). The remaining $4.50 ($3.00 cost of the drug and $1.50 of the dispensing fee)
is borne by the plan and does not count toward TrOOP.
In another example, the beneficiary buys a generic drug. The price for the generic drug is $20 and the dispensing
fee is $2. The beneficiary wil pay 25% of the cost of the generic drug plus the pharmacy fee ($22 × 0.25 = $5.50).
The $5.50 wil count as TrOOP. The government’s 75% coverage portion wil not count as TrOOP.
In 2018, about 8% of Part D enrollees exceeded the out-of-pocket threshold and reached the
catastrophic phase of the benefit. These enrollees accounted for about 60% of total Part D
spending on basic benefits that year.93 Medicare picks up a larger share of spending (reinsurance)
for enrollees who reach the catastrophic threshold. Spending for reinsurance is now the largest
share of Medicare spending for the Part D program. According to MedPAC, 71% of enrollees
reaching the catastrophic portion of the benefit in 2018 were receiving the LIS. Although LIS
enrollees were more likely to reach the catastrophic phase of the benefit, the LIS share of
enrollees reaching the catastrophic threshold has declined from more than 80% in 2010 and
earlier years. The change reflects more rapid growth in Part D enrollment by non-LIS individuals,
as wel as an increase in the average price of drugs used by the non-LIS population.94
Low-Income Subsidies
Medicare Part D provides subsidies to assist low-income beneficiaries with premiums and cost
sharing.95 LIS cost sharing varies according to a beneficiary’s assets and income and, also,

92 Example is based on “CMS, “Costs in the Coverage Gap,” at https://www.medicare.gov/drug-coverage-part-d/costs-
for-medicare-drug-coverage/costs-in-the-coverage-gap.
93 MedPAC, July 2020 Data Book, Health Care Spending and the Medicare Program , Chart 10-19, at
http://www.medpac.gov/-documents-/data-book. T he data are the most recent available.
94 Ibid, Chart 10-20.
95 While assistance with Part B premiums and cost sharing for low-income beneficiaries is primarily paid for by state
Medicaid programs (through their Medicare Savings Programs), the Part D low-income subsidy is federally funded.
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whether a beneficiary is institutionalized, or is receiving community-based care. Full-subsidy
eligibles96 have no deductible, minimal cost sharing during the initial coverage period and
coverage gap, and no cost sharing above the catastrophic threshold. Additional y, full-benefit dual
eligibles who are residents of medical institutions or nursing facilities have no cost sharing. (See
“Eligibility for Low-Income Assistance.”)
Premium Assistance
Full-Subsidy-Eligible Individuals
Low-income beneficiaries who qualify for a full subsidy do not pay monthly plan premiums if
they enroll in certain, lower-cost Part D plans. A PDP qualifies as a lower-cost or “benchmark”
plan if it offers basic Part D coverage and charges premiums equal to, or below, a regional low-
income premium subsidy amount calculated by CMS each year. (See “Availability of Low-
Income Plans.”) If a LIS beneficiary selects a plan with a premium that is higher than the regional
benchmark, he or she must pay the extra cost.
Partial-Subsidy-Eligible Individuals
Partial-subsidy-eligible individuals receive premium assistance based on an income sliding scale,
as specified in Table 5.
Table 5. Sliding-Scale Premium for Partial-Subsidy-Eligible Individuals
Percentage of
Premium Subsidy
Federal Poverty Level (FPL) and Asset Thresholds
Amount
Income up to or at 135% FPL; assets that do not exceed the calendar year resource limits
100%
for individuals or couples.
Income above 135% FPL but at or below 140% FPL; assets that do not exceed the calendar
75%
year resource limits for individuals or couples.
Income above 140% FPL but at or below 145% FPL; assets that do not exceed the calendar
50%
year resource limits for individuals or couples.
Income above 145% FPL but below 150% FPL; assets that do not exceed the calendar year
25%
resource limits for individuals or couples.
Source: SSA Program Operations Manual, Section HI 03030.025, “Resource Limits for Subsidy Eligibility,” at
https://secure.ssa.gov/poms.nsf/lnx/0603030025.
Cost-Sharing Subsidies
Cost-sharing subsidies for LIS enrollees are linked to the standard prescription drug benefit but
represent the maximum cost sharing that can be applied to LIS enrollees in any type of Part D
plan. Full-subsidy eligibles have no deductible, minimal cost sharing during the initial coverage

96 A full-benefit dual eligible is someone who is qualified for full Medicaid benefits. Full-benefit beneficiaries may be
deemed full-subsidy Medicare Part D recipients if they meet certain guidelines. For definition of full-subsidy eligible
benefit, see CMS, Medicare Part D Prescription Drug Manual, Chapter 13, “ Premium and Cost -Sharing Subsidies for
Low-Income Individuals,” Section 50.2.1, Rev. October 1, 2018, at https://www.cms.gov/Medicare/Prescription-Drug-
Coverage/PrescriptionDrugCovContra/Downloads/Chapter-13-Premium-and-Cost -Sharing-Subsidies-for-Low-Income-
Individuals-v09-14-2018.pdf.
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period and coverage gap, and no cost sharing above the catastrophic threshold. Partial-subsidy
individuals have higher cost sharing. (See Table 6.)
Other specific policies related to cost sharing during the initial coverage period and coverage gap
for dual eligibles include the following:97
 Full-benefit, dual eligibles who are residents of medical institutions or nursing
facilities have no cost sharing, with some exceptions. The ACA expanded the LIS
subsidy so that beneficiaries receiving home and community-based services in
lieu of institutional care also have no cost sharing.
 Other full-benefit, dual-eligible individuals with incomes up to or at 100% of
FPL pay $1.30 for a generic drug prescription or preferred multiple-source drug
prescription and $4.00 for any other drug prescription up to the catastrophic
threshold in 2021.
 Full-subsidy-eligible individuals with incomes between 100% and 150% of FPL
have cost sharing for al drug costs, up to the catastrophic limit of $3.70 for a
generic drug or preferred multiple-source drug and $9.20 for any other drug in
2021.
Partial-subsidy-eligible individuals have a $92 deductible in 2021, 15% coinsurance for al costs
up to the catastrophic trigger, and cost sharing above this level of $3.70 for a generic drug
prescription or preferred multiple source drug prescription and $9.20 for any other drug
prescription.
Each year, cost-sharing amounts for full-benefit dual eligibles up to or at 100% of FPL are
updated by the annual percentage increase in the CPI-U. The cost-sharing amounts for al other
beneficiaries, and the deductible amount for other full- and partial-subsidy-eligible individuals,
are increased by the annual percentage increase in per capita beneficiary expenditures for Part D-
covered drugs.

97 CMS, Medicare Part D Prescription Drug Manual, Chapter 13, “Premium and Cost -Sharing Subsidies for Low-
Income Individuals,” Section 60, Rev. October 1, 2018, at https://www.cms.gov/Medicare/Prescription-Drug-
Coverage/PrescriptionDrugCovContra/Downloads/Chapter-13-Premium-and-Cost -Sharing-Subsidies-for-Low-Income-
Individuals-v09-14-2018.pdf.
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Table 6. Part D Standard Benefits, 2021
(by per capita drug spending category)

Low-Income Subsidy (LIS)-Eligible Individuals

Non-LIS Beneficiaries
Full-Subsidy-Eligible
Other Subsidy Eligible
Total drug
Spending
(Dollar
Paid by Part
Paid by
Paid by
Paid by
Paid by
Ranges)
D
Enrollee
Part D
Paid by Enrollee
Part D
Enrollee
$0 up to $445
0%
$445
$445
0
$353
$92
Deductible
Between
75%
25%
100% less
Institutionalized
85%
15%
Deductible and
enrol ee cost
duals: $0
Initial
sharing
Duals up to or at
Coverage
100% of FPL:
Limit
$1.30/$4.00a
($445.01-
Others:
$4,130)
$3.70/$9.20
Coverage
5% (plus 70%
25% for
100% less
Institutionalized
85%
15%
Gap
manufacturer
brand name
enrol ee cost
duals: $0
Between Initial
discount) for
drugs and
sharing
Duals under 100% of
Coverage
brand name
25% for
FPL: $1.30/$4.00a
Limit ($4,130)
drugs and
generic drugs
Others:
and
75% for
Catastrophic
generic drugs
$3.70/$9.20b
Threshold
(about
$10,048.39)
Over
95%
5%
100%
$0
100% less
$3.70/$9.20c
Catastrophic
enrol ee
Threshold
cost
sharing
Source: CMS, “Announcement of Calendar Year (CY) 2021 Medicare Advantage Capitation Rates and Medicare
Advantage and Part D Payment Policies and Final Cal Letter.” FPL is federal poverty level. Duals refers to dual
eligibles.
a. Maximum of $1.30 per prescription for generic or preferred drugs that are multiple source drugs; $4.00 per
prescription for other drugs.
b. Maximum of $3.70 per prescription for generic or preferred drugs that are multiple source drugs; $9.20 per
prescription for other drugs.
c. Cost sharing is the lower of 5% coinsurance or Minimum of $3.70 per prescription for generic or preferred
drugs that are multiple source drugs; $9.20 per prescription for other drugs.
Employer Subsidies for Retiree Drug Coverage
The MMA included provisions designed to encourage employers to continue to offer prescription
drug benefits to their Medicare-eligible retirees. Employers have several options for providing
such coverage.
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Retiree Drug Subsidy
Employers and union groups that provide prescription drug insurance to Medicare-eligible, retired
workers may apply for federal retiree drug subsidies (RDS).98 To qualify, an employer or union
must offer drug benefits that are actuarial y equivalent to, or more generous than, standard Part D
prescription drug coverage. Sponsors must submit applications for CMS approval at least 90 days
prior to the beginning of a plan year.
Medicare provides payments for eligible retirees, defined as individuals who are entitled to
Medicare benefits under Part A and/or are enrolled in Part B, and who live in the service area of a
Part D plan. An individual must be a retired participant in an employer- or union-qualified group
health plan or the Medicare-enrolled spouse or dependent of a retired participant. A retiree health
plan cannot receive a subsidy for a current worker or an individual who is enrolled in a Part D
plan. (An employer or union does have the option of sponsoring its own Part D plan [see
“Employer Group Waiver Plans” section, below].)
For each retiree enrolled in a qualified plan in 2021, sponsors receive a federal subsidy equal to
28% of gross prescription drug costs between a threshold of $445 and a cost limit of $9,200.99
The retiree subsidies are designed to encourage employers to maintain drug coverage, and have
general y been less expensive for Medicare than would be enrolling these beneficiaries in a Part
D drug plan. In 2020, the average annual RDS was forecast to be about $550 per beneficiary
compared to average Medicare per beneficiary costs of $2,154 for Part D beneficiaries.100
Prior to enactment of the ACA, group health plans offering qualified drug coverage were eligible
to receive the Medicare RDS and, in addition, claim a federal tax deduction for the subsidy, along
with the rest of the plan’s spending on retiree health benefits. The ACA prohibited companies,
beginning in 2013, from claiming a tax deduction for the Medicare RDS.101 In addition, retiree
health plans are not eligible for ACA manufacturer discounts on brand-name drugs through the
coverage gap discount program. These changes, which result in higher relative costs for retiree
plans, have helped prompt employers to move away from the RDS program. The Medicare
Trustees predict that the share of beneficiaries covered through the retiree drug subsidy wil
decline from about 20% of Part D enrollment in 2010 to about 2% in 2029.102
Employer Group Waiver Plans
As fewer employers use the Part D retiree drug subsidy, a growing number have provided drug
benefits to retirees, through Part D Employer Group Waiver Plans (EGWPs).103 EGWPs are
sponsored by large employers, state and local governments, school districts and other entities.

98 CMS, “Retiree Drug Subsidy,” at https://www.rds.cms.hhs.gov/.
99 CMS, “Announcement of Calendar Year (CY) 2021 Medicare Advantage Capitation Rates and Medicare Advantage
and Part D Payment Policies and Final Call Letter,” p. 72.
100 2020 Medicare T rustees Report , T able IV.B9, p. 144, and T able V.D1, p. 188, at https://www.cms.gov/files/
document/2020-medicare-trustees-report.pdf.
101 Internal Revenue Service, “Frequently Asked Questions: Retiree Drug Subsidy,” at https://www.irs.gov/newsroom/
frequently-asked-questions-retiree-drug-subsidy.
102 2020 Medicare T rustees Report , T able IV.B7, p. 144.
103 CMS, Medicare Prescription Drug Benefit Manual, Chapter 12, “Employer/Union Sponsored Group Health Plans,”
Rev. November 7, 2008, at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/
PartDManuals. Employers and unions may offer EGWP PDPs only to retirees, while MA EGWPs, including MA -PD
plans, may be offered to retirees or current workers.
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EGWPs qualify for waivers of Medicare regulations in areas including enrollment, marketing,
premiums, and benefit design. The waivers al ow plan sponsors (employers or unions) to tailor
Medicare EGWPs to their distinct retiree populations.
In general, CMS may waive or modify Medicare requirements that “hinder the design of, the
offering of, or the enrollment in” employer-sponsored group Medicare plans.104 More specificaly,
CMS may provide waivers of Medicare regulations to al ow employers and unions to do the
following:105
 restrict enrollment in an EGWP to the employer’s own retirees and eligible
spouses and dependents of the retirees;
 subsidize EGWP premiums and set different premiums in different geographic
areas of the country;
 offer national plans rather than plans in specific geographic regions;
 provide smal er networks of contracted pharmacies than are required for other
Part D plans, so long as the networks are adequate to meet enrollee needs;
 offer a different benefit structure than Part D plans, so long as the EGWP meets
requirements for the gross value of the overal benefit; and
 hold annual open enrollment periods at different times than the national Medicare
open enrollment period for MA and Part D (October 15 through December 15).
Employers and unions may offer EGWPs under direct contract with CMS or through third parties
that design and administer the benefit.106 EGWPs must comply with Part D requirements to offer
an adequate formulary, provide lower cost sharing for LIS enrollees, and other enrollee
protections. EGWP sponsors are not required to submit annual bids to CMS on the grounds that
the process of putting together a bid could “hinder the design, offering, or enrollment in
employer-sponsors coverage given the additional complexity and level of effort that would be
required.”107 EGWPs instead are paid by CMS based on the national average bid of other Part D
plans.
In addition, the coverage gap manufacturer discount is calculated differently for EGWPs than for
regular Part D plans. In 2012, CMS issued final rules that changed the definition of Part D
supplemental benefits to exclude supplemental benefits offered through EGWPs.108 Instead, any
supplemental benefits offered as part of an EGWP are considered non-Medicare benefits and are

104 Specific authority for EGWPs can be found at SSA Sections 1857(i) and 1860D-22(b).
105 CMS, “Approved Part D Waivers,” https://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/EGWP-Waivers.pdf.
106 Secondary Payer Manual on the CMS website at http://www.cms.hhs.gov/Manuals/IOM/list.asp.
107 CMS, “Insurance Standards Bulletin Series: Employer Prescription Drug Coverage that Supplemental Medicare Part
D Coverage provided through an Employer Group Waiver Plan,” January 23, 2013. CMS, “Part C and D User Call,”
November 6, 2013, at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/PartD-
EGWP.
108 CMS, “Medicare Program; Changes to the Medicare Advantage an d the Medicare Prescription Drug Benefit
Programs for Contract Year 2013 and Other Changes; Final Rule,” 77 Federal Register, p. 22081, April 12, 2012, at
https://www.govinfo.gov/content/pkg/FR-2012-04-12/html/2012-8071.htms. In its rulemaking, CMS amended 42 CFR
§423.100 to include in the definition of “ other health or prescription drug coverage” any coverage offered by EGWPs
other than basic prescription drug coverage. CMS also made a conforming change to the definition of supplemental
benefits in §423.100 to exclude benefits offered by EGWPs. “ With respect to EGWPs, this would mean that a
manufacturer discount always would be applied before any additional coverage beyond Part D, whether offered by the
EGWP itself or by another party,” according to CMS.
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treated instead as other health insurance that pays in a secondary position to Medicare. That
means that manufacturer discounts in the coverage gap for EGWP plans are calculated based on
the standard Part D benefit without taking into account the EGWP’s supplemental benefits.109
This al ows sponsors to offer EGWP plans that offer lower cost sharing in the coverage gap than
the standard benefit of 25% but stil collect the maximum manufacturer discount. A recent
MedPAC analysis found EGWPs made up about 16% of Part D enrollment in 2018 but accounted
for 45% of manufacturer discounts.110
Drug Coverage
In order for a drug to be paid by Medicare’s prescription drug benefit, it must be a drug that is
covered under Part D and included in the formulary of an individual’s Part D plan. (See
“Formularies.”) The MMA defines covered Part D drugs as (1) outpatient prescription drugs
approved by the Food and Drug Administration (FDA), and used for a medical y accepted
indication; (2) biological products that may be dispensed only upon a prescription and that are
licensed under the Public Health Service (PHS) Act and produced at a licensed establishment; (3)
insulin (including medical supplies associated with the injection of insulin); and (4) vaccines
licensed under the PHS Act. Drugs can also be treated as part of a plan’s formulary as the result
of a beneficiary coverage determination or appeal.
Certain drugs are excluded from Part D coverage by law, including drugs specifical y excluded
from coverage under Medicaid. The exclusion applies to (1) drugs used for anorexia, weight loss,
or weight gain; (2) fertility drugs; (3) drugs used for cosmetic purposes or hair growth; (4) drugs
for symptomatic relief for coughs and colds; (5) prescription vitamins and minerals; and (6)
covered drugs when the manufacturer requires, as a condition of sale, that associated tests be
purchased exclusively from the manufacturer. Drugs used for the treatment of sexual or erectile
dysfunction are excluded from coverage unless they are used to treat another condition for which
the drug has been approved by the FDA.111
Some previously barred drugs are now covered. Since January 1, 2013, Part D plans have been
required to include benzodiazepines in their formularies.112 Barbiturates must be included in plan
formularies for an indication of epilepsy, cancer, or chronic mental health disorders. Effective in
January 2014, the ACA removed smoking cessation agents, barbiturates and benzodiazepines
from the list of drugs al owed to be excluded from Medicaid coverage. The ACA provisions
meant that Part D restrictions on barbiturate coverage (i.e., limiting the drugs to treatment of
epilepsy, cancer, or chronic mental health disorders) were ended.113

