Beneficiary Cost-Sharing Under the Medicare Prescription Drug Benefit

Beneficiary Cost-Sharing Under the Medicare Prescription Drug Benefit

Order Code RL31525
CRS Report for Congress
Received through the CRS Web
Beneficiary Cost-Sharing Under
the Medicare Prescription Drug Benefit
Updated January 20, 2005
Jim Hahn
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Beneficiary Cost-Sharing Under the Medicare
Prescription Drug Benefit
Summary
On December 8, 2003, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 was signed into law (H.R. 1, P.L. 108-173). The law
adds Part D to Medicare, establishing a new voluntary prescription drug benefit that
begins in 2006. This report analyzes how the cost-sharing and premium provisions
under Part D would affect the amount that a beneficiary would pay annually for
prescription drugs. In addition, this report gives examples of how annual cost-
sharing would differ for beneficiaries with various levels of total prescription drug
spending in 2006 under the plan’s standard benefit.
Standard prescription drug coverage under the plan would pay 75% of drug
costs after the enrollee paid the $250 deductible (in 2006). After $2,250 in total drug
spending (the “coverage limit”), the enrollee would pay for all prescription drug
spending until reaching the $3,600 out-of-pocket protection threshold. This threshold
would be reached when total spending on prescription drugs exceeds $5,100,
assuming none of the cost-sharing is paid for by group health insurance or other
third-party arrangement. Medicare would then cover 95% of all additional drug
expenses, as long as the beneficiary paid a minimum of $2 for each generic drug and
preferred multiple-source drug, and a $5 copayment for all other drugs.
Thus, for most beneficiaries, Medicare would not contribute directly to the cost
of drugs when annual drug expenses fall in a certain range, although Medicare would
contribute directly toward beneficiary drug expenses at levels below and above this
range. This aspect of the coverage is often referred to as the “doughnut hole.” Under
Medicare Part D standard coverage, the doughnut hole is between $2,250 and $5,100
in total prescription drug spending.
Low-income beneficiaries would not face a doughnut hole in their coverage.
“Dual eligibles,” Medicare beneficiaries enrolled in their state’s full Medicaid
benefits who are also institutionalized, would pay no premium and have no cost-
sharing whatsoever in 2006. Noninstitutionalized dual eligibles with countable
income below 100% of poverty would pay no premium or deductible but would face
a $1 copayment for each generic and preferred multiple-source drug, and a $3
copayment for all other covered drugs until their total annual drug costs reach $5,100.
In 2006, all other dual eligibles would face a $2 copayment for each generic and
preferred multiple-source drug, and a $5 copayment for all other covered drugs until
total annual drug costs reach $5,100. Medicare beneficiaries with countable income
under 135% of poverty and countable assets in 2006 of no more than $6,000 for an
individual and $9,000 for a married couple would have this same level of cost
sharing. Beneficiaries who do not qualify in any of the previous low-income
categories but have countable income below 150% of poverty and countable assets
of no more than $10,000 for an individual or $20,000 for a married couple in 2006
would be eligible for a partially subsidized premium and lower cost-sharing
requirements than under the standard benefit.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Cost-Sharing and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Cost-Sharing Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The “Doughnut Hole” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Income-based Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Cost-Sharing Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Beneficiaries Receiving the Standard Benefit . . . . . . . . . . . . . . . . . . . . . . . 12
Breakeven . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
List of Figures
Figure 1. Marginal Beneficiary Cost-Sharing by Total Drug
Expenditures Under Medicare Part D Standard Coverage, 2006 . . . . . . . . . . 5
Figure 2. Annual Out-of-Pocket and Premium Spending,
by Total Drug Spending, Up to $2,000, 2006 . . . . . . . . . . . . . . . . . . . . . . . 14
Figure 3. Annual Out-of-Pocket and Premium Spending,
by Total Drug Spending, Up to $12,000, 2006 . . . . . . . . . . . . . . . . . . . . . . 15
List of Tables
Table 1. Prescription Drug Standard Coverage in Medicare Part D, 2006 . . . . . . 3
Table 2. Summary of Prescription Drug Coverage for Low-Income
Individuals in Part D, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Beneficiary Cost-Sharing Under the
Medicare Prescription Drug Benefit
Introduction
On December 8, 2003, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 was signed into law (H.R. 1, P.L. 108-173). The law
adds Part D to Medicare, which establishes a new voluntary prescription drug benefit
that begins in 2006. This report analyzes how the cost-sharing and premium
provisions under Part D would affect the amount that a beneficiary would pay
annually for prescription drugs.1 In addition, this report gives examples of how
annual cost-sharing would differ for beneficiaries with various levels of total
prescription drug spending in 2006 under the plan’s standard benefit.
Cost-Sharing and Insurance
Insurance acts to reduce uncertainty and individuals’ exposure to high costs due
to catastrophic events such as severe illness. In general, individuals pay a premium,
and in exchange, insurers pay for their covered benefits. Premiums are paid
regardless of whether covered expenses are actually incurred.
In addition to premiums, enrollees may also face cost-sharing, which is the
portion of total expenses that enrollees must pay for covered benefits. Cost-sharing
in a health plan generally includes some combination of deductibles, coinsurance,
copayments, and limits on individuals’ out-of-pocket expenses. Because these
concepts are necessary to evaluate and compare the prescription drug coverage in the
proposals, they are described in Box 1.
1 For a discussion of other issues associated with a prescription drug benefit, such as how
much risk would be borne by private insurance, see CRS Report RL31966, Overview of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, by Jennifer
O’Sullivan et al.