109 In 2014, CMS published a rule requiring EGWPs to ensure that any supplemental benefits comply with any
applicable requirements for issuance under state insurance laws and/or ERISA rules (see January 25, 2013 Insurance
Bulletin from the Center for Consumer Information and Insurance Oversight: http://www.cms.gov/cciio/resources/
Regulations-and-Guidance/index.html#Health Market Reforms).
110 MedPAC, Report to the Congress: Medicare Payment Policy, March 13, 2020, p. 416, at http://medpac.gov/docs/
default-source/reports/mar20_medpac_ch14_sec.pdf?sfvrsn=0.
111 CMS, Medicare Prescription Drug Benefit Manual, Chapter 6, “Part D Drugs and Formulary Requirements,”
Section 20.1, Rev. January 15, 2016, at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/Part-D-Benefits-Manual-Chapter-6.pdf.
112 T hese changes were required by Section 175 of MIPPA; P.L. 110-275.
113 CMS, “ Announcement of Calendar Year (CY) 2014 Medicare Advantage Capitation Rat es and Medicare Advantage
and Part D Payment Policies and Final Call Letter,” April 1, 2013, pp. 152-153, at http://www.cms.gov/Medicare/
Health-Plans/MedicareAdvtgSpecRateStats/downloads/Announcement2014.pdf.
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If a state covers excluded drugs for Medicaid beneficiaries, it must also cover them for dual
eligibles in cases where the drugs are determined to be medical y necessary. Dual eligibles may
therefore receive coverage from Medicaid for some drugs that are excluded from Medicare.
Additional y, a Part D sponsor may elect to include one or more of these drugs in an enhanced
Part D plan; however, no federal subsidy is available for the associated costs.
Drugs Covered by Other Parts of Medicare
Part D drug plans are prohibited from covering drugs covered by other parts of Medicare. This
includes prescription medications provided during a stay in a hospital or skil ed nursing facility
that are paid for by the Part A program, and the limited circumstances when Part B covers
prescription drugs. Part B-covered drugs include drugs that are not usual y self-administered and
are provided incident to a physician’s professional services or drugs necessary for the proper
functioning of Part B durable medical equipment. These include such things as
immunosuppressive drugs for persons who have had a Medicare-covered transplant;
erythropoietin (an anti-anemia drug) for persons with end-stage renal disease; oral anticancer
drugs; drugs requiring administration via a nebulizer or infusion pump in the home; and certain
vaccines (influenza, pneumococcal, and hepatitis B for intermediate- or high-risk persons).114 As
part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136),
Congress specified that any Coronavirus Disease 2019 (COVID-19) vaccine would be covered
under Medicare Part B.115
Formularies
Prescription drug plans operate formularies, which are lists of drugs that a plan chooses to cover
and the terms under which they are covered. This means that plans can choose to cover some, but
not al , FDA-approved prescription drugs, within set program standards.
A Part D sponsor’s formulary must be developed and reviewed by a special CMS-approved
Pharmacy and Therapeutics (P&T) Committee.116 A majority of the committee members must be
practicing physicians or practicing pharmacists and the committees must each include one
physician and one pharmacist who are experts in caring for elderly or disabled individuals.
Committees are to base decisions on the strength of scientific evidence and standards of practice
when developing and reviewing formularies. CMS in 2016 strengthened conflict-of-interest
provisions for P&T committees in Medicare Part D in response to concerns raised by the
Department of Health and Human Service (HHS) Office of Inspector General.117

114 For an examination of Part D vs. Part B coverage issues see CMS, Medicare Prescription Drug Benefit Manual,
Chapter 6, “Part D Drugs and Formulary Requirements,” Appendix C, Rev. January 15, 2016, at https://www.cms.gov/
Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/Downloads/Part-D-Benefits-Manual-Chapter-6.pdf.
115 CRS Report R46334, Selected Health Provisions in Title III of the CARES Act (P.L. 116-136). See Section 3713.
116 CMS, Medicare Prescription Drug Benefit Manual, Chapter 6, “Part D Drugs and Formulary Requirements”
Section 30.1, Rev. January 15, 2016, at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/Part-D-Benefits-Manual-Chapter-6.pdf. T he committee may be set up by a
sponsor or a pharmacy benefit manager acting on behalf of the plan sponsor. Committee members must sign conflict of
interest statements detailing economic or other relationships with entities affected by drug coverage decisions that
could influence committee decisions.
117 HHS OIG, “Gaps in Oversight of Conflicts of Interest in Medicare Prescription Drug Decisions,” March 2013, at
https://oig.hhs.gov/oei/reports/oei-05-10-00450.asp. See also CMS, “ Medicare Program; Contract Year 2016 Policy
and T echnical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs,” 80 Federal
Register, February 12, 2015, p. 7951, at https://www.federalregister.gov/documents/2015/02/12/2015-02671/medicare-
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CMS requires that P&T committees “must review for clinical appropriateness the practices and
policies for formulary management activities, such as prior authorizations, step therapies, quantity
limitations, generic substitutions, and other drug utilization activities that affect enrollee access.”
However, P&T committee recommendations regarding these activities are advisory only and not
binding on the Part D sponsors.118 (See “Drug Utilization.”)
Formulary Categories and Classes
Formulary drugs are grouped into categories and classes of products that work in a similar way or
are used to treat the same condition. The MMA required CMS to ask the United States
Pharmacopeial Convention (USP)119 to develop a list of categories and classes for plans and to
periodical y revise such classifications. A plan formulary must include at least two drugs in each
category or class used to treat the same medical condition (unless only one drug is available in the
category or class, or two drugs are available but one drug is clinical y superior). The two-drug
requirement must be met by providing two chemical y distinct drugs. (Plans cannot meet the
requirement by including two dosage forms or strengths of the same drug or a brand-name drug
and its generic equivalent.)
Six Classes of Clinical Concern
In general, Part D drug plans are required to operate formularies that cover at least two drugs in
each drug class and category. However, Part D plans are required to cover substantial y al
available drugs in the following six categories or classes: immunosuppressant, antidepressant,
antipsychotic, anticonvulsant, antiretroviral, and antineoplastic.120 Plan sponsors are not al owed
to steer beneficiaries who are already using these drugs toward alternative therapies via policies
such as requiring prior authorization or step-therapy mandates (see “Drug Utilization”). This
protected classes requirement, which started as CMS guidance, was designed to mitigate the risk
that drug therapy could be interrupted for vulnerable populations.
The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA; P.L. 110-275) and
the ACA codified the six protected classes requirement, while directing the HHS Secretary to
spel out more specific criteria for identifying drug categories or classes of clinical concern.121 As
part of this process, the statutes al ow HHS to revamp the current protected classes and
categories, including permitting Part D sponsors to exclude certain drugs from their formularies

program-contract-year-2016-policy-and-technical-changes-to-the-medicare-advantage-and-the/.
118 CMS, Medicare Prescription Drug Benefits Manual, Chapter 6, “ Part D Drugs and Formulary Requirements,”
§30.1.5, Rev. January 15, 2016, at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/Part-D-Benefits-Manual-Chapter-6.pdf; and SSA 1860D-4(b)(3).
119 T he United States Pharmacopeial Convention (USP) is a nonprofit organization that sets standards for the identity,
strength, quality, and purity of medicines, food ingredients and dietary supplements.
120 CMS, Medicare Prescription Drug Benefit Manual, Chapter 6, “Part D Drugs and Formulary Requirements,”
Section 30.2.5, Rev. January 15, 2016, at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/Part-D-Benefits-Manual-Chapter-6.pdf.
121 T he MIPPA required that, beginning with plan year 2010, the HHS Secretary identify categories and cla sses of
drugs for which both of the following criteria are met: (1) restricted access to drugs in the category or class would have
major or life threatening clinical consequences for individuals who have a disease or disorder treated by the drugs in
such category or class and (2) there is significant clinical need for such individuals to have access to multiple drugs
within a category or class due to unique chemical actions and pharmacological effects of the drugs within the category
or class. T he ACA specified that the six drug categories or classes of clinical concern would remain in place until the
HHS Secretary established new criteria to identify drug categories or classes of clinical concern under §1860D–
4(b)(3)(G) of the Social Security Act through no tice and rulemaking.
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(or limit access to such drugs through utilization management or prior authorization
restrictions).122 In November 2018, CMS published a proposed rule that would have given Part D
plan sponsors more authority to use step therapy and prior authorization to control enrollee
utilization in the protected classes.123 In May 2019, CMS announced it would not implement most
of the proposed changes but instead would put into regulatory form existing sub-regulatory policy
regarding utilization requirements for protected class drugs. Under the final rules, plans may use
step therapy and prior authorization for enrollees beginning a course of therapy with drugs in the
six protected classes to confirm a drug’s intended use is for a protected class indication; to ensure
clinically appropriate use; and to promote utilization of preferred formulary alternatives , or a
combination thereof. Step therapy and prior authorization are not al owed for antiretroviral
(HIV/AIDs) medications.124 In the Federal Register notice announcing the final rules, CMS said
it decided against a broader expansion of step therapy because the risks of inappropriately
interrupting therapy for stabilized patients currently using a drug outweighed the potential clinical
benefits and cost savings.125
Vaccines
The Tax Relief and Health Care Act of 2006 (P.L. 109-432) required that Part D plans, beginning
in 2008, include al commercial y available vaccines in their drug formularies, with the exception
of vaccines covered under Medicare Part B. Medicare Part B general y covers vaccinations for
influenza, pneumonia, and the Hepatitis B vaccine for intermediate to high-risk cases. Part B wil
also cover immunizations for patients exposed to an injury or disease, such as tetanus shots.126 In
addition, under the 2020 CARES Act, Medicare Part B wil cover a vaccine for COVID-19 when
a vaccine becomes available.127 The Part B coverage designation means a COVID-19 vaccine
cannot be covered under Part D.
The Tax Relief and Health Care Act of 2006 modified the definition of a Part D drug to require
plans to cover the costs for administering Part D-covered vaccines, as wel as the vaccine itself.

122 In January 2014, CMS issued proposed rules that would have narrowed the protected classes to anticonvulsants,
antiretrovirals, and antineoplastics, beginning in plan year 2015 . Antipsychotic drugs would have continued to be
treated as a class of clinical concern in 2015 and until CMS determined that it was appropriate to change the c riteria for
these products. In May 2014, CMS announced it would not finalize the proposed regulations relating to the six
protected classes. See CMS, “ Medicare Program; Contract Year 2015 Policy and T echnical Changes to the Medicare
Advantage and the Medicare Prescription Drug Benefit Programs; Proposed Rule,” 79 Federal Register, pp. 1936 and
2063, January 10, 2014, at http://www.gpo.gov/fdsys/pkg/FR-2014-01-10/pdf/2013-31497.pdf.
123 CMS, “ Modernizing Part D and Medicare Advantage T o Lower Drug Prices and Reduce Out -of-Pocket Expenses,”
Proposed Rule, 83 Federal Register, November 30, 2018, p. 62152; https://www.federalregister.gov/documents/2018/
11/30/2018-25945/modernizing-part-d-and-medicare-advantage-to-lower-drug-prices-and-reduce-out-of-pocket -
expenses.
124 Ibid, §30.2.5. Part D sponsors may not implement prior authorization or step therapy requirements designed to steer
enrollees already taking a drug to a preferred alternatives within the six classes. T his includes beneficiaries already
enrolled in a Part D plan as well as new enrollees who were actively taking drugs in any of the six classes of clinical
concern prior to enrollment into the plan. If a sponsor cannot determine at the point of sale whether an enrollee is
currently taking a drug (e.g., new enrollee filling a prescription for the first time), the sponsor is to treat such enrollee
as though he or she is currently taking the drug.
125 CMS, “ Modernizing Part D and Medicare Advantage T o Lower Drug Prices and Reduce Out -of-Pocket Expenses,”
Final Rule, 84 Federal Register, May 23, 2019, p. 23840, at https://www.federalregister.gov/documents/2019/05/23/
2019-10521/modernizing-part-d-and-medicare-advantage-to-lower-drug-prices-and-reduce-out-of-pocket-expenses.
126 CMS, Medicare Learning Network, “Medicare Part D Vaccines,” June 2019, at https://www.cms.gov/Outreach-and-
Education/Medicare-Learning-Network-MLN/MLNProducts/Downloads/Vaccines-Part -D-Factsheet -ICN908764.pdf.
127 CRS Report R46334, Selected Health Provisions in Title III of the CARES Act (P.L. 116-136).
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CMS considers the negotiated price for a Part D vaccine to include the vaccine ingredient cost, a
dispensing fee (if applicable), sales tax (if applicable), and a vaccine administration fee.128
CMS policy is that Part D vaccines, including administration costs, are to be bil ed on one claim.
The policy applies to providers both in- and out-of-network. Unlike Part B vaccines, which are
bil ed directly to Medicare, Part D claims are paid by the insurance provider; therefore the
entity/individual administering the Part D vaccine, such as a physician, may not be able to
directly bil the Part D sponsor for the vaccine and administration. In some instances, patients
must pay a physician for a vaccination up front, and then submit the bil to their Part D plan.
CMS has issued guidance to plans regarding alternative bil ing options, such as al owing in-
network pharmacists to administer vaccinations and to directly bil Part D, or having physicians
electronical y submit claims to Part D plans.129 In an effort to increase vaccination rates, CMS has
encouraged Part D sponsors to offer a $0 vaccine tier or to put vaccines on a formulary tier with
low cost -sharing.130
Plan-Year Formulary Changes
Part D plans may alter their formularies from year to year. Plans are also al owed, in limited
circumstances, to make changes to their formularies within a plan year.131 Plans general y may
not change therapeutic categories and classes of drugs within a plan year, except to account for
new therapeutic uses or to add newly approved Part D drugs. If Part D plans remove drugs from
their formularies during a plan year (or change cost-sharing or access requirements), they must
provide timely notice to CMS, affected enrollees, physicians, pharmacies, and pharmacists.
Since 2019, Part D sponsors have been al owed to immediately remove brand-name drugs from a
formulary (or change the cost-sharing tier) during a plan year if they replace the brand-name
product with a therapeutical y equivalent generic that is placed on the same or lower cost-sharing
tier and if the generic is subject to the same or less restrictive utilization criteria than the brand-
name drug. To qualify for substitution, the new generic must have been released to the market
after the initial formulary was submitted. Plans are not required to give prior notice of the
formulary change but (1) must general y advise enrollees in plan documents, such as annual
formularies, that such changes may occur without a specific advance notice and (2) must tel
affected enrollees about any substitutions that do occur.132
Other formulary changes may be made in the following circumstances:
 Plans may immediately remove drugs from their formularies that are deemed
unsafe by the FDA or are pulled from the market by their manufacturers. Plans
do not have to provide prior notice of such actions, but must provide
retrospective notice to CMS and other affected parties.

128 Ibid. p.2.
129 Ibid.
130 CMS, “Announcement of Calendar Year (CY) 2019 Medicare Advantage Capitation Rates and Medicare Advantage
and Part D Payment Policies and Final Call Letter,” p. 230, April 2, 2018, at https://www.cms.gov/Medicare/Health-
Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2019.pdf.
131 CMS, Medicare Prescription Drug Benefit Manual, Chapter 6, “Part D Drugs and Formulary Requirements,”
Section 30.3, Rev. January 15, 2016, at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/Part-D-Benefits-Manual-Chapter-6.pdf.
132 CMS, “Medicare Program: Contract Year 2019 Policy and T echnical Changes to Medicare Advantage, Medicare
Cost Plan, Medicare Fee-for-Service, Medicare Prescription Drug Benefit Programs, and PACE Program,” 83 Federal
Register, April 16, 2018, p. 16604, at https://www.gpo.gov/fdsys/pkg/FR-2018-04-16/pdf/2018-07179.pdf.
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 After March 1 each year, Part D sponsors may make maintenance changes to
their formulary, such as replacing brand name with new generic drugs or
modifying formularies as a result of new information on drug safety or
effectiveness.
 Plans with CMS approval may remove drugs from a formulary, move covered
drugs to a less-preferred tier status, or add utilization management requirements
in accordance with approved procedures after 30 days advance notice.133
Transition Policies
CMS established transition standards to ensure that enrollees who move to a new plan do not
abruptly lose coverage for drugs used in ongoing therapy—for example, in a case where a new
plan does not cover a drug a beneficiary has been using. Transition policies also cover cases
where enrollees are affected by formulary changes in their current plan from one year to the
next.134 In such cases, a beneficiary can request that his or her physician check to see if the
prescription can be switched to a similar drug on the new formulary. If the physician determines
that a specific drug is medical y necessary, the doctor may request that the plan make an
exception to its policy.
Plans are required to continue a beneficiary’s previous prescription during the first 90 days of the
calendar year. Any refil must be for an approved month’s supply (unless the prescription is
written for a shorter period) for any drug not on the plan’s formulary.135 The requirement also
applies to drugs that are on a plan’s formulary, but which require prior authorization or step
therapy. Transition policies also cover situations where enrollees undergo changes in the level of
care, such as moving from a hospital to home.
Drug Utilization Management Programs
CMS regulations require that each Part D plan have an appropriate drug utilization management
program that (1) includes incentives to reduce costs when medical y appropriate, and (2)
maintains policies and systems to assist in preventing over-utilization and under-utilization of
prescribed medications.136 Since the Part D program began in 2006, the trend among plans has
been to impose greater cost-sharing and utilization management. In addition, during the past
several years, Congress and CMS have imposed more stringent requirements on plans in an effort

133 Ibid. In most cases, plans may not remove covered Part D drugs from their formularies, or make any change in
preferred or tiered cost -sharing status of a covered Part D drug, between the beginning of the annual coordinated
election period October 15, and 60 days after the beginning of the contract year.
134 For example, if a plan sponsor alters an announced formulary to account for a new drug or therapeutic use.
According to CMS, a minimum of a 108-day look-back (consistent with other reviews) is typically needed to document
ongoing drug therapy.
135 CMS, “Medicare Program: Contract Year 2019 Policy and T echnical Changes to Medicare Advantage, Medicare
Cost Plan, Medicare Fee-for-Service, Medicare Prescription Drug Benefit Programs, and PACE Program,” 83 Federal
Register, April 16, 2018, p. 16604, at https://www.gpo.gov/fdsys/pkg/FR-2018-04-16/pdf/2018-07179.pdf. See also 42
C.F.R. §423.120. T he rule changed the transition requirement to an approved month’s supply (from a 30 -day supply) so
that it will be equivalent to the approved month ’s supply measurement in the applicable plan’s annual bid to provide
Part D services. T he rule also shortened the length of transition prescriptions that are provided to residents of long-term
care facilities to an approved month’s supply.
136 42 C.F.R. §423.153.
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to identify possible program fraud and abuse involving certain prescription drugs, particularly
opioids. (See “Part D Opioid Overutilization Monitoring.”)
Tiered Formularies
Plan D plan sponsors may assign formulary drugs to tiers that correspond to different levels of
cost sharing. In general, this structured pricing encourages use of generic medications by placing
these medicines on the plan tier with the lowest out-of-pocket costs, and discourages the use of
more expensive or less effective drugs by putting them on tiers that require higher out-of-pocket
spending. Plans have some flexibility in structuring the tiers, so long as the overal plan is at least
actuarial y equivalent to a standard Part D plan. In 2021, the typical five-tier formulary design in
Part D includes the following tiers: preferred generics, generics, preferred brands, non-preferred
drugs, and specialty drugs.137
Part D plans are permitted to institute a specialty tier for expensive products (e.g., unique drugs or
biologics). Beneficiaries cannot appeal cost-sharing amounts for drugs placed on a specialty tier.
Plans typical y charge a percentage of the cost of a drug on the specialty tier (coinsurance), rather
than a flat co-payment. To ensure that beneficiaries dependent on specialty drugs are not “unduly
discouraged” from enrolling in tiered plans, CMS has instituted the following conditions: (1) a
plan may have only one specialty tier; (2) a plan with a standard deductible may impose
coinsurance of up to 25% for specialty drugs, while a plan with a reduced or zero deductible may
impose coinsurance of up to 33%, and (3) only drugs with negotiated prices exceeding a set
threshold may be placed on a specialty tier ($670 for a month’s supply for 2021).138 Although
specialty drugs are less than 1% of Part D prescriptions, they are nearly 20% of expenditures.
The specialty tier is not necessarily the tier with the highest coinsurance. Some Part D plans
charge coinsurance greater than 33% for drugs on a non-preferred brand name formulary tier, up
to the initial coverage limit. According to CMS, best practices for developing formularies dictate
that drugs are placed in a non-preferred tier only when drugs that are therapeutical y similar (i.e.,
drugs that provide similar treatment outcomes) are in more preferable positions on the
formulary.139 CMS reviews plan sponsors’ drug tier placement to ensure their formulary does not
substantial y discourage enrollment of certain beneficiaries, such as those with potential y high
drug costs.
Under CMS guidance, plan sponsors offering alternative or enhanced plans that use tiered cost
sharing can offer a non-preferred brand tier or a non-preferred drug tier, but not both. CMS has
warned Part D sponsors that including a significant number of generic drugs on a tier labeled as a
brand tier is misleading and could lead to beneficiary confusion. CMS set a maximum threshold
of 25% generic composition for a non-preferred brand tier starting in 2019.140 CMS reviewed but

137 Juliette Cubanski and Anthony Damico, “Medicare Part D: A First Look at Prescription Drug Plans in 2021,” Kaiser
Family Foundation, October 29, 2020, at https://www.kff.org/medicare/issue-brief/medicare-part -d-a-first-look-at-
medicare-prescription-drug-plans-in-2021/.
138 CMS, “ Updated Contract Year (CY) 2021 Final Part D Bidding Instructions,” May 22, 2020, at
https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/
2021%20mtm%20and%20specialty%20thresholds%20final%20part%20d%20bidding%2005.22.2020_7.pdf . CMS had
issued a proposed rule that would have allowed plans to offer two specialty drug price tiers rather than one. CMS did
not finalize the specialty tier portion of the rule, and instead issued special guidance for 2021.
139 CMS, Medicare Prescription Drug Benefit Manual, Chapter 6, “Part D Drugs and Formulary Requirements,”
Section 30.2.7, Rev. January 15, 2016, at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/Part-D-Benefits-Manual-Chapter-6.pdf.
140 CMS, “Announcement of Calendar Year (CY) 2019 Medicare Advantage Capitation Rates and Medicare Advantage
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did not change its policy in 2020, despite concerns from advocacy groups that placing generics on
non-preferred drug tiers could increase enrollee cost sharing for those generics. CMS noted
“limited instances when Part D sponsors were not including generic alternatives when available.”
CMS said it would continue to monitor the issue.141
Other Drug Utilization Controls
Other utilization restrictions include (1) prior authorization, in which a beneficiary, with
assistance of a prescribing physician, must obtain a plan’s approval before it wil cover a
particular drug; (2) step therapy, where a beneficiary must first try a generic or less expensive
drug, or a drug that a plan has deemed to be therapeutical y equivalent to a prescribed drug, rather
than the drug that was original y prescribed; and (3) quantity limits, where the supply of drugs is
initial y limited to reduce the likelihood of waste (e.g., if a drug was not effective for a
beneficiary or had intolerable side effects). A beneficiary who wants his or her plan to waive a
utilization control must provide a physician statement indicating that a prescribed drug and
dosage is medical y necessary and providing a rationale as to why restrictions are not appropriate.
Since 2014, PDPs have been required to apply a daily cost-sharing rate to prescriptions for less
than a 30-day supply of medication (with some exceptions).142 The daily cost-sharing rate is
defined as the monthly co-payment under the enrollee’s Part D plan, divided by 30 or 31 and
rounded to the nearest lower dollar amount. The daily cost-sharing requirement gives
beneficiaries an incentive to ask physicians for shorter prescriptions when trying a medication for
the first time because the Part D sponsor wil charge the lower, pro-rated cost sharing when the
prescription is dispensed. Shorter prescriptions are seen as a means to reduce Part D beneficiary
costs and drug waste in cases where a prescribed drug is ultimately found not to be effective.143
Part D Opioid Overutilization Monitoring
Since 2013, CMS has operated a system to combat inappropriate utilization of opioids in Part D.
First, CMS has encouraged Part D plans to enhance their internal formulary and drug utilization
review programs to provide opioid safety controls at the point of sale, retrospectively review drug
claims to identify beneficiaries at risk of overutilization, and perform case management for
beneficiaries deemed at risk of opioid abuse.144 Second, CMS has operated a program-wide
Overutilization Monitoring System (OMS) to verify that Part D sponsors have established
effective and appropriate opioid management programs. Under the OMS, CMS performs
retrospective reviews of Part D prescription data to identify enrollees at risk of opioid
overutilization. CMS defines at-risk beneficiaries as those using high dosages of opioids (over a

and Part D Payment Policies and Final Call Letter,” p. 229, April 2, 2018, at https://www.cms.gov/Medicare/Health-
Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2019.pdf.
141 CMS, “Announcement of Calendar Year (CY) 2020 Medicare Advantage Capitation Rates and Medicare Advantage
and Part D Payment Policies and Final Call Letter,” p. 210-211, April 1, 2019; https://www.cms.gov/Medicare/Health-
Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2020.pdf.
142 42 C.F.R. §423.153(b)(4)(i).
143 CMS, “Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs for Contract Year
2013 and Other Changes, Final Rule,” 77 Federal Register, April 12, 2012, p. 22126, at http://www.gpo.gov/fdsys/pkg/
FR-2012-04-12/pdf/2012-8071.pdf.
144 CMS, “Announcement of Calendar Year (CY) 2013 Medicare Advantage Capitation Rates and Medicare Advantage
and Part D Payment Policies and Final Call Letter,” April 2, 2012, p. 131, at https://www.cms.gov/Medicare/Health-
Plans/HealthPlansGenInfo/Downloads/2013-Call-Letter.pdf.
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specified period of time) provided by multiple prescribers or pharmacies.145 Part D plans are to
review drug use of beneficiaries identified through the OMS.
The Comprehensive Addiction and Recovery Act of 2016 (CARA; P.L. 114-198) provided Part D
sponsors with authority to limit the number of pharmacies and prescribers that can be used by
enrollees identified as at risk of overutilization of frequently abused drugs, beginning in 2019.
This “lock-in” provision is designed to reduce fraud and abuse by making it easier to control
enrollee opioid use.146
Since 2019, Part D plan sponsors have been al owed to limit an at-risk beneficiary’s access to
frequently abused drugs (initial y defined by CMS as opioids and concurrent use of
benzodiazepines) by imposing a prescription safety edit at the point of sale, and/or by requiring
an at-risk enrollee to obtain opioids only from a selected pharmacy(ies) and/or prescriber(s), after
case management and appropriate notice.147 The OMS and lock-in policies do not apply to Part D
beneficiaries who are being treated for active cancer-related pain, receiving pal iative or end-of-
life care, or are residents of certain long-term care facilities, including those that dispense
frequently abused drugs through a contract with a single pharmacy.148
The 2019 rule149 also seeks to reduce opioid fraud and abuse by barring Part D plans from
covering prescriptions written by physicians or other health care providers who are on a special
CMS preclusion list.150 Starting in 2022, the Substance Use-Disorder Prevention That Promotes
Opioid Recovery and Treatment for Patients and Communities Act (SUPPORT Act; P.L. 115-271)
requires Part D plan sponsors to implement lock-in programs.151
Medication Therapy Management
Part D plans (with some exceptions) must include a Medication Therapy Management (MTM)
program, which is a system of coordinated pharmacy care for patients with multiple medical
conditions who may be seeing a series of practitioners. A MTM program includes medication

145 For a description of the OMS, see “ Announcement of Calendar Year (CY) 2018 Medicare Advantage Capitation
Rates and Medicare Advantage and Part D Payment Policies and Final Call Letter, and see p. 234 of the CMS 2019
Final Call Letter, at https://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/
Announcement2019.pdf.
146 CMS, “Medicare Program; Contract Year 2019 Policy and T echnical Changes to the Medicare Advantage, Medicare
Cost Plan, Medicare Fee-for-Service, the Medicare Prescription Drug Benefit Programs, and the PACE Program,” 83
Federal Register, April 16, 2018, pp. 16442-16480.
147 Ibid. An enrollee may ask for a redetermination of a designation as an at -risk beneficiary.
148 CMS, “ Part D Drug Management Program Policy Guidance,” November 20, 2018. Available at
https://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/RxUtilization.
149 CMS, “Announcement of Calendar Year (CY) 2019 Medicare Advantage Capitation Rates and Medicare Advantage
and Part D Payment Policies and Final Call Letter,” April 2, 2018, p. 239, at https://www.cms.gov/Medicare/Health-
Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2019.pdf. T he requirements also applied to the 2020
plan year.
150 CMS, “ CY 2020 Medication T herapy Management Program Guidance and Submission Instructions,” April 5, 2019,
at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/Downloads/Memo-
Contract -Year-2020-Medication-Therapy-Management-MTM-Program-Submission-v-041019-.pdf. T he preclusion list
covers prescribers, individuals, and entities that (a) are revoked from Medicare, are under an active reenrollment bar,
and for whom CMS determines that the underlying conduct that led to the revocation is detrimental to the best interests
of the Medicare program; or (b) have engaged in behavior for which CMS could have revoked the prescriber,
individual, or entity to the extent applicable if they had been enrolled in Medicare, and CMS determines that the
underlying conduct that would have led to the revocation is detrimental to the best interests of t he Medicare program.
151 CRS Report R45449, The SUPPORT for Patients and Communities Act (P.L.115 -271): Medicare Provisions.
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reviews, patient consultation and education and other services. Each plan’s program must be
reviewed and approved annual y by CMS, and is one of several, required elements that is
considered when CMS evaluates a sponsor’s bid to participate in the Part D program for an
upcoming contract year.
Part D sponsors must automatical y enroll beneficiaries in a MTM program if they meet the
following criteria: (1) they have multiple chronic diseases, with three being the maximum that
can be required; (2) they are taking at least two to eight Part D drugs; and (3) they are likely to
have annual covered drug costs that exceed $4,376 in 2021.152
Part D sponsors also may target beneficiaries with any chronic diseases or with specific chronic
diseases. If plans target beneficiaries with specific diseases, they must include at least five of the
diseases CMS has defined as nine core chronic conditions:153
 Alzheimer’s Disease;
 Chronic Heart Failure;
 Diabetes;
 Dyslipidemia;
 End-Stage Renal Disease (ESRD);
 Hypertension;
 Respiratory Disease (such as asthma or chronic lung disorders);
 Bone Disease-Arthritis; and
 Mental Health (such as depression, schizophrenia, or bipolar disorder).
In addition, the SUPPORT Act adds Part D enrollees identified as at risk for prescription drug
abuse to the list of targeted MTM program enrollees, effective in plan year 2021.154
CMS guidelines state that, once enrolled, beneficiaries should remain in a MTM program for the
course of a plan year, even if they no longer meet one or more of the eligibility criteria. The
MTM program must include a comprehensive review of a beneficiary’s medications, intervention
with both beneficiaries and prescribers, and quarterly, targeted medication reviews.155 In 2015,
CMS announced a five-year MTM pilot program, beginning in 2017, to test whether offering Part
D sponsors additional payment incentives and more regulatory flexibility would lead to improved
outcomes for MTM beneficiaries.156
Part D Plans: Payment and Participation
Medicare Part D participants must obtain coverage through a private insurer, or other entity, that
contracts with Medicare (a plan sponsor). As previously described, beneficiaries may select either

152 CMS, “ 2021 Medication T herapy Management Program Information and Submission In structions,” May 22, 2020,
at https://www.cms.gov/files/document/memo-contract -year-2021-medication-therapy-management-mtm-program-
submission-v-052220.pdf.
153 Ibid.
154 Section 6064 of the SUPPORT Act. CRS Report R45449, The SUPPORT for Patients and Communities Act
(P.L.115-271): Medicare Provisions.
155 Ibid.
156 CMS, “ Part D Enhanced Medication T herapy Management Model,” at https://innovation.cms.gov/initiatives/
enhancedmtm/.
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a stand-alone prescription drug plan or a Medicare Advantage plan that includes prescription drug
coverage along with other Medicare services.157
PDPs are required to be available region-wide within each of the 34 designated PDP regions.
MA-PD plans are general y local, operating on a countywide basis; however, region-wide MA-
PD plans are available in many of the 26 MA regions in the United States. A PDP sponsor may
offer a PDP in more than one region, including al PDP regions; however, the sponsor must
submit separate coverage bids for each region it serves.158 Medicare payments to plans are
determined through a competitive bidding process, and enrollee premiums are tied to plan bids.
Plans bear some risk for their enrollees’ drug spending. (See “Approval of PDP Plans.”)
Approval of PDP Plans
Each year, CMS issues a cal letter to sponsors planning to offer PDP and/or MA plans in the
following year. The 2021 final cal letter was issued in April 2020.159 Potential PDP and MA
sponsors are required to submit bids by the first Monday in June of the year prior to the plan
benefit year. The following information must be included as part of the bid: (1) coverage to be
provided; (2) actuarial value of qualified prescription drug coverage in the region of a beneficiary
with a national average risk profile; (3) information on the bid, including the basis for the
actuarial value, the portion of the bid attributable to basic coverage and, if applicable, the portion
attributable to enhanced coverage, and assumptions regarding the reinsurance subsidy; and (4)
service area. The bid also includes costs (including administrative costs and return on
investment/profit) for which the plan is responsible. The bid must exclude costs paid by enrollees,
payments expected to be made by CMS for reinsurance (although plans provide a separate
estimate of reinsurance costs), and any other costs for which the sponsor is not responsible. CMS
reviews the information when negotiating with plan sponsors and in deciding whether to approve
their program bids.
CMS may approve a drug plan only if certain requirements are met. For example, CMS must
determine that the plan and sponsor meet requirements relating to actuarial determinations and
beneficiary protections. The plan cannot be designed in a way (including any formulary or tiered
formulary structure) that would likely discourage enrollment by certain beneficiaries.
If their bids are approved, plan sponsors enter into 12-month contracts with CMS. A contract may
cover more than one Part D plan. Under the terms of a contract, the sponsor agrees to comply
with Part D requirements and have satisfactory administrative and management arrangements.
Beginning in 2016, CMS imposed a two-year Part D application ban on sponsors that have been
approved to offer PDP plans but withdraw their bids after CMS announces the annual LIS
benchmark amounts.160