CRS-2
Box 1. Terms Used to Describe Cost-Sharing
Deductible: The amount an enrollee in an insurance plan must pay out-of-pocket before the
insurer begins paying for covered services. Generally, the enrollee must meet this amount each
year. Plans with no deductible are said to provide “first-dollar” coverage.
Coinsurance rate: The percentage of covered costs paid by the enrollee. The terms of
coverage can specify various coinsurance rates for different aspects of coverage, for instance
before and after a threshold of expenses.
Copayment: A fixed dollar amount that the enrollee must pay for each covered benefit — for
instance, a filled prescription. A copayment differs from coinsurance in that the copayment
amount does not vary with the cost of the service. However, copayments may differ based on
the type of drug (for example, one copayment amount for brand-name drugs, another for generic
drugs).
Coverage limit: The total amount of incurred expenses at which the insurer (federal
government, health care plan, etc.) reduces its contributions to the enrollee’s expenses. For
example, once an enrollee’s drug costs exceed the coverage limit, the enrollee must pay for
most or all the additional drug expenses.
Catastrophic coverage: To protect beneficiaries from exposure to extraordinarily large
expenses, insurers may offer catastrophic coverage, wherein the insurer (for instance, Medicare
or a private health plan) typically pays all or almost all additional expenses once an enrollee
meets the annual out-of-pocket protection threshold, or catastrophic threshold (excluding
premiums).
Cost-Sharing Arrangements
P.L. 108-173 establishes Medicare Part D, which includes a voluntary
“standard” prescription drug benefit in Medicare that would take effect in 2006.2
Variations in the beneficiary cost-sharing requirements of the plan will affect the
level of potential out-of-pocket costs to individual beneficiaries. Since participation
is voluntary, expected out-of-pocket expenses are likely to be a critical factor when
beneficiaries consider whether to enroll.
Under Part D, a beneficiary with the standard coverage would pay 25% of drug
costs after meeting the $250 deductible (in 2006).3 After $2,250 in total drug
spending (the “coverage limit”), the enrollee would pay for all prescription drug
spending until reaching the $3,600 out-of-pocket protection threshold. This amount
is often referred to as the “true” out-of-pocket threshold because, according to the
language in the conference agreement, cost-sharing paid on behalf of the enrollee by
group health insurance or other third-party arrangement does not count toward the
$3,600. This threshold is reached when total spending on prescription drugs exceeds
2 Beneficiaries will be able to purchase either “standard coverage” or alternative coverage
with actuarially equivalent benefits. Plans with different but actuarially equivalent benefits
might have other cost-sharing requirements with slightly different deductibles and
coinsurance rates.
3 All of the nominal dollar amounts related to the benefit will be increased by the annual
percentage increase in average per capita Medicare drug expenditures in subsequent years.