157 T he Part D sponsors are private entities licensed to offer health insurance under state law. Alternatively, they could
meet solvency standards established by CMS for entities not licensed by the state.
158 If two or more plans are not available in a region (one of which is a PDP), Medicare is required to contract with a
“fallback” plan to serve beneficiaries in that area. Because of the large number of Part D plans participating in the
program, CMS has not needed to solicit bids from fallback contractors.
159 CMS, “Announcement of Calendar Year (CY) 2021 Medicare Advantage Capitation Rates and Medicare Advantage
and Part D Payment Policies and Final Call Letter,” April 6, 2020, p.71, at https://www.cms.gov/files/document/2021-
announcement.pdf.
160 CMS, “ CMS Finalizes Program Changes for Medicare Advantage and Prescription Drug Benefit Programs for
Contract Year 2016,” February 6, 2015, at http://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact -sheets/2015-
Fact -sheets-items/2015-02-06.html.
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Noninterference Provision
To bolster market competition and limit the federal role, the MMA included a noninterference
provision (SSA §1860D-11(i)), stating that in carrying out the requirements of the Part D
program, “the Secretary: (1) may not interfere with the negotiations betw een drug manufacturers
and pharmacies and PDP sponsors; and (2) may not require a particular formulary or institute a
price structure for the reimbursement of covered part D drugs.”161
Some Members of Congress have introduced proposals to repeal or modify the noninterference
provision since the start of the Part D program, to give the HHS Secretary the authority to
negotiate drug prices. Supporters of secretarial negotiation maintain that by leveraging the
combined purchasing power of tens of mil ions of Part D enrollees, the Secretary could secure
larger price reductions from drug manufacturers and pharmacies than can be obtained by plan
sponsors. Opponents note that Part D enrollment is concentrated in a few plan sponsors that
already have substantial bargaining power. The Congressional Budget Office in previous analyses
of legislation has said the Secretary was not likely to have sufficient negotiating leverage unless
given authority to create a central formulary, set prices administratively, and/or take other actions
if manufacturers failed to cut prices. 162
Plan Availability
For the 2020 plan year, sponsors offered 948 PDPs and 2,799 MA-PD plans.163 The number of
PDPs per region in 2020 ranged from a low of 24 to a high of 32 across the 34 Part D regions,
and beneficiaries in an average county (weighted by population) have 27 MA-PD options to
choose from.164 The number of PDPs and MA-PD plans has been increasing in recent years, as
CMS has relaxed some regulations and insurers have expanded MA-PD plan offerings.165
According to early analyses, in 2021 a total of 996 PDPs are to be offered nationwide. Medicare
beneficiaries wil have 30 PDPs and 27 MA-PD plans to choose from in their geographic area, on
average.166
Availability of Low-Income Plans
A Part D plan qualifies as a LIS benchmark plan if it offers basic Part D coverage and charges
premiums that are equal to, or lower than, the average, regional low -income benchmark premium.
Regional LIS benchmark premiums are recalculated annual y, based on the weighted average of
al premiums in each of the 34 PDP regions. The formula for determining the benchmark is based
on premiums for basic prescription drug coverage, or the actuarial value of basic prescription
drug coverage for plans that offer enhanced coverage. For MA-PD plans, the formula uses the
portion of the premium attributable to basic prescription drug benefits.

161 Social Security Act, §1860D-11(i).
162 CRS In Focus IF11318, Negotiation of Drug Prices in Medicare Part D.
163 MedPAC, Report to the Congress: Medicare Payment Policy, March 13, 2020, p. 419, at http://medpac.gov/docs/
default-source/reports/mar20_medpac_ch14_sec.pdf?sfvrsn=0.
164 Ibid.
165 Ibid.
166 Juliette Cubanski and Anthony Damico, “Medicare Part D: A First Look at Prescription Drug Plans in 2021,” Kaiser
Family Foundation, October 29, 2020, at https://www.kff.org/medicare/issue-brief/medicare-part -d-a-first-look-at-
medicare-prescription-drug-plans-in-2021/.
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In 2020, there were 244 LIS benchmark PDPs—an increase of 13% from 2019.167 LIS
beneficiaries enrolled in a plan that loses its benchmark status for a coming plan year either are
enrolled automatical y in a new plan by CMS or must select a new plan to avoid paying
premiums and other cost-sharing requirements. (See “LIS Enrollment.”) As is the case for non-
LIS enrollees, enrollment for LIS enrollees has become concentrated over time. In 2020, 90% of
LIS beneficiaries were in plans offered by five sponsors: CVS Health, UnitedHealth Group,
Humana, Wel Care, and Cigna (including its subsidiary Express Scripts).168
Plan Payments
Medicare provides a subsidy for each non-LIS Medicare enrollee in a Part D plan that is equal to
74.5% of average, standard coverage. The average subsidy takes two forms: direct subsidy
payments and reinsurance payments. Medicare also establishes risk corridors to limit a plan’s
overal losses or profits. In addition, Medicare pays most of the cost sharing and premiums for
LIS beneficiaries enrolled in PDP or MA-PD plans.
Direct Subsidies
Medicare makes monthly prospective payments (direct subsidies) to plans for each Part D
enrollee. The per enrollee subsidy is based on the nationwide average of plan bids for providing
basic drug coverage,169 weighted by the plans’ shares of total enrollment. (The national average
monthly bid is $43.07 for plan year 2021.)170 A plan’s total subsidy amount across al plan
enrollees is risk-adjusted to account for the health status of the beneficiaries expected to enroll;
plans with sicker enrollees receive a higher subsidy based on Medicare data on the health history
of those enrollees. The subsidy is further adjusted to cover expected, additional costs associated
with LIS enrollees in that plan. Lastly, the payment is reduced by the base beneficiary premium
for the plan times the number of enrollees. (See “Premiums.”)
Reinsurance Subsidies
As previously noted, in a standard drug plan, Medicare subsidizes 80% of each plan’s costs for
catastrophic coverage—the reinsurance subsidy. Plan sponsors are liable for 15% of costs and
enrollees have maximum 5% coinsurance. (See “Part D Benefit Structure.”) Prospective
reinsurance payments to plans are made on a monthly basis during the year, based on either
estimated or incurred costs, with final reconciliation made after the close of the year when plans
have data on their actual costs. Medicare subsidies for reinsurance are now the largest component
of Part D and also are the fastest-growing portion of the program. (See “Historical Program
Spending.”)

167 MedPAC, Report to the Congress: Medicare Payment Policy, March 13, 2020, p. 422, at http://medpac.gov/docs/
default-source/reports/mar20_medpac_ch14_sec.pdf?sfvrsn=0.
168 Ibid, p. 423.
169 T he calculation of the national average monthly bid amount does not include bids submitted by Medical Savings
Account (MSA) plans, MA private fee-for-service plans, specialized MA plans for special needs populations (SNP),
Program of All-Inclusive Care for the Elderly (PACE) plans, or plans established through reasonable cost contracts.
170 CMS, “Annual Release of Part D National Average Bid Amount and other Part C & D Bid Related Information ,”
July 29, 2020, at https://www.cms.gov/files/document/july-29-2020-parts-c-d-announcement.pdf.
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Beneficiary Cost Sharing/Direct and Indirect Remuneration
Beneficiary cost sharing for Part D drugs dispensed by network pharmacies is based on each
sponsor’s negotiated price for a drug.171 Negotiated prices, as currently defined by CMS, are the
total amount network pharmacies receive from Part D plans for dispensing a covered drug,
inclusive of al pharmacy price concessions except those that cannot reasonably be determined at
the point of sale.172 Negotiated prices include pharmacy dispensing fees. Negotiated prices must
not be rebated back to a plan sponsor in full or in part.173
When a beneficiary fil s a prescription at a network pharmacy, the plan sponsor compiles a
summary record cal ed a Prescription Drug Event (PDE). The PDE includes a range of
information, such as the amount paid to the pharmacy for the drug, quantity dispensed, out-of-
pocket spending by the beneficiary, and coverage by qualified third parties, such as other insurers.
CMS and plan sponsors use PDA data to track out-of-pocket and total drug spending (plan plus
beneficiary spending) as enrollees move through stages of the Part D benefit.174
Prescription drug concessions that are not passed on to enrollees at the point of sale are not
included in PDE records but instead are reported to CMS as direct and indirect remuneration
(DIR). DIR includes discounts, chargebacks or manufacturer rebates, cash discounts, free goods
contingent on a purchase agreement, up-front payments, coupons, goods in kind, free or reduced-
price services, grants, or other price concessions or similar benefits from manufacturers,
pharmacies, or similar entities.175 Plans must submit detailed DIR reports to CMS within six
months after the close of a plan year.176
As noted, during the course of each plan year, CMS makes monthly prospective payments to Part
D sponsors based on estimated costs in their annual plan bids. After the close of each plan year,
CMS uses PDE and DIR data along with other information during the annual reconciliation
process, to determine whether sponsors have been overpaid or whether Medicare owes them
money. (See “Reconciliation.”)
Risk Corridor Payments
The MMA also established risk corridors for Part D plans. Under the risk corridors, Medicare
limits plan sponsors’ potential losses, or gains, by financing some higher-than-expected costs, or

171 As defined at 42 C.F.R. §423.100. Enrollees can be charged the usual and customary price (list price) f or a drug,
rather than the negotiated price, when filling a prescription at an out -of-network pharmacy.
172 42 C.F.R. §423.100.
173 By law, Part D sponsors must provide beneficiaries with access to negotiated prices for covered drugs at the point of
sale that “ take into account” any rebates, discounts, or other direct and indirect price concessions obtained by the plans.
According to CMS, the statutory language gives plan sponsors latitude to decide what price concessions to include in
the negotiated price. Plan sponsors may instead choose to pass price concessions through to beneficiaries outside of
negotiated prices, such as in the form of lower monthly plan premiums. However, all aggregate price concessions that
plan sponsors obtain for Part D covered drugs—whether included in the negotiated price at the point of sale or passed
on to enrollees outside the negotiated price—must be reported to CMS for use in annual plan payment and
administration. See 42 C.F.R. §423.100.
174 For more CMS information on PDE data see https://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovGenIn/PartDData.html.
175 DIR is defined at 42 C.F.R. §423.308, under “Actually Paid.”
176 On November 20, 2020, HHS issued a final rule to bar most drug rebates, effective in plan year 2022 . If the final
rule takes effect, it is forecast to reduce cost sharing for some Part D enrollees who are sicker or are taking more
expensive brand-name drugs, but to increase plan premiums for all enrollees, and possibly increase costs to the
Medicare program. See Appe ndix B.
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recouping some excessive profits, relative to the amount the plan original y bid to offer Part D.
Risk corridors are based on a plan’s al owable costs (spending) relative to a percentage of its
target amount (revenues), as defined below:
 Allowable costs are defined as costs (excluding administrative costs, but
including costs directly related to drug dispensing) incurred by a plan sponsor or
organization that are actual y paid (net of discounts, chargebacks, and average
percentage rebates from drug manufacturers) by the sponsor or organization.
Plans may not include costs for benefits beyond the Part D basic benefit amount.
The costs are reduced by the sum of reinsurance payments and low-income
subsidy payments.177
 The target amount is defined as total payments to a plan (including amounts paid
by both Medicare and enrollees) based on a plan’s standardized bid178 for
offering the Part D drug benefit, as risk adjusted. The target amount does not
include administrative expenses assumed in the plan’s standardized bid.179
At the end of each year, CMS compares a Part D plan’s al owable costs to its target amount and
shares in any gains or losses within a predetermined range, or corridor. For plan year 2021, a plan
that has higher-than-expected costs must cover al benefit spending up to 105% of its
standardized bid. A plan with costs above 105% and up to 110% of its bid must cover 50% of the
costs within this range and CMS wil pay the other 50%. A plan with costs above 110% of the bid
must pay 20% of this additional amount, with CMS covering the other 80%. Likewise, a plan that
spends less than its standardized bid may keep al savings between 100% and 95% of the bid. A
plan that has spending below 95% to 90% of its bid may keep 50% of the savings within this
range, while rebating 50% to CMS. A plan with savings below 90% of the bid may keep 20% of
the savings within this range and must rebate 80% to CMS. As CMS has gained more experience
with Part D, the risk corridors have widened, increasing the share of insurance risk borne by the
plans. Since 2012, CMS has had the authority under the MMA to either leave the corridors
unchanged or to widen them. CMS has moved to keep the corridors at 2011 levels through the
2021 program year.180 CMS does not have the authority to narrow the risk corridors.

177 Social Security Act §1860D-15(e)(1)(B).
178 T he plans’ standardized bid is their estimated cost of providing the standard Part D drug benefit. T his bid is used in
the calculation to determine plan payments.
179 Social Security Act §1860D-15(e)(3)(B).
180 CMS, “ Advance Notice of Methodological Changes for Calendar Year (CY) 20 21 for Medicare Advantage (MA)
Capitation Rates, Part C and Part D Payment Policies and 2015 Call Letter ,” February 5, 2020, p. 42, at
https://www.cms.gov/files/document/2021-advance-notice-part-ii.pdf.
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Table 7. Plan Liability Under Part D Risk Corridor Provisions
Risk Corridor
Plan Liability for Costs Above and Below Target
2006-2007

Costs below 95% of target
80% refund
Costs between 95% and 97.5% of target
75% refund
Costs between 97.5% and 102.5% of target
Ful risk
Costs between 102.5% and 105% of target
Risk for 25% of amount
Costs over 105% of target
Risk for 20% of amount
2008-2021

Costs below 90% of target
80% refund
Costs between 90% and 95% of target
50% refund
Costs between 95% and 105% of target
Ful risk
Costs between 105% and 110% of target
Risk for 50% of amount
Costs over 110% of target
Risk for 20% of amount
Source: CMS, “2021 Initial Cal Letter.”
Reconciliation
Following the close of a calendar year, CMS makes retroactive adjustments to the direct subsidy
payments made to plans to reflect actual plan experience. The direct subsidy payments are
adjusted based on updated data about actual beneficiary health status and enrollment.
Additional y, prospective payments for reinsurance and low-income subsidy payments are
compared to actual incurred costs, net of any DIR (including discounts, chargebacks, or rebates
from drug manufacturers), and other related data, and appropriate adjustments are made to the
plan payments. Final y, any necessary adjustments are made to reflect risk sharing under the risk
corridor provisions. In general, Part D sponsors have tended to overestimate their costs for
operating Part D plans in the aggregate. For example, Part D plans in most years made net risk
corridor payments to CMS. (See Table 8.)
Table 8. Medicare Part D Risk Corridor Payments
(in bil ions of dol ars)
Net Risk-Sharing
Year
Payments
2006
-$1.6
2007
- 0.5
2008
- 0.2
2009
- 0.7
2010
- 0.1
2011
- 0.9
2012
- 1.1
2013
- 0.7
2014
- 0.1
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Net Risk-Sharing
Year
Payments
2015
- 1.1
2016
- 1.1
2017
-0.5
2018
0.0
2019
0.2
2020
0.9
Source: 2020 Medicare Trustees Report, Table IV.B10, and 2016 Medicare Trustees Report, Table IV.B10.
Notes: Positive amounts represent net payments from CMS to Part D insurers, and negative amounts represent
net payments from the plans to CMS. The amounts may include the delayed settlement of risk sharing from prior
years. Figures for 2006 and 2007 include reimbursement of certain state costs under the Part D transition
demonstration program. Figures for 2019 and 2020 are estimates; other years are actual data.
According to CMS, data on individual plans continue to show considerable variation in terms of
risk sharing, with some plans making significant risk corridor payments to CMS and others
requiring government payments.181 In the past, MEDPac has raised questions about whether Part
D plans adequately assess risk in their annual plan bids but has suggested that keeping Part D risk
corridors in place, at least temporarily, would help to limit excess plan profits.182
Reduction of Part D Plan Payments Under Sequestration
Due to provisions in the Budget Control Act of 2011 (BCA; P.L. 112-25), most Medicare benefit
related payments are to be reduced through sequestration by 2%.183 (The CARES Act suspended
these reductions from May 2020 through December 2020.) Under Part D, Medicare payments to
plans for the direct subsidies and retiree drug subsidies are to be reduced by this amount.
Payments for reinsurance, risk-sharing, and the LIS are exempt from these reductions. Part D
plans are not permitted to increase beneficiary premiums or cost sharing or to reduce benefits to
make up for their lower payments under sequestration.184 The sequestration of Medicare benefit
spending is scheduled to continue through FY2030.
Pharmacy Access and Payment
Part D sponsors are required to establish a pharmacy network sufficient to ensure access to
covered Part D drugs for al enrollees. Sponsors must demonstrate that they provide (1)

181 CMS, “ Advance Notice of Methodological Changes for Calendar Year (CY) 201 8 for Medicare Advantage (MA)
Capitation Rates, Part C and Part D Payment Policies and 2015 Call Letter ,” February 1, 2017, p. 39, at
https://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Announcements-and-Documents-Items/
2018Advance.html.
182 MedPAC, Report to the Congress: Medicare and the Health Care Delivery System , June 2016, p. 165, at
http://www.medpac.gov/docs/default -source/reports/june-2016-report -to-the-congress-medicare-and-the-health-care-
delivery-system.pdf?sfvrsn=0.
183 For additional information on sequestration and Medicare, see CRS Report R45106, Medicare and Budget
Sequestration.
184 CMS Memorandum, “Additional Information Regarding the Mandatory Payment Reductions in the Medicare
Advantage, Part D, and Other Programs,” May 1, 2013, at https://www.cms.gov/Medicare/Medicare-Advantage/Plan-
Payment/Downloads/PaymentReductions.pdf.
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convenient access to retail pharmacies for al enrollees, (2) adequate access to home infusion
pharmacies for al enrollees, (3) convenient access to long-term care (LTC) pharmacies for
residents of LTC facilities, and (4) access to Indian Health Service, Tribes, or Urban Indian
Programs pharmacies operating in the sponsor’s service area.
Any Willing Pharmacy
Part D sponsors are required to permit any pharmacy that is wil ing to accept the sponsor’s
standard contracting terms and conditions to participate in the plan’s network, including mail-
order pharmacies.185 A sponsor’s standard terms and conditions, particularly reimbursement
terms, may vary to accommodate geographic areas or types of pharmacies, so long as al similarly
situated pharmacies are offered the same standard terms and conditions. A Part D sponsor may
not require a network pharmacy to accept insurance risk as a condition of participation in its
pharmacy network.
Since 2019, Part D plans have been required to (1) make standard pharmacy contract terms and
conditions available by September 15 of each year for contracts effective on January 1 of the
following year, and (2) provide a copy of a standard contract to a requesting pharmacy within
seven business days after receiving such a request from the pharmacy.186
Preferred Pharmacy
While any qualified pharmacy can participate in a plan network, Part D plans, with the exception
of plans offering defined, standard coverage,187 may contract with a smal er subset of pharmacies,
or pharmacy chains, to serve as preferred pharmacies.188 Preferred pharmacies general y are
marketed as having lower beneficiary cost sharing than other pharmacies in the plan network.
Beneficiaries who sign up for a preferred pharmacy plan stil have the option of going to any one
of a number of network pharmacies in their plan region, but may face a higher cost share to fil a
prescription at a non-preferred pharmacy.
The creation of a preferred pharmacy network must not increase overal CMS payments to a Part
D plan.189 In addition, the cost differential between preferred and non-preferred pharmacies
cannot be set at a level that discourages enrollees in certain locations, such as inner cities or rural
areas, from enrolling in a Part D plan.

185 CMS, Medicare Prescription Drug Manual, Chapter 5, “Benefits and Beneficiary Protections,” Section 50.8.1, Rev.
September 30, 2011, at http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/
Downloads/MemoPDBManualChapter5_093011.pdf.
186 CMS, “Medicare Program: Contract Year 2019 Policy and T echnical Changes to Medicare Advantage, Medicare
Cost Plan, Medicare Fee-for-Service, Medicare Prescription Drug Benefit Programs, and PACE Program,” 83 Federal
Register, April 16, 2018, p. 16589, at https://www.gpo.gov/fdsys/pkg/FR-2018-04-16/pdf/2018-07179.pdf. Final rule is
42 C.F.R §423.38.
187 Because cost sharing cannot be changed under defined standard coverage, such plans cannot have price differences
based on the pharmacy used.
188 T he rules are waived in certain instances, such as MA-PD plans that offer access to drugs through retail pharmacies
owned and operated by the MA organization that offers the plan. See CMS, Medicare Prescription Drug Manual,
Chapter 5, “Benefits and Beneficiary Protections,” Section 50.9, Rev. September 30, 2011, at http://www.cms.gov/
Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/Downloads/
MemoPDBManualChapter5_093011.pdf.
189 Ibid.
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Retail Pharmacy Access
To ensure that enrollees have convenient access to covered drugs, Part D networks must include a
sufficient number of pharmacies that dispense drugs directly to patients (other than by mail
order).
CMS defines convenient access as follows:
 In urban areas, at least 90% of Medicare beneficiaries in a Part D sponsor’s
service area, on average, live within 2 miles of a retail pharmacy participating in
the sponsor’s network.
 In suburban areas, at least 90% of Medicare beneficiaries in the sponsor’s service
area, on average, live within 5 miles of a retail pharmacy participating in the
sponsor’s network.
 In rural areas, at least 70% of Medicare beneficiaries in the sponsor’s service
area, on average, live within 15 miles of a retail pharmacy participating in the
sponsor’s network.190
CMS issued a definition of retail pharmacy, which took effect in 2019, to provide better guidance
for Part D plans in determining which contracted pharmacies count toward meeting the
convenient access standards.191 The definition of retail pharmacy includes ‘‘any licensed
pharmacy that is open to dispense prescription drugs to the walk-in general public from which
Part D enrollees could purchase a covered Part D drug without being required to receive medical
services from a provider or institution affiliated with that pharmacy.’’192
Mail-Order Pharmacy Access
Part D plans have the option of including mail-order pharmacies in their networks, although they
may not count such pharmacies in meeting retail pharmacy access requirements.193 Plan sponsors
may offer a subset of formulary drugs (such as a particular tier of drugs or maintenance drugs)
through mail-order pharmacies. If a Part D plan offers a mail-order pharmacy benefit (such as a
90-day supply of a maintenance drug) it must ensure that enrollees have reasonable access to the
same benefit at retail network pharmacies. However, enrol ees may be charged more by Part D

190 CMS recognizes that the rural standard can be impracticable or impossible to meet in such areas, and will consider
modifications in certain cases. CMS, Medicare Prescription Drug Manual, Chapter 5, “ Benefits and Beneficiary
Protections,” Section 50.10, Rev. September 30, 2011, at http://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/MemoPDBManualChapter5_093011.pdf.
191 CMS, “Medicare Program: Contract Year 2019 Policy and T echnical Changes to Medicare Advantage, Medicare
Cost Plan, Medicare Fee-for-Service, Medicare Prescription Drug Benefit Programs, and PACE Program,” 83 Federal
Register, April 16, 2018, p. 16589, at https://www.gpo.gov/fdsys/pkg/FR-2018-04-16/pdf/2018-07179.pdf. Final rule is
42 C.F.R. §423.38.
192 CMS, “Medicare Program: Contract Year 2019 Policy and T echnical Changes to Medicare Advantage, Medicare
Cost Plan, Medicare Fee-for-Service, Medicare Prescription Drug Benefit Programs, and PACE Program,” 83 Federal
Register, April 16, 2018, p. 16596, at https://www.gpo.gov/fdsys/pkg/FR-2018-04-16/pdf/2018-07179.pdf; 42 C.F.R.
§423.100.
193 CMS, Medicare Prescription Drug Manual, Chapter 5, “Benefits and Beneficiary Protections,” Section 50.10 and
50.2, Rev. September 30, 2011, at http://www.cms.gov/Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/MemoPDBManualChapter5_093011.pdf.
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sponsors for fil ing certain prescriptions at a retail pharmacy, rather than a mail-order pharmacy,
within limits set by CMS.194
Specialty Pharmacy Access
Part D plans may designate certain pharmacies as specialty pharmacies for the distribution of
drugs where the FDA has restricted distribution of the drug to certain facilities or physicians or
appropriate dispensing requires extraordinary special handling, provider coordination, or patient
education that cannot be met by a network pharmacy. Part D plans may not require enrollees to
use a specialty pharmacy to fil a prescription solely because a drug has been placed on a Part D
plan’s specialty drug tier. Specialty drug tier designation is based on cost ($670 per month in
2021), not on other special handling requirements.195
CMS does not have a regulatory definition of specialty pharmacy. Plans may set their own
definition and fee structure for specialty pharmacies and specialty networks, including preferred
specialty networks. However, Part D pharmacy contracting conditions must be reasonable and
relevant and must be applied consistently.
Long-Term Care Pharmacy Access
Part D sponsors must offer convenient LTC pharmacy access to beneficiaries in LTC facilities.196
In meeting this access requirement, plan sponsors must offer standard LTC pharmacy network
contracts to al LTC pharmacies operating in their service area that request such contracts. The
pharmacies must be able to meet performance and service criteria specified by CMS, as wel as
any standard terms and conditions established by the Part D sponsor for its network LTC
pharmacies. Part D sponsors may not rely on out-of-network pharmacies to meet the LTC
convenient access standards.
Home Infusion Pharmacy Access
Part D covers certain home-infusion drugs, which are prescription drugs that are given
intravenously in a home setting. Administration of the drugs may require supplies and equipment
such as tubing and catheters or special pumps. Part D plan sponsors must be able to deliver home-
infusion drugs to plan enrollees within 24 hours after the enrollees are released from an acute care
setting, unless the next dose of the medication is not due to be taken for more than 24 hours. (An
acute care setting is a hospital, ambulatory care unit, or similar facility where a patient receives

194 Ibid, Section 50.10. Sponsors may require an enrollee to pay higher cost sharing up to an amount equal to the mail -
order cost sharing plus any differential in contracted rates between retail and mail-order, but plans may charge
beneficiaries a lower cost sharing at retail if they so choose. Some pharmacies may ship drugs to patients in long-term
care facilities or in rural areas. A pharmacy that makes some but not the predominance of its deliveries through the mail
is not a mail-order pharmacy.
195 Ibid. Section 50.3 and CMS, “Updated Contract Year (CY) 2021 Final Part D Bidding Instructions,” May 22, 2020,
at https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/
2021%20mtm%20and%20specialty%20thresholds%20final%20part%20d%20bidding%2005.22.2020_7.pdf . CMS had
issued a proposed rule that would have allowed plans to offer two specialty drug price tiers rather than one. CMS did
not finalize the specialty tier portion of the rule, and instead issued special guidance on specialty tier pricing for 2021.
196 Ibid. Section 50.5.1. “Part D sponsors must demonstrate that they have a network of contracted LT C pharmacies that
provide convenient access to LT C pharmacies for enrollees who reside in LT C facilities. In order to demonstrate
convenient access to LT C pharmacies, Part D sponsors must include, as part of their initial pharmacy access
submissions, a list of all contracted LT C pharmacies. In addition, Part D sponsors are required to submit an updated list
of all contracted LT C pharmacies as part of the annual Part D reporting requirements.”
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treatment for a serious but brief il ness.) Part D plans are not expected to pay for supplies,
equipment, or professional services needed for home infusion therapy. They are expected to stock
drugs in a form that can be easily used, to deliver products when needed, and to ensure that
enrollees have the necessary supplies and professional assistance before dispensing home-
infusion drugs.
Out-of-Network Access
In general, a beneficiary must go to a pharmacy in his or her Part D network. However, in cases
where enrollees cannot reasonably be expected to obtain covered drugs at a network pharmacy,
and when such cases are not routine, a Part D plan must ensure that enrollees have adequate
access to out-of-network pharmacies.197 One example would be if a Part D enrollee were traveling
in the United States, came down with an il ness, and needed to have a prescription fil ed. Another
possible scenario would be a federal disaster declaration in the case of major storm or other event,
where a beneficiary was not able to use an in-network provider. In 2020, CMS and Congress
made special provision for Part D early refil s and out-of-network pharmacy access during the
COVID-19 public health emergency (PHE).198
Part D plans must craft reasonable guidelines for out-of-network usage, including limits on out-
of-network access such as limiting the quantity of drugs dispensed or the purchase of
maintenance medications via mail order for extended out-of-area travel. In general, plans may not
routinely al ow more than a month’s worth of medication to be dispensed at an out-of-network
pharmacy. Enrollees likely wil be required to pay more for a covered Part D drug purchased out
of the plan network than one purchased at a network pharmacy.
Payments to Pharmacies
Part D sponsors often own or hire pharmacy benefit managers (PBMs) that design and/or
administer many aspects of their Part D plans. PBMs are the middlemen in the prescription drug
pricing system. Among other things, PBMs contract with pharmacies to participate in Part D
networks, design plan formularies, and operate electronic systems for processing Part D claims.
(See Appendix B for more information.) PBMs, acting on behalf of plan sponsors, general y
reimburse pharmacies at a contractual y set rate for the cost of a drug (ingredient cost) plus a
dispensing fee.199 Sponsors separately reimburse the PBMs for the drugs. PBM pharmacy
reimbursement for generic drugs general y is based on a maximum al owable cost (MAC) list,
where a PBM sets a ceiling price based on a survey of market prices for the product. Part D MAC
lists must be updated on a regular basis.200 For brand-name drugs, PBMs may reimburse

197 CMS, Medicare Prescription Drug Manual, Chapter 5, “Benefits and Beneficiary Protections,” Section 60, Rev.
September 30, 2011, at http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/
Downloads/MemoPDBManualChapter5_093011.pdf.
198 CRS Report R46334, Selected Health Provisions in Title III of the CARES Act (P.L. 116-136), coordinated by
Elayne J. Heisler. See Section 3714. Requiring Medicare Prescription Drug Plans and MA-PD Plans to Allow During
the COVID-19 Emergency Period for Fills and Refills of Covered Part D Drugs for Up to a 3-Month Supply.
199 42 C.F.R. §423.100 Dispensing fees are costs incurred at the point of sale in excess of the ingredient cost of a
covered Part D drug. Dispensing fees include pharmacy costs such as checking insurance status, performing quality
assurance, physically delivery, special packaging, and salaries of pharmacists and other pharmacy workers as well as
the costs associated with maintaining the pharmacy facility and acquiring and maintaining technology and equipment.
200 42 C.F.R. §423.505(b)(21). Under CMS regulations for plan contracting, plan sponsors must update MAC lists at
least every seven days and indicate the source for pricing data for the updates. Sponsors must disclose MAC prices in
advance of their use for reimbursement.
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pharmacies based on a list price (such as the Average Wholesale Price, or AWP, which is the
estimated price paid by a retailer to a wholesaler), minus a set percentage.
Pharmacies negotiate separately with wholesalers or manufacturers for the drugs they dispense.
PBM pharmacy contracts and accompanying guidance may impose various conditions, including
pricing; audit terms; and quality requirements, such as set targets for accuracy in dispensing
drugs. Contracts are confidential and are not standard among Part D plans.
Part D sponsors are required to make payment for “clean claims,” within 14 calendar days of the
date when an electronic claim is received, and within 30 calendar days of the date that non-
electronical y submitted claims are received.201 A clean claim is a claim that does not require
further development or investigation (for example, has al required documentation) or other
special treatment that would prevent the claim from being paid in a timely manner. If payment is
not issued, mailed, or otherwise transmitted within the applicable number of calendar days after a
clean claim is received, the PDP sponsor or MA-PD plan wil be required to pay interest to the
pharmacy that submitted the claim.
In recent years, Part D sponsors have imposed fees on pharmacies for not meeting contractual y
specified quality metrics (such as accuracy in fil ing prescriptions or goals for generic dispensing)
or as a condition of participating in a preferred pharmacy network. PBM contracts also may
provide incentive payments to pharmacies that exceed set standards. CMS considers such fees on
network pharmacies to be a concession that reduces the cost of dispensing a Part D drug.
However, because many plan sponsors, and their PBMs, impose pharmacy fees based on
performance over time, sponsors often do not pass the fees on as a price reduction at point of sale
but report them as DIR. According to CMS, DIR pharmacy price concessions, net of al pharmacy
incentive payments, grew more than 45,000% from 2010 to 2017.202
Coverage Determinations, Appeals, and Grievances
Part D enrollees have the right to request or appeal coverage determinations, file grievances
against plan sponsors, and file complaints regarding quality of care.203 PDPs and MA-PD plans
are required to provide enrollees with written information about their rights, and to institute both
standard and expedited procedures for addressing coverage issues.204
If a Part D sponsor operates a drug management program, the sponsor must comply with special
appeal procedures for issues involving beneficiaries who have been deemed at risk of prescription
drug abuse. (See “Part D Opioid Overutilization Monitoring.”) An at-risk determination is subject
to the Part D benefit appeals process and timeframes. If an enrollee disagrees with an at-risk
determination, the enrollee has the right to request a redetermination and potential y higher levels
of appeal.205