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$5,100, assuming none of the cost-sharing is paid by group health insurance or other
third-party arrangement. After reaching this threshold, Medicare would cover 95%
of all additional drug expenses, but the beneficiary must pay a minimum of $2 for
each generic drug and multiple-source4 preferred drug and $5 for all other drugs. The
Congressional Budget Office estimates that the average monthly enrollee premium
will be $35 in 2006.5
Table 1. Prescription Drug Standard Coverage
in Medicare Part D, 2006
Annual premium
$420 ($35/month)a
Annual deductible
$250
Coinsurance on drug costs above
25%
deductible and up to coverage limit
Coverage limit
$2,250 (beneficiary will have paid a $250
deductible and $500 of coinsurance costs)
Range of spending where enrollee pays
$2,251-$5,100b
100% of drug costs
Catastrophic threshold
$3,600 out-of-pocket ($5,100 total
expendituresb)
Cost-sharing payments that apply toward
Cost-sharing paid by the enrollee, another
out-of-pocket threshold
individual, a state pharmaceutical assistance
program, or by Medicare under the low-
income subsidy program.
Coinsurance beyond out-of-pocket
5%, with a minimum copayment of $2 for
threshold
each generic drug or preferred multiple-source
drug and $5 for all other drugs
a. Amount estimated by the Congressional Budget Office (CBO).
b. Cost-sharing paid by a state pharmaceutical assistance program (meeting certain criteria) or family
members (so long as they are not reimbursed by an insurer) also count towards the out-of-pocket
threshold. Payments by private insurers (including retiree health plans) or through supplemental
4 A “multiple-source drug” is a covered outpatient prescription drug for which there are 2
or more drug products rated as therapeutically and pharmaceutically equivalent by the Food
and Drug Administration.
5 Although the CBO estimate of the average monthly premium is $35 in 2006, many
Medicare beneficiaries will face different monthly premium amounts for several reasons:
(1) the drug premiums will be adjusted for geographic variation in the price of drugs; (2)
beneficiaries’ premiums will be adjusted up or down to reflect the difference between the
approved bid of their prescription drug plan of choice and the national average bid amount
(adjusted for geographic variation); and (3) a late enrollment penalty will increase the
monthly premiums for beneficiaries who do not have any other “creditable prescription drug
coverage” (including Medicaid, a group health plan, a state pharmaceutical assistance
program, veterans’ or military coverage, or Medigap) and fail to enroll within 63 days of
becoming eligible for Part D.

CRS-4
coverage purchased from a Medicare prescription drug or Medicare Advantage plan do not
count.
The “Doughnut Hole”
Under Part D, Medicare does not contribute toward the cost of drugs when an
some individuals’ annual drug expenses fall in a certain range — that is, when
expenses are above the coverage limit but below the total amount necessary to reach
the out-of-pocket threshold. This aspect of the coverage has been referred to as the
“doughnut hole.”6
Under Part D, beneficiaries receiving the standard benefit must pay the full cost
of drugs once they reach the coverage limit of $2,250 and until their true out-of-
pocket payments reach the catastrophic cap of $3,600. Because of the $250
deductible and the 25% coinsurance up to the initial coverage limit, beneficiaries
with the standard benefit will have spent $750 out-of-pocket (excluding the
premium) when a total of $2,250 in drug costs has been spent. Assuming none of the
cost-sharing is paid for by group health insurance or other third-party arrangement,
they will have to spend an additional $2,850 to reach the catastrophic threshold of
$3,600. Since there is no Medicare contribution over this range, the beneficiary will
bear the full cost of drugs from the coverage limit of $2,250 until accumulated drug
expenses reach $5,100, as shown in Figure 1.
6 Some have referred to this as a “gap in coverage,” which can be misleading. Coverage
continues to be in effect even when Medicare is not contributing directly to the cost of
drugs, and the beneficiaries’ out-of-pocket expenditures accumulate toward the catastrophic
threshold. While there may be a gap in Medicare payments, there continues to be coverage,
and beneficiaries continue to have access to negotiated discounted prices.