201 T his provision was added by MIPPA and may be found at §1860D-12(b)(4)(A)(ii) of the Social Security Act.
202 CMS, “Modernizing Part D and Medicare Advantage to Lower Drug Prices and Reduce Out of Pocket
Expenditures,” 83 Federal Register 6217, November 30, 20184, at https://www.federalregister.gov/documents/2018/
11/30/2018-25945/modernizing-part-d-and-medicare-advantage-to-lower-drug-prices-and-reduce-out-of-pocket -
expenses.
203 CMS, Medicare Appeals, at https://www.medicare.gov/Pubs/pdf/11525-Medicare-Appeals.pdf.
204 CMS, “Parts C & D Enrollee Grievances, Organization/Coverage Determinations, and Appeals Guidance,”
Effective January 1, 2020, at https://www.cms.gov/Medicare/Appeals-and-Grievances/MMCAG/Downloads/Parts-C-
and-D-Enrollee-Grievances-Organization-Coverage-Determinations-and-Appeals-Guidance.pdf.
205 CMS, “Parts C & D Enrollee Grievances, Organization/Coverage Determinations, and Appeals Guidance,” Section
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An enrollee may appoint a representative to act on his or her behalf during the grievance and
appeals process such as a friend, relative, attorney, physician, or an employee of a pharmacy or a
charity. To appoint a representative, an enrollee must submit a written statement to the drug plan
sponsor.206 Alternatively, a surrogate or representative may be appointed by a court or authorized
under a state or other applicable law to act on behalf of an enrollee. A prescribing physician or
other prescriber may request a standard or expedited coverage determination, redetermination, or
independent review entity (IRE) reconsideration on behalf of an enrollee without being named a
representative.207 (Physicians or prescribers do not have al the rights of a designated
representative, however, unless they have gone through the formal appointment process.)
Coverage Determination
A coverage determination is any decision (whether an approval or denial) made by a plan sponsor
with regard to covered benefits. Examples of coverage determinations include (1) a decision
about whether to provide or pay for a Part D drug that an enrollee believes may be covered;208
(2) a decision concerning a request about a specific drug payment tier;209 (3) a decision
concerning a request to cover a drug that is not included on a plan formulary; (4) a decision
regarding cost-sharing levels; or (5) a decision regarding whether an enrollee has satisfied a prior
authorization or other utilization management requirement. An enrol ee, an enrollee’s appointed
representative, or his or her physician may file a request for a coverage determination.210
An enrollee may also request an expedited decision regarding a drug that has not already been
furnished. The plan is to make a decision within 24 hours in cases where using the standard
timeframe may seriously jeopardize the life or health of the enrollee or the enrollee’s ability to
regain maximum function. A Part D sponsor that approves a request for expedited determination
must make its determination and notification, whether adverse or favorable, as expeditiously as
the enrollee’s health condition requires, but no later than within 24 hours.211 If a Part D plan
sponsor denies a request for an expedited determination, it must

40.3, Effective January 1, 2020, at https://www.cms.gov/Medicare/Appeals-and-Grievances/MMCAG/Downloads/
Parts-C-and-D-Enrollee-Grievances-Organization-Coverage-Determinations-and-Appeals-Guidance.pdf.
206 An enrollee may request a representative by using a government form (Form CMS-1696) or by submitting an
equivalent written notice that includes information about enrollee and is signed and dated by both the enrollee and the
representat ive. T here are exceptions in the case of institutionalized or incapacitated enrollees.
207 CMS, “Parts C & D Enrollee Grievances, Organization/Coverage Determinations, and Appeals Guidance,” Section
60.1, Effective January 1, 2020, at https://www.cms.gov/Medicare/Appeals-and-Grievances/MMCAG/Downloads/
Parts-C-and-D-Enrollee-Grievances-Organization-Coverage-Determinations-and-Appeals-Guidance.pdf.
208 T his includes a decision not to pay because the drug is not on the plan’s formulary, the drug is determined not
medically necessary, or the drug is furnished by an out -of-network pharmacy.
209 T he MMA provided that if a Part D plan includes a tiered cost -sharing structure, a plan enrollee can request an
exception to the structure. Under an exception, a nonpreferred drug could be covered as a preferred drug if the
prescribing physician determined that the preferred drug for treatment of the same condition would not be as effective
for the individual, would have adverse effects for the individual, or both.
210 CMS, “Parts C & D Enrollee Grievances, Organization/Coverage Determinations, and Ap peals Guidance,” Section
40.2, Effective January 1, 2020, at https://www.cms.gov/Medicare/Appeals-and-Grievances/MMCAG/Downloads/
Parts-C-and-D-Enrollee-Grievances-Organization-Coverage-Determinations-and-Appeals-Guidance.pdf.
211 CMS, “Coverage Determinations,” https://www.cms.gov/Medicare/Appeals-and-Grievances/
MedPrescriptDrugApplGriev/CoverageDeterminations-.
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 make the determination within the 72-hour timeframe established for a standard
determination; and
 give the enrollee and prescribing physician or other prescriber prompt oral notice
of the denial.
If a sponsor fails to notify the beneficiary of its decision within the established time frames, the
decision is deemed an automatic denial, at which point the sponsor must forward the case to the
independent review entity, the second level of appeal.212
Appeals
If a plan sponsor’s coverage determination is unfavorable, it must provide the affected enrollee
with a written denial notice that includes information on appeals rights. An appeal is a request for
a further review of a coverage determination.213 There are five levels of appeals.
Redetermination
The first level of appeal is a redetermination by the plan. An enrollee, enrollee’s representative,
or enrollee’s prescribing physician or other prescriber may request a standard or expedited
redetermination by filing a written request with the plan sponsor. The request general y must be
filed within 60 calendar days from the date printed or written on the written coverage
determination denial notice. If a physician asks for, or supports, an expedited appeal on the
grounds that waiting seven days could seriously harm an enrollee’s health, the appeal is to
automatical y be expedited.214
Plan sponsors must provide immediate access to the redetermination process through their
websites. CMS strongly encourages plans to establish interactive, web-based systems to meet this
requirement.
A plan sponsor must also provide an enrollee or prescribing physician with a reasonable
opportunity to present evidence, and the redetermination must be made by a person not involved
in the original coverage decision.215 Enrollees are to be notified of the results within 7 days in the
case of standard redetermination or within 72 hours for an expedited request. Part D sponsors
must authorize payment for a benefit within 14 calendar days and must mail the payment no later
than 30 calendar days after receiving the request.216
Reconsideration by an Independent Review Entity
At the second level of appeal, an enrollee dissatisfied with a redetermination has a right to
reconsideration by an independent review entity (IRE) working under contract with CMS, also

212 42 C.F.R. §423.570.
213 Individuals can appeal coverage determinations related to formulary drugs and nonformulary drugs. T hey cannot
appeal denial of coverage for excluded drugs.
214 CMS, “Parts C & D Enrollee Grievances, Organization/Coverage Determinations, and Appeals Guidance,” Section
50.7.1, Effective January 1, 2020, at https://www.cms.gov/Medicare/Appeals-and-Grievances/MMCAG/Downloads/
Parts-C-and-D-Enrollee-Grievances-Organization-Coverage-Determinations-and-Appeals-Guidance.pdf.
215 If the issue is the denial of coverage based on medical necessity, the redetermination must be made by a physician.
216 CMS, “Parts C & D Enrollee Grievances, Organization/Coverage Determinations, and Appeals Guidance,” Section
60.3, Effective January 1, 2020, at https://www.cms.gov/Medicare/Appeals-and-Grievances/MMCAG/Downloads/
Parts-C-and-D-Enrollee-Grievances-Organization-Coverage-Determinations-and-Appeals-Guidance.pdf.
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known as a Qualified Independent Contractor (QIC). An enrollee or an enrollee’s appointed
representative may request a standard or expedited reconsideration. The request must be made
within 60 days of a redetermination. The IRE is required to make a decision within 7 days for a
standard reconsideration and 72 hours for an expedited reconsideration. Plans must make
payment in 14 days for a standard reconsideration.217
According to CMS, Medicare received 35,414 reconsideration cases in CY2016. In about 30% of
the cases, the plan sponsor’s decision was overturned.218
Additional Levels of Appeal
If the above appeals result in decisions unfavorable to the enrollee, several additional levels of
review may be pursued.
At the third level of appeal, an enrollee or the appointed representative may request a hearing
with an administrative law judge (ALJ). A request must be made within 60 days of the IRE
decision letter. To qualify for an ALJ hearing, the projected value of denied coverage must meet a
minimum dollar amount ($170 for 2020).219 An enrollee cannot request an expedited hearing if
the only issue at question involves a request for payment of Part D drugs that have already been
furnished.220 There is a 90-day limit for a regular decision and a 10-day limit for an expedited
decision.
The fourth level of appeal is the Medicare Appeals Council (MAC). A beneficiary or the
appointed representative may request a review by the MAC within 60 days of the ALJ decision.
The MAC may grant or deny the request for review. If it grants the request, it may issue a final
decision or dismissal, or remand the case to the ALJ with instructions on how to proceed with the
case. The review is to be completed within 90 days for a regular review and 10 days for an
expedited review.
Standard Hearing
The final appeal level is a federal district court. A beneficiary or the appointed representative may
request a review by a federal court within 60 days of the MAC decision notice. To receive a
review by the court, the projected value of denied coverage must be greater than or equal to a
minimum dollar amount ($1,670 for 2020).
Grievances
Grievances are complaints or disputes other than those involving coverage determinations.
Grievances may include such things as complaints about a plan’s customer service hours of

217 Ibid.
218 CMS, “Fact Sheet: Part D Reconsiderations Appeals Data-2016,” at CMS webpage “ Reconsiderations by the
Independent Review Entity,” at https://www.cms.gov/Medicare/Appeals-and-Grievances/MedPrescriptDrugApplGriev/
Reconsiderations.html. Data exclude cases that were dismissed, withdrawn, or remanded (the Part D QIC did not have
jurisdiction to make a substantive decision on the case) and cases involving non -Part D drugs. T he Part D QIC reversed
plan decisions in 29.81% of cases.
219 “Medicare Part D Flowchart 2020,” at https://www.cms.gov/Medicare/Appeals-and-Grievances/
MedPrescriptDrugApplGriev/Downloads/Flowchart -Medicare-Part -D.pdf.
220 CMS, “Parts C & D Enrollee Grievances, Organization/Coverage Determinations, and Appeals Guidance,” Section
30, Effective January 1, 2020, at https://www.cms.gov/Medicare/Appeals-and-Grievances/MMCAG/Downloads/Parts-
C-and-D-Enrollee-Grievances-Organization-Coverage-Determinations-and-Appeals-Guidance.pdf.
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operation, the time it takes to get a prescription fil ed, or a plan’s benefit design. A grievance may
also include a complaint that a Part D plan refused to expedite a coverage determination or
redetermination. A beneficiary with a grievance may file a complaint within 60 days of the event.
Although CMS regulations do not require a Part D plan sponsor to consider a grievance that is
filed after the 60-day deadline, the regulations do not prevent a plan sponsor from doing so on a
case-by-case basis.221
Plan sponsors are to respond in a timely manner. A Part D plan sponsor must respond to an
enrollee grievance within 24 hours if it involves a refusal by the Part D plan to grant an enrollee’s
request for an expedited coverage determination or an expedited redetermination and the enrollee
has not yet purchased or received the drug in dispute.222 (Sometimes a complaint may involve
both a grievance and a coverage determination.)
Quality of Care Complaints
Complaints regarding quality of care received by Part D enrollees may be resolved by the plan
sponsor, but also may be handled through a separate process: the Quality Improvement
Organization (QIO) process.223 The QIO program is implemented by a network of contractors
throughout the United States that work with providers and beneficiaries to improve the quality of
health care delivered to Medicare beneficiaries. When a Part D plan responds to an enrollee’s
grievance in writing, it must include a description of the enrollee’s right to file a QIO
grievance.224 Quality of care grievances filed with a QIO may be filed and investigated beyond
the 60-day time frame.
Program Oversight
The size, nature, and complexity of the Medicare Part D program put it at particular risk for fraud,
waste, and abuse. Some examples of program vulnerabilities that have been identified include
drug diversion (redirecting prescription drugs, such as opioids, for il egal purposes); bil ing for
drugs that are not dispensed; and inappropriate plan denials of covered drugs. A variety of entities
are involved in oversight activities to ensure program compliance and identify potential y
fraudulent activities
CMS Oversight
CMS is responsible for preventing and detecting fraud and abuse in Medicare Part D and ensuring
sponsors’ compliance with applicable requirements. CMS conducts a wide variety of oversight
activities, such as bid reviews, marketing reviews, financial and accounting reviews, program
audits, and LIS-readiness audits.225 Some of the management controls used in the routine
operation of Medicare Part D play a primary role in the administration of the benefit and a
secondary role in fraud prevention and detection.

221 42 C.F.R. §423.564.
222 42 C.F.R. §423.564.
223 Social Security Act, §1154(a)(14).
224 For more information, see CMS, “Quality Improvement Organizations,” at http://www.cms.gov/Medicare/Quality-
Initiatives-Patient-Assessment -Instruments/QualityImprovementOrgs/index.html?redirect=/qualityimprovementorgs.
225 T he only statutorily required activity is that CMS conduct financial audits of o ne-third of the plans each year. Social
Security Act §1860D-12(b)(3)(C).
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For each plan sponsor, CMS establishes a point of contact (account manager) for al
communications with the plan. The account managers are to work with plans to resolve any
problems, including compliance issues. As part of its oversight strategy, CMS conducts routine
program audits to ensure compliance with various program requirements, including such things
as enrollment and disenrollment, marketing and beneficiary information, pharmacy access,
coordination of benefits, claims processing and payment, and grievances and coverage
determinations.226 CMS can also conduct separate, focused audits to confirm that a previously
identified deficiency has been corrected or to check into an indication of noncompliance. These
audits include a combination of desk and on-site activities.
In financial audits, CMS looks at the accuracy and validity of data reported by the plans. These
audits, normal y conducted after payment reconciliation, may examine things such as possible
overpayments to plans, misrepresentation of bids, underreporting of rebates, and inaccurate
prescription drug event data. If financial audits identify problems, CMS would recalculate
payment reconciliation for that sponsor and target the sponsor for a future audit.
If egregious problems are identified, CMS actions can range from warning letters to civil
monetary penalties or removal from the program, depending on the extent to which plans have
violated Part D program requirements.
Oversight Responsibilities of Part D Sponsors
CMS requires plan sponsors to monitor and correct their own behavior, as wel as the behavior of
those they contract with. Part D sponsors are required by law to implement a comprehensive
fraud and abuse program to detect, correct, and prevent fraud, waste, and abuse. Chapter 9 of
CMS’s Prescription Drug Benefit Manual provides both interpretive rules and guidelines for
sponsors to follow in developing this program.227
Part D sponsors are required to have, and to implement, an effective compliance plan as a
condition of participation in the Medicare program. Elements of an effective plan include written
policies and procedures; a designated compliance officer and committee; training and education,
effective lines of communication, wel -publicized disciplinary guidelines, and internal monitoring
and auditing; and prompt response to detected offences and development of corrective actions.
Part D sponsors are also required to provide fraud, waste, and abuse training and education to
first-tier, downstream, and related entities.228 This includes pharmacists, pharmacy clerks, and
others who are employed by entities that plans contract with to provide the Medicare drug benefit.

226 CMS, “Program Audits, at https://www.cms.gov/Medicare/Compliance-and-Audits/Part-C-and-Part-D-Compliance-
and-Audits/ProgramAudits.html; and CMS, Prescription Drug Benefit Manual, Chapter 9, “ Compliance Program
Guidelines,” Rev. January 11, 2013, at http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Do wnloads/
mc86c21.pdf.
227 CMS, Prescription Drug Benefit Manual, Chapter 9, “Compliance Program Guidelines,” Rev. January 11, 2013, at
http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Do wnloads/mc86c21.pdf.
228 Ibid.
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Medicare Part D Oversight Contractors
Medicare Drug Integrity Contractor: National Benefit Integrity
CMS contracts with a private firm, Qlarant,229 to act as the National Benefit Integrity Medicare
Drug Integrity Contractor (NBI MEDIC) for Part D plans. The NBI MEDIC’s responsibilities
include conducting complaint investigations; performing data analysis; developing and referring
cases to law enforcement, as wel as supporting ongoing investigations; conducting audits; and
reviewing PDP and MA-PD plan fraud and abuse compliance programs.230
The NBI MEDIC is also responsible for working with other entities to coordinate fraud
prevention and detection efforts, including the Part D sponsors, other Medicare contractors, the
HHS Office of Inspector General (OIG), the Department of Justice, and state agencies.
Medicare Drug Integrity Contractor: Outreach and Education
CMS also has contracted with Rainmakers Strategic Solutions LLC231 to act as the Outreach and
Education Medicare Drug Integrity Contractor (O&E MEDIC). The O&E MEDIC provides
education on waste, fraud, and abuse for plan sponsors, pharmacists, law enforcement, as wel as
for Medicare advocates and enrollees. The O&E MEDIC maintains a website containing fraud
and abuse related regulations and guidance, professional education materials, and relevant state
and federal agency contact information.
Part D Recovery Audit Contractor
The ACA required CMS to expand its Recovery Audit Contractor (RAC) program to Medicare
Part C and Part D.232 CMS has contracted with ACLR Strategic Business Solutions to perform the
Part D RAC audit functions.233 The Part D RAC reviews Medicare payments made to plan
sponsors and pharmacies to identify any over- or underpayments, provides information to CMS to
help prevent future improper payments, and refers potential fraud findings to the NBI MEDIC.
Program Spending and Financing234
Medicare’s financial operations are accounted for through two trust funds maintained by the
Department of the Treasury—the Hospital Insurance (HI) trust fund for Part A and the
Supplementary Medical Insurance (SMI) trust fund, which contains separate accounts for Parts B

229 NBI Medicare Drug Integrity Contractor, at https://www.qlarant.com/about/contracts/.
230 CMS, Prescription Drug Benefit Manual, Chapter 9, “Compliance Program Guidelines,” Section 50.7.4, Rev.
January 11, 2013, at http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/
Downloads/Chapter9.pdf.
231 CMS, “ Review Contractor Directory - Interactive Map,” at https://www.cms.gov/Research-Statistics-Data-and-
Systems/Monitoring-Programs//Medicare-FFS-Compliance-Programs/Review-Contractor-Directory-Interactive-Map/
index.html. See also: Education & Outreach Medicare Drug Integrity Contractor, at
http://www.rainmakerssolutions.com/.
232 For additional information see CMS, “ Review Contractor Directory - Interactive Map,” at https://www.cms.gov/
Research-Statistics-Data-and-Systems/Monitoring-Programs//Medicare-FFS-Compliance-Programs/Review-
Contractor-Directory-Interactive-Map/index.html.
233 CMS, “Part D RAC Audit Process,” at https://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-
Programs/recovery-audit-program-parts-c-and-d/Audit-Process.html.
234 T his section was written by Patricia A. Davis, Specialist in Health Care Financing, Congressional Research Service.
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and Part D.235 Unlike the HI program, SMI was not intended to be fully supported through
dedicated sources of income. Instead, it relies primarily on general tax revenues and beneficiary
premiums as revenue sources.
Expenditures
According to the 2020 Medicare Trustees Report, during CY2019, total Part D expenditures were
approximately $97.6 bil ion.236 (See Table 9.) This amount included the combined costs of
prescription drugs provided by Part D plans to enrollees and Medicare payments to employer-
sponsored retiree health plans and federal administrative expenses, including expenses incurred
by HHS, SSA, and the Department of the Treasury in administering Part D. Such duties include
making payments to Part D plans and implementing fraud and abuse control activities. (See the
Appendix A for historical and projected Part D expenditures.)
Revenues
The major sources of revenue for the Part D account include general revenues, beneficiary
premiums, and state contributions. In CY2019, of the $98.7 bil ion in total Part D income, general
revenues accounted for $70.2 bil ion, premiums accounted for $15.8 bil ion, and transfers from
states for $12.3 bil ion.
The appropriation language adopted for the Part D account provides resources for benefit
payments without the need for congressional approval. This al ows substantial flexibility in the
amount of general revenues available to the account, and eliminates the need for a contingency
reserve. As a result, assets in the Part D account are general y low and only need to be held for a
short time until they are used to meet immediate expenditures. As premium and general revenue
income for Part D is reset each year to match expected costs, the Medicare Trustees consider the
Part D account to be in satisfactory financial condition under current law.
Beneficiary Premiums
Beneficiary premiums are based on the participating plans’ national average bid amounts and are
defined prior to each year’s operations,237 with the average premium amounting to 25.5% of the
expected per capita plan costs for basic coverage. (See “Premiums.”) In 2021, the base monthly
premium is $33.06; however, beneficiaries pay different premiums depending on the plan they
selected (and whether they are entitled to low-income premium subsidies). Beneficiaries may
have their premiums deducted from their Social Security or other federal benefit payments; these
are then forwarded to Part D plans on their behalf. Alternatively, they may pay their premiums
directly to the Part D plans.
As required by the ACA, since 2011, beneficiaries with higher incomes pay income-related
monthly premium adjustments in addition to the premiums charged by the plans in which they

235 T he MMA established within the Supplementary Medical Insurance (SMI) T rust Fund the Medicare Prescription
Drug Account to be used in conjunction with the Part D prescription drug program . For additional information on
Medicare program financing, see CRS Report R43122, Medicare Financial Status: In Brief.
236 2020 Medicare T rustees Report , T able III.D3, p. 103, at https://www.cms.gov/Research-Statistics-Data-and-
Systems/Statistics-T rends-and-Reports/ReportsTrustFunds/index.html.
237 For example, the base premiums for 2021 were announced in July 2020. See CMS Memorandum, CMS, “Annual
Release of Part D National Average Bid Amount and other Part C & D Bid Information,” July 20, 2020, at
https://www.cms.gov/files/document/2021-announcement.pdf.
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have enrolled.238 (See “Premium Surcharge for Higher-Income Enrollees.”) These extra amounts
are credited to the Part D trust fund account and reduce the amount of general revenue funding
needed. Because individual plan premiums vary, the additional amount paid is calculated as a
percentage of the base beneficiary premium, not the individual’s actual premium amount. This
extra amount is usual y deducted from an individual’s monthly Social Security payments
regardless of how that person ordinarily pays the monthly prescription plan premiums. If the
amount is greater than the monthly payment from Social Security, or an individual does not
receive Social Security payments (e.g., the individual has not yet signed up for Social Security
benefits), then CMS may directly bil the individual for this amount.
In CY2019, $5.2 bil ion in premium amounts were withheld from Social Security benefit checks
or other federal benefit payments. (See Table 9.) Another $10.6 bil ion in premiums were paid
directly to the plans by beneficiaries. As noted, premiums for the Part D program are general y set
at an amount equal to 25.5% of standard benefit costs; however, as recipients of the Part D low -
income subsidies are not required to pay premiums and premiums are based only on standard
benefits (i.e., the premium calculation does not include such things as costs associated with the
low-income subsidy and risk-corridor payments), premiums made up about 16% of total Part D
program revenues in 2019.
General Revenues
General revenues are transferred from the Treasury to the Part D Account on an as-needed basis
to cover the portion of program expenditures funded by federal subsidies. These transfers are
based on expected costs of the direct subsidy, reinsurance payments, employer subsidies, low -
income subsidies, net risk-sharing payments, administrative expenses, and advanced discount
payments.239 In CY2019, contributions received from the general fund of the Treasury amounted
to $70.2 bil ion, or about 71% of total Part D revenue.
Table 9. Statement of Operations of Part D Account, CY2019
(in mil ions of dol ars)
Assets at Beginning of Year
$7,999.4
Revenues
$98,747.9
Premiums from Enrol ees
15,760.1
Premiums deducted from Social Security checks
5,159.6
Premiums paid directly to plans
10,600.5
Government Contributions
70,222.2
Prescription drug benefits
70,162.6
Administrative expenses
59.7
Payments from States
12,288.5
Interest
59.1

238 T he income thresholds are set at the same levels as those under Part B. For additional information, see CMS
Memorandum, “ 2020 Part D Income-Related Monthly Premium Adjustment ,” September 27, 2019 at
https://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/PartDIRMAA2020.pdf.
239 Beginning in 2011, prescription drug manufacturers of brand name drugs provide a discount for their drugs when
used during the coverage gap. Medicare makes payments prospectively to non-employer Part D plan sponsors and is
reimbursed for these amounts once the sponsors receive the discounts from the manufacturers. T his discount reduces
beneficiary out -of-pocket costs, but has little net effect on federal Part D spending.
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Expenditures
$97,572.9
Benefit Payments
97,090.6
Federal Administrative Expenses
482,3
Assets at End of Year
$9,174.4
Source: 2020 Medicare Trustees Report, Table III.D1.
Note: Totals may not add due to rounding.
State Contributions
Subsequent to the availability of Part D drug coverage and low-income subsidies beginning in
2006, Medicaid is no longer the primary payer of drug costs for full-benefit dual-eligible
beneficiaries. However, MMA contained a provision (labeled by some as the “clawback
provision”) that requires states to pay the Part D account in the SMI trust fund a portion of the
costs that they would have incurred for this population if they were stil the primary payer. These
amounts are based on the product of the estimated annual per capita full dual-eligible drug
payment amount and the monthly State enrollment of full dual-eligibles.
Starting in 2006, states paid 90% of these estimated costs. This percentage phased down over a
10-year period to 75% starting in 2015. In CY2019, state payments amounted to $12.3 bil ion, or
about 12.4% of Part D revenues.
Historical Program Spending
Actual spending for the Medicare prescription drug benefit has been lower than estimated at the
beginning of the program. The 2004 Medicare Trustees Report, the first of such reports issued
subsequent to the enactment of MMA, projected that total program spending would be $85 bil ion
in CY2006 (the first year of the program) and would grow to about $162 bil ion by CY2013.240
Actual Medicare expenditures for the Part D drug benefit were approximately $47 bil ion in
CY2006 and close to $70 bil ion in CY2013. The difference between projected and actual
spending has been due to both lower than expected enrollment and per capita spending. (See
Table 10.) Original CBO estimates of Part D spending were also higher than actual spending for
FY2004-FY2013. (See Table 11.)

240 Original spending projections were made for the 10-year period 2004 to 2013. The Medicare T rustees report on a
calendar year basis, while CBO reports on a fiscal year basis.
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Table 10. Comparison of Projected and Actual Part D Enrollment and Spending
(CY2006-CY2013)
Enrollment
Total Part D Spending

(in thousands)
Per Enrollee Spending
(in billions of dollars)
2004
2016
2004
2016
2004 Trustees
2016 Trustees
Trustees
Trustees
Trustees
Trustees
Report
Report
Report
Report
Report
Report

(Projected)a
(Actual)b
(Projected)
(Actual)
(Projected)
(Actual)
2006
40,736
30,560
$2,069
$1,708
$85.0
$47.4
2007
41,468
31,392
2,225
1,556
93.0
49.7
2008
42,296
32,589
2,391
1,504
101.9
49.3
2009
43,158
33,644
2,557
1,798
111.2
60.8
2010
44,069
34,772
2,725
1,775
120.9
62.1
2011
45,117
35,720
2,892
1,868
131.4
67.1
2012
46,374
37,448
3,120
1,776
145.6
66.9
2013
47,761
39,103
3,367
1,772
161.8
69.7
Source: CRS analysis of data from Tables II.A3, II.C18 and II.C19 of the 2004 Medicare Trustees Report and
Tables V.B4, III.D3 and III.D4 of the 2016 Medicare Trustees Report.
a. Al data from the 2004 report are projected.
b. Al data from the 2016 report are actual.
Table 11. Comparison of Original CBO Estimates and Actual Part D Costs,
FY2004-FY2013
(in bil ions of dol ars)

% Actual
Different
2004-
from

2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2013
Projected
Federal
CBO
$0.6
$1.5
$32.1 $52.9 $59.9 $65.7 $72.6 $79.5 $88.5
$98.9
$552.2

Spending
Original
Cost
Estimatea

2016
0.2
1.2
27.7
41.5
35.4
43.5
52.7
57.0
44.5
50.1
353.8
35.9%
Medicare
less
Trustees
Reportb
Total
CBO
0.6
1.5
46.8
74.8
84.2
92.0
101.3 110.6 122.8
136.8
771.4

Spending Original
Cost
Estimate

2016
0.2
1.2
33.9
52.4
47.2
56.8
63.8
71.0
61.0
68.3
455.8
40.9%
Medicare
less
Trustees
Source: Congressional Budget Office, Projection of Spending for the Medicare Part D Benefit: Letter to the
Honorable Wil iam “Bil ” M. Thomas, February 9, 2005; and the 2016 Medicare Trustees Report, June 22, 2016,
Table V.H8.
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Notes:
a. The figures in this table are for fiscal years, whereas those in Table 11 are for calendar years. Original
projections were for the 10-year period FY2004 through FY2013.
b. Actual federal Medicare Part D cost is measured as total expenditures less premium income and transfers
from states. Trustee report figures for FY2004-FY2013 reflect actual spending.
While aggregate Part D expenditures have increased by an average annual rate of 4.8% from 2009
to 2019, most of this growth reflects the growth in enrollment during the initial years of the
program. Per capita expenditures during this time increased at a much slower annual rate of
1.4%.241 Both the Medicare Trustees and CBO attribute the slower per capita growth rate to a
high proportion of prescriptions fil ed with low-cost generic drugs, as wel as to patent
expirations of major drugs during this period.242
In their 2020 report, the Medicare Trustees noted that 2018 Part D per capita benefit expenditures
were lower than in 2017 and attributed this decrease to reconciliation payments received from
plans for their experience in 2017.243 The Medicare Trustees reported a similar level of per capita
expenditures for 2019 and attributed this to higher assumed DIR and slow reinsurance growth in
plan bids. (However, in 2020, the trustees expect significant reconciliation payments to be made
to plans, which would substantial y increase the level of per capita benefit spending in 2020.)
(See Table 12.)
Estimated Future Part D Expenditures
Over the 10 year period from 2020 to 2029, the Medicare Trustees project more rapid growth in
Part D costs, with aggregate benefits increasing on average at 6.9% annual y and per capita
expenditures increasing on average by 4.2% each year.244 This projected growth is due to
expectations of a slowing in the generic drug dispensing rate and an increase in the cost of
specialty drugs. (See Table 12 and Table 13.)
Table 12. Historical and Projected Growth in Part D Benefits
Part D Benefits
Aggregate
as a
Calendar
Benefitsa
Percentage
Per Capita
Percentage
Percentage of
Year
(Billions)
Change
Benefits
Change
GDP
Historical data
2004
$0.4
—
$362
—
0.00%
2005
1.1
—
596
—
0.01
2006
47.1
—
1,708
—
0.34
2007
48.8
3.7%
1,556
−8.9%
0.34
2008
49.0
0.4
1,504
−3.3
0.33
2009
60.5
23.4
1,798
19.6
0.42

241 T he corresponding rates for the 2008-2018 period were 6.8% for total expenditure growth and 3.2% for per capita
growth. T he T rustees note that this “erratic pattern” occurred primarily because of the large 2009 reconciliation
payment for the 2008 plan year which had the effect of establishing a higher base level in 2009, thus reducing the 10 -
year annual rate for 2009-2019. 2020 Medicare T rustees Report , pp. 105-106.
242 2020 Medicare T rustees Report , pp. 105-106; and CBO, “ Competition and the Cost of Medicare’s Prescription Drug
Program,” July 2014, at http://www.cbo.gov/sites/default/files/cbofiles/attachments/45552-PartD.pdf.
243 2020 Medicare T rustees Report, p. 104.
244 Ibid., pp. 106.
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Part D Benefits
Aggregate
as a
Calendar
Benefitsa
Percentage
Per Capita
Percentage
Percentage of
Year
(Billions)
Change
Benefits
Change
GDP
2010
61.7
2.0
1,775
−1.3
0.41
2011
66.7
8.1
1,868
5.3
0.43
2012
66.5
−0.4
1,776
−5.0
0.41
2013
69.3
4.2
1,772
−0.2
0.41
2014
77.7
12.1
1,919
8.3
0.44
2015
89.5
15.1
2,140
11.5
0.49
2016
99.5
11.2
2,302
7.6
0.53
2017
100.1
0.6
2,251
−2.2
0.51
2018
94.7
−5.4
2,069
−8.1
0.46
2019
97.1
2.5
2,057
−0.6
0.45
Intermediate Estimates
2020
106.3
9.4
2,176
5.8
0.48
2021
115.6
8.8
2,300
5.7
0.50
2022
122.3
5.7
2,361
2.7
0.50
2023
129.0
5.5
2,424
2.7
0.51
2024
138.4
7.2
2,534
4.5
0.52
2025
146.6
5.9
2,618
3.3
0.53
2026
156.6
6.8
2,731
4.3
0.55
2027
167.2
6.8
2,853
4.5
0.56
2028
178.1
6.5
2,977
4.3
0.57
2029
189.6
6.4
3,108
4.4
0.58
Source: 2020 Medicare Trustees Report, Table III.D4
Notes: Amounts shown are on a cash basis.
a. This amount does not include administrative expenses. See Table A-1 for data on total Part D
expenditures.
Table 13. Medicare Part D Reimbursement Amounts
(in bil ions of dol ars)
Retiree Drug

Direct Subsidya
Reinsurance
Low-Income Subsidy
Subsidy

Calenda r
Year
Amount
Percentage
Amount
Percentage
Amount Percentage
Amount
Percentage
Totalb
Historical Data
2006
$16.00
39.2%
$6.0
14.7%
$15.0
36.8%
$3.8
9.3%
$40.8
2007
17.6
38.1%
8.0
17.3%
16.7
36.1%
3.9
8.4%
46.2
2008
17.5
35.9%
9.4
19.3%
18.1
37.1%
3.8
7.8%
48.8
2009
18.2
35.1%
10.1
19.5%
19.6
37.8%
3.9
7.5%
51.8
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Retiree Drug