CRS-5
Figure 1. Marginal Beneficiary Cost-Sharing by Total Drug Expenditures
Under Medicare Part D Standard Coverage, 2006
100%
90%
80%
ry
70%
cia
fi
ene
60%
B
Catastrophic coverage
t by
Part D standard
begins at $5,101
cke
50%
coverage deductible
is $250
f-Po
Part D standard coverage
40%
"doughnut hole";
Out-o
beneficiary pays all costs from
id
$2,251 to $5,100
30%
% Pa
20%
2006 projected median drug
2006 projected average drug
10%
expenditures ($1,891)
expenditures ($3,155)
0%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Total Annual Drug Expenditures
Source: Congressional Research Service (CRS). The projected median and average prescription drug expenditures for 2006 are from the 2003 baseline of the Congressional Budget
Office (CBO) and represent spending by or for Medicare enrollees, not including the impact of Part D.

CRS-6
Income-Based Provisions
The Medicare Part D standard benefit’s cost-sharing requirements are lowered
for beneficiaries below certain income levels (with additional eligibility criteria);
premiums, deductibles and coinsurance levels are reduced for qualifyin prescription
are sometimes required rather than coinsurance. There is no coverag low-income
beneficiaries. In addition, low fixed-dollar copayments for each ge limit for these
individuals, and thus no doughnut hole.
The provisions pertaining to low-income Medicare beneficiaries under Medicare
Part D are summarized in Table 2. Eligibility is based not only on beneficiaries’

CRS-7
countable income,7 but also their countable assets, or “resources,”8 whether they are
enrolled in Medicaid with full benefits (“dual eligibles”), and whether they are
institutionalized.9
Under Part D, dual eligibles who are institutionalized would have no cost-
sharing and pay no premiums for their prescription drug coverage. In 2006,
noninstitutionalized dual eligibles with countable income of no more than100% of
the poverty level would have no premium or deductible but would have copayments
of $1 for generic and preferred multiple-source drugs, and $3 copayments for all
other drugs costs from $251 up to $5,100. Once annual drug costs reach $5,100, the
beneficiary would pay no more for additional prescription drug expenses for the
year.10
Noninstitutionalized dual eligibles with countable income above 100% of
poverty and beneficiaries with countable income below 135% of poverty and
countable assets of not more than $6,000 for an individual or $9,000 for a married
couple would not pay premiums or deductibles, but would face slightly different
copayments. For drug costs of $251 up to $5,100 in 2006, these beneficiaries would
pay $2 per generic prescription and preferred multiple-source drug and $5 for all
other prescription drugs. Once annual drug costs exceed $5,100, these beneficiaries
would have no additional cost-sharing.
Those who do not qualify in any of the previous low-income categories but have
countable income below 150% of poverty and countable assets of no more than
7 “Countable income” means the amount of income counted for determining eligibility for
Supplemental Security Income (SSI) and is defined in Section 1612 of the Social Security
Act, as amended. “Poverty line,” or “poverty,” refers to the federal poverty guidelines
published by the Department of Health and Human Services. The 2003 federal poverty
guideline for an unmarried, aged Medicare beneficiary is $8,980 in countable income in the
48 contiguous states and the District of Columbia, $11,210 in Alaska, and $10,330 in
Hawaii. The 2003 federal poverty guideline for a married, aged Medicare beneficiary is
$12,120 in the 48 contiguous states and the District of Columbia, $15,140 in Alaska, and
$13,940 in Hawaii. Because the guidelines apply to “countable income” (which excludes
certain amounts and types of income), persons may qualify even though their total income
is above these amounts. For further information, see CRS Report RS21675, Medicare
Prescription Drug Proposals, Estimates of Beneficiaries Who Fall Below Income
Thresholds, by State, by Chris L. Peterson.
8 Throughout this report, “countable assets” refers to the amount of assets counted for
determining eligibility for Supplemental Security Income (SSI), defined in Section 1613 of
the Social Security Act, as amended.
9 To be considered “institutionalized,” dual eligibles must be an inpatient in a Medicaid-
certified medical institution or nursing facility, according to 1902(q)(1)(B) of the Social
Security Act, as amended.
10 Under Part D, Medicare is the payer of dual eligibles’ covered prescription drugs.
Medicaid coverage is not permitted to pay for these drugs or the accompanying cost-sharing.
However, this is not the windfall to states that it might appear to be. In 2006, states must
pay the federal government approximately 90% of the costs they would otherwise have
incurred if drug coverage for dual eligibles had continued under Medicaid. This percentage
drops annually until reaching 75% in 2015.

CRS-8
$10,000 for an individual or $20,000 for a married couple in 2006 would be eligible
for a partially subsidized premium, determined on a linear sliding scale.11 These
beneficiaries would face a $50 annual deductible for their prescription drug coverage.
Once the deductible was met, they would pay 15% of additional prescription drug
expenses from $251 to $5,100. Copayments of $2 per generic and preferred
multiple-source drug and $5 for all other prescription drugs would be required for
total annual drug expenses in excess of $5,100.
11 According to CBO estimates, beneficiaries with income at 135% of poverty will have no
premium, while those with incomes equal to 150% of poverty would be responsible for the
full $35 monthly premium. In general, individuals with incomes equal to 142.5% of poverty
(the midpoint of the range) would have a $17.50 monthly premium.

CRS-9
Table 2. Summary of Prescription Drug Coverage for Low-Income Individuals in Part D, 2006
Noninstitutionalized
dual eligibles with
countable income above
100% of poverty;
All other Medicare
Dual eligibles with
Medicare beneficiaries
beneficiaries with
countable incomec at or
with countable income
countable income below
Institutionalizeda dual
below 100%
below 135% of poverty
150% of poverty plus
eligiblesb
of poverty
plus assets testd
assets testd
Monthly premiume
$0
$0
$0-$35
Cost sharing for first
$250 of drug costs
$0
$0
$50
(annual deductible)
No cost-sharing or
Cost-sharing for drug
premium
$1/generic or preferred
$2/generic or preferred
costs from $250 to $5100
multiple-source drug,f
multiple-source drug,f
15%
(copayment or
$3 for all others
$5 for all others
coinsurance rate)
Cost-sharing for drug
$2/generic or preferred
costs exceeding $5100
$0
$0
multiple-source drug,f
(copayment)
$5 for all others
Source: Congressional Research Service.
a. To be considered “institutionalized,” dual eligibles must be an inpatient in a Medicaid-certified medical institution or nursing facility, according to 1902(q)(1)(B) of the Social Security
Act, as amended.
b. “Dual eligibles” are those Medicare beneficiaries who are also enrolled to receive the full benefits of their state’s Medicaid program.

CRS-10
c. “Countable income” means the amount of income counted for determining eligibility for Supplemental Security Income (SSI), defined in Section 1612 of the Social Security Act,
as amended. “Poverty” refers to the federal poverty guidelines published by the Department of Health and Human Services.
d. The assets test refers to the amount of assets counted for determining eligibility for SSI, defined in Section 1613 of the Social Security Act, as amended. To qualify in the below
135% of poverty category in 2006, countable assets (resources) are limited to $6,000 for an individual and $9,000 for a married couple. To qualify in the category below 150%
of poverty, countable assets are limited to $10,000 for an individual and $20,000 for a couple.
e. Additional amounts may be required for prescription drug plans with relatively high premiums. The full $35 premium is an estimate from the Congressional Budget Office (CBO).
f. A “multiple-source drug” is a covered outpatient prescription drug for which there are two or more drug products rated as therapeutically and pharmaceutically equivalent by the
Food and Drug Administration.

CRS-11
Cost-Sharing Examples
Examples follow of how much a hypothetical enrollee with a given level of drug
costs would pay under the standard coverage in Medicare Part D in 2006. For a given
level of prescription drug expenses, a beneficiary’s out-of-pocket payments will vary
depending on the plan’s deductible, coinsurance, coverage limit, and out-of-pocket
threshold. The cost to the government of providing coverage will also vary depending
on these plan characteristics as well as the premium charged to enrollees. More
specifically, if a plan is designed to increase the beneficiary’s share of the cost, the
government’s share of the cost will decrease.
Each of the following examples assumes that none of the cost-sharing is paid
by group health insurance or other third-party arrangement. The calculations do not
consider reductions in expenditures due to negotiated discounts, the effects of
formularies and pharmacy benefit managers (PBMs), or the consequences of
incentives to use generic medications.
Example 1: Enrollee has zero annual drug costs
Medicare Part D standard coverage, 2006
Premium
$420
Total payments
$420
In Example 1, the enrollee does not have any drug expenditures, and therefore
would pay only the premiums.
Example 2: Enrollee’s annual drug costs equal $50
Medicare Part D standard coverage, 2006
Deductible
$50
Premium
$420
Total payments
$470
In the second example, the enrollee’s annual drug expenditures equal $50. The
$50 in drug costs falls below the plan’s deductible. Consequently, the enrollee pays
the entire $50 plus the premiums.
Example 3: Enrollee’s annual drug costs equal $750
Medicare Part D standard coverage, 2006
Deductible
$250
Coinsurance (= 25% of $500a)
$125
Premium
$420
Total payments
$795
a. Equal to total drug expenditures ($750) minus the deductible ($250).

CRS-12
In Example 3, the enrollee has $750 in total annual drug spending. This amount
exceeds the deductible in Part D standard coverage by $500. The enrollee would pay
the premiums, the full $250 deductible and 25% of the $500 amount.
Example 4: Enrollee’s annual drug costs equal $1,500
Medicare Part D standard coverage, 2006
Deductible
$250
Coinsurance (= 25% of $1,250a)
$313
Premium
$420
Total payments
$983
a. Equal to total drug expenditures ($1,500) minus the deductible.
The fourth example illustrates enrollee out-of-pocket spending when the
enrollee’s total drug costs equal $1,500. The enrollee would pay the premiums, the
$250 deductible and 25% of expenses above the deductible.
Example 5: Enrollee’s annual drug costs equal $3,000
Medicare Part D standard coverage, 2006
Deductible
$250
Coinsurance (= 25% of $2,000a)
$500
Expenditures above $2,250 coverage
limit
$750
Premium
$420
Total payments
$1,920
a. Equal to the coverage limit ($2,250) minus the deductible ($250).
In Example 5, the enrollee’s cumulative drug costs for the year equal $3,000.12
Under Part D, for this level of total prescription drug spending, Medicare payments
would occur only for the first $2,250 of expenses. Thus, the $3,000 in expenses
generated by the enrollee would exceed the initial coverage limit by $750. The
enrollee would pay these excess expenses out-of-pocket. In total, the enrollee would
pay the premiums as well as the following cost-sharing: (1) the $250 deductible; (2)
25% of $2,000, where $2,000 equals the difference between the deductible and the
coverage limit of $2,250; and (3) the $750 in expenditures exceeding the initial
coverage limit.
12 CBO projected that in 2006, Medicare beneficiaries will spend an average of $3,155
annually on drugs, not taking into account the prescription drug benefit