Direct Subsidya
Reinsurance
Low-Income Subsidy
Subsidy

Calenda r
Year
Amount
Percentage
Amount
Percentage
Amount Percentage
Amount
Percentage
Totalb
2010
19.6
35.1%
11.2
20.1%
21.1
37.8%
3.9
7.0%
55.8
2011
19.2
32.7%
13.7
23.3%
22.2
37.8%
3.6
6.1%
58.7
2012
19.7
32.5%
15.5
25.5%
22.5
37.1%
3.0
4.9%
60.7
2013
19.6
30.8%
19.2
30.1%
23.2
36.4%
1.7
2.7%
63.7
2014
18.5
25.9%
27.2
38.1%
24.3
34.1%
1.3
1.8%
71.3
2015
18.1
23.2%
33.2
42.6%
25.6
32.8%
1.1
1.4%
78.0
2016
17.1
21.4%
35.5
44.4%
26.4
33.0%
1.0
1.3%
80.0
2017
14.6
18.2%
37.6
46.8%
27.3
34.0%
0.8
1.0%
80.3
2018
13.5
16.2%
40.6
48.7%
28.5
34.2%
0.8
1.0%
83.4
2019
11.6
13.1%
46.3
52.4%
29.8
33.7%
0.7
0.8%
88.4
Intermediate Estimate
2020
10.2
11.2%
46.6
51.2%
33.5
36.8%
0.7
0.8%
91.0
2021
10.4
10.7%
50.3
51.7%
35.9
36.9%
0.7
0.7%
97.3
2022
10.3
9.9%
54.8
52.5%
38.5
36.9%
0.7
0.7%
104.3
2023
10.8
9.6%
59.1
52.7%
41.4
36.9%
0.8
0.7%
112.1
2024
11.5
9.6%
63.4
52.9%
44.2
36.9%
0.8
0.7%
119.9
2025
12.1
9.5%
67.3
53.0%
46.7
36.8%
0.8
0.6%
126.9
2026
12.7
9.4%
72.2
53.2%
49.9
36.8%
0.9
0.7%
135.7
2027
13.4
9.3%
77.2
53.4%
53.2
36.8%
0.9
0.6%
144.7
2028
14.1
9.1%
82.5
53.5%
56.7
36.7%
1.0
0.6%
154.3
2029
14.7
9.0%
88.1
53.7%
60.3
36.7%
1.1
0.7%
164.2
Source: CRS analysis based on data in the 2016 and 2020 Medicare Trustees Reports, Table IV.B10.
Notes: Amounts shown are on an incurred basis.
a. The direct subsidy amount shown is net of risk-sharing payments.
b. The total amounts do not include premiums paid by beneficiaries.
The Medicare Trustees project that total Part D expenditures wil almost double between 2019
and 2029—from $97.6 bil ion to $190.3 bil ion. (See Table A-1.) Annual per capita Part D benefit
expenditures also are projected to increase—from $2,057 in 2019 to $3,108 in 2029.245 Over the
longer term, the Medicare Trustees project that total Part D spending wil grow from 0.45% of
GDP in 2019 to 0.58% in 2029 and to 0.94% of GDP in 2094.246

245 Ibid., T able III.D4.
246 Ibid., T ables III.D4 and III.D6. GDP projection estimates are reported on an incurred basis.
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Appendix A. Historical and Projected Part D
Operations
Table A-1. Operation of the Part D Account in the SMI Trust Fund,
CY2004-CY2029
(in bil ions of dol ars)

Income
Expenditures
Trust Fund
Transfers
Interest
Balance
General
from
and
Benefit
Admin.
Net
at End
Year Premiums
Revenue
States
Other
Total
Payments
Expenses
Total
Change
of Year
Historical Data
2004
—
$0.4
—

$0.4
$0.4
—
$0.4
—
—
2005
—
1.1
—

1.1
1.1
—
1.1
—
—
2006
$3.5
39.2
$5.5
$0.0
48.2
47.1
$0.3
47.4
$0.8
$0.8
2007
4.1
38.8
6.9
0.0
49.7
48.8
0.9
49.7
0.0
0.8
2008
5.0
37.3
7.1
0.0
49.4
49.0
0.3
49.3
0.1
0.9
2009
6.3
47.1
7.6
0.0
61.0
60.5
0.3
60.8
0.1
1.1
2010
6.5
51.1
4.0
0.0
61.7
61.7
0.4
62.1
-0.4
0.7
2011
7.7
52.6
7.1
0.0
67.4
66.7
0.4
67.1
0.3
1.0
2012
8.3
50.1
8.4
0.0
66.9
66.5
0.4
66.9
0.0
1.0
2013
9.9
51.0
8.8
0.0
69.7
69.3
0.4
69.7
0.0
1.0
2014
11.4
58.1
8.7
0.0
78.2
77.7
0.4
78.1
0.1
1.1
2015
12.8
68.4
8.9
0.0
90.0
89.5
0.3
89.8
0.3
1.3
2016
13.8
82.4
10.0
0.0
106.2
99.5
0.5
99.9
6.3
7.6
2017
15.5
73.2
11.4
0.1
100.2
100.1
-0.1
100.0
0.2
7.8
2018
15.9
67.8
11.7
0.1
95.4
94.7
0.5
95.2
0.2
8.0
2019
15.8
70.2
12.3
0.5
98.7
97.1
0.5
97.6
1.2
9.2
Intermediate Estimates
2020
16.1
76.4
12.6
0.1
105.1
106.3
0.7
106.9
−1.8
7.3
2021
17.1
86.5
13.4
0.1
117.1
115.6
0.7
116.3
0.8
8.2
2022
18.9
90.3
14.4
0.1
123.7
122.3
0.7
123.0
0.8
8.9
2023
20.4
94.3
15.5
0.1
130.4
129.0
0.7
129.7
0.6
9.5
2024
22.1
100.8
16.8
0.1
139.7
138.4
0.7
139.1
0.7
10.2
2025
23.6
106.1
18.0
0.1
147.8
146.6
0.6
147.2
0.6
10.8
2026
25.8
112.7
19.2
0.2
157.9
156.6
0.6
157.2
0.7
11.5
2027
27.0
121.0
20.5
0.2
168.6
167.2
0.6
167.8
0.8
12.3
2028
29.4
128.1
21.9
0.2
179.6
178.1
0.7
178.8
0.8
13.1
2029
31.6
135.9
23.4
0.2
191.2
189.6
0.7
190.3
0.9
14.0
Source: 2020 Medicare Trustees Report, Table III.D3.
Notes: Sums may not equal totals due to rounding. Some of the fluctuation in year by year spending is due to
the payment structure of the Part D program. For example, in 2006, plan bids and therefore payments were
higher than actual spending; the $4 bil ion in reconciliation payments resulted in lower per capita Part D spending
in 2007 and 2008. The Medicare Trustees expect that in 2019, incurred reinsurance spending wil be higher than
plan bids, leading to “significant” reconciliation payments to plans in 2020.
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Appendix B. Drug Rebates and PBMs in Medicare
Part D
Part D plan sponsors typical y work with pharmacy benefit managers (PBMs) to negotiate price
concessions from drug manufacturers. PBMs also create networks of contracted retail pharmacies
that dispense prescriptions for Part D plans for set reimbursement. PBMs general y do not take
delivery of drugs, with the exception of in-house mail-order or specialty pharmacies. 247
Part D price concessions primarily take the form of rebates—price reductions provided after the
point of sale—from a list price for a brand-name drug.248 Plan sponsors and PBMs can secure
rebates for including a brand-name drug on a plan formulary or for placing the drug on a
favorable cost-sharing tier. The final value of a rebate may be tied to sales volume of a drug and
may be aggregated and paid to the PBM in instal ments.
PBMs have the most leverage to negotiate rebates when there are competing drugs on the market
for treating a condition. They have less ability to negotiate rebates for sole-source drugs or drugs
in the six protected classes, where al drugs must be covered. Rebates have risen from 10.4% of
total Part D drug costs in 2008 to an estimated 25.3% in 2018.249
When Part D plan sponsors contract with PBMs under a pass-through pricing arrangement, the
sponsor reimburses the PBM the same amount that the PBM paid the pharmacy for a given drug.
If the sponsor uses a PBM lock-in contract, the PBM may negotiate to compensate pharmacies at
a lower price for a drug than the price the PBM has guaranteed to the plan.250 However, under
Part D regulations, any difference between the PBM and pharmacy reimbursement must be
reported to CMS as an administrative cost and enrollee cost sharing must be based on the lower
pharmacy price.
A 2019 Government Accountability Office (GAO) study found that PBMs performed 74% of
drug benefit management services for Part D plans. PBM compensation primarily consisted of
fees from plan sponsors, with PBMs retaining less than 1% of rebates they negotiated for Part D
plans as compensation.251 According to the GAO, PBMs earned Part D revenue from a volume-
based fee on PBM-processed claims; a per member, per month fee on plan sponsors; or a
combination of the two.
Plan sponsors mainly have used drug rebates to buy down, or reduce, plan premiums for al
enrollees, rather to reduce the price of specific drugs at the point of sale. As noted, under the

247 Some large Part D sponsors own their own PBMs, including CVS Caremark, UnitedHealth Group, and a coalition of
Blue Cross/Blue Shield plans. Other sponsors may contract with outside PBMs for services.
248 CMS, “Fraud and Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals
and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription
Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees,” 84 Federal Register, February 6, 2019, p.
2340, at https://www.federalregister.gov/documents/2019/02/06/2019-01026/fraud-and-abuse-removal-of-safe-harbor-
protection-for-rebat es-involving-prescription-pharmaceuticals.
249 CMS, “T he 2018 Annual Report of the Boards of T rustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance T rust Funds,” June 5, 2018, T able IV.B8, p. 143, at https://www.cms.gov/Research-
Statistics-Data-and-Systems/Statistics-T rends-and-Reports/ReportsTrustFunds/Downloads/T R2018.pdf.
250 HHS OIG, “Memorandum Report: Medicare Part D Pharmacy Discounts for 2008, OEI -02-10-100120, November
17, 2010, at https://oig.hhs.gov/oei/reports/oei-02-10-00120.pdf.
251 GAO, “ Use of Pharmacy Benefit Managers and Efforts to Manage Drug Expenditures and Utilization ,”
https://www.gao.gov/assets/710/700260.pdf.
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CMS interpretation of Part D negotiated price, plan sponsors have some latitude to include price
concessions at the point of sale or to report them to CMS later as DIR.
In a 2005 Federal Register notice of final rules to implement the Part D program, CMS said it
expected plan sponsors would pass through a high percentage of any drug price concessions in
negotiated prices at the point of sale.252 However, in a 2018 Federal Register proposal, CMS
noted that less than 1% of sponsors had passed through price concessions at retail pharmacies.253
Instead, sponsors collect and apply the vast majority of price concessions, including manufacturer
rebates and pharmacy fees, after the point of sale and report them to CMS as DIR.254
The way in which plan sponsors apply and report price concessions—in negotiated prices or as
DIR—has an impact on beneficiary out-of-pocket spending, plan premiums, and Medicare
spending.
 When plan sponsors do not apply rebates and other price concessions to
negotiated prices at the point of sale, enrollees prescribed more expensive brand-
name drugs may pay cost sharing, such as coinsurance, based on a plan’s higher
pharmacy price, rather than the lower net price that includes rebates and other
price concessions that plan sponsors receive after the point of sale. Higher cost
sharing means a greater burden on beneficiaries, and it also means more
beneficiaries accumulate out-of-pocket spending sufficient to reach the
catastrophic portion of the Part D benefit, where Medicare subsidizes a higher
share of drug costs and sponsors’ financial risk is reduced.
 When plan sponsors submit bids to CMS each June to provide Part D benefits for
the following plan year, they must provide CMS with an estimate of expected
DIR. The DIR reduces sponsors’ projected costs for offering the Part D benefit.
That, in turn, reduces plan premiums, which are based on the average of plan
bids. Sponsors have a financial incentive to keep premiums low, because they are
a key factor considered by beneficiaries when selecting Part D plans. Because
Medicare subsidizes about 75% of premiums, lower premiums also reduce
Medicare spending in this area of the benefit.
During the past several years, CMS has put forth proposals to alter the Part D bidding and
payment system to address concerns about rising drug prices, rising reinsurance costs, and
growing enrollee out-of-pocket costs. For example, in a 2018 Federal Register notice, CMS
asked for comment on whether to alter the definition of negotiated prices to (1) include al
pharmacy price concessions received by a plan sponsor for a covered Part D drug and (2) reflect

252 CMS, “42 C.F.R. Parts 400, 403, 411, 417, and 423 Medicare Program; Medicare Prescription Drug Benefit; Final
Rules,” 70 Federal Register, January 28, 2005, p. 4244, at https://www.federalregister.gov/documents/2005/01/28/05-
1321/medicare-program-medicare-prescription-drug-benefit .
253 According to CMS, in recent years less than 1% of plans have passed through any price concessions to beneficiaries
at the point of sale, and the amount that is passed through is less than 1% of the total price concessions those plans
receive. CMS, “Modernizing Part D and Medicare Advantage to Lower Drug Prices and Reduce Out of Pocket
Expenditures,” 83 Federal Register, November 30, 2018, p. 62174, at https://www.federalregister.gov/documents/
2018/11/30/2018-25945/modernizing-part-d-and-medicare-advantage-to-lower-drug-prices-and-reduce-out -of-pocket-
expenses.
254 Ibid.
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the lowest possible reimbursement a network pharmacy would receive, in total, for a particular
drug. 255 No rule was published.256
On February 6, 2019, CMS published a proposed rule to bar most prescription drug rebates in
Part D plans by ending federal anti-kickback protections for rebates.257 CMS chose not to publish
a final rule when the comment period ended. On July 24, 2020, President Trump signed an
executive order directing the HHS Secretary to complete the rulemaking.258 On November 20,
2020, HHS issued a final rule to bar most drug rebates, effective in plan year 2022.259 If the final
rule takes effect, it is forecast to reduce cost sharing for some Part D enrollees who are sicker or
are taking more expensive brand-name drugs but to increase plan premiums for al enrol ees and
possibly to increase costs to the Medicare program.260

Author Information

Suzanne M. Kirchhoff

Analyst in Health Care Financing

255 CMS, “Modernizing Part D and Medicare Advantage to Lower Drug Prices and Reduce Out of Pocket
Expenditures,” 83 Federal Register, November 30, 2018, p. 62174, at https://www.federalregister.gov/documents/
2018/11/30/2018-25945/modernizing-part-d-and-medicare-advantage-to-lower-drug-prices-and-reduce-out -of-pocket-
expenses.
256 Ibid, 62174.
257 CMS, “Fraud and Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals
and Creation of New Safe Harbor Prot ection for Certain Point-of-Sale Reductions in Price on Prescription
Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees,” 84 Federal Register, February 6, 2019, p.
2340, at https://www.federalregister.gov/documents/2019/02/06/2019-01026/fraud-and-abuse-removal-of-safe-harbor-
protection-for-rebates-involving-prescription-pharmaceuticals. T he proposed rule would add an exception to the
definition of “discount” so that manufacturer rebates would no longer be protected under the safe harbor. In addition,
the proposed rule would create a new safe harbor under which manufacturers could provide drug price reductions to
Part D or Medicaid managed care plans under certain conditions.
258 White House, “ Executive Order on Lowering Prices for Patients by Eliminating Kickbacks to Middlemen ,” July 24,
2020, at https://www.whitehouse.gov/presidential-actions/executive-order-lowering-prices-patients-eliminating-
kickbacks-middlemen/.
259 CMS, “ Fraud And Abuse; Removal Of Safe Harbor Protection For Rebates Involving Prescription Pharmaceuticals
And Creation Of New Safe Harbor Protection For Certain Point-Of-Sale Reductions In Price On Prescription
Pharmaceuticals And Certain Pharmacy Benefit Manager Service Fees,” November 20, 2020, at https://www.hhs.gov/
sites/default/files/rebate-rule-discount -and-pbm-service-fee-final-rule.pdf. (Rule has not yet been published in the
Federal Register.) According to the rule, “ Several of the positive and negative transfers are imperfect offsets of one
another. For example, the analyses commissioned for this rule estimated that th e amount saved by reducing cost sharing
exceeds the cost of any increase in premiums for beneficiaries overall. However, more beneficiaries would pay more
for premiums, if premiums rise, than they would save in cost sharing, suggesting that out -of-pocket impacts are likely
to vary by individual and the greatest benefit of these transfers accrues to sicker beneficiaries (e.g., those with more
drug spending and/or those using high cost drugs).”
260 CBO, “ Incorporating the Effects of the Proposed Rule on Safe Harbors for Pharmaceutical Rebates in CBO’s
Budget Projections—Supplemental Material for Updated Budget Projections: 2019 to 2029 ,” May 2019, Incorporating
the Effects of the Proposed Rule on Safe Harbors for Pharmaceutical Rebates in CBO’s Budget Projections—
Supplemental Material for Updated Budget Projections: 2019 to 2029 .
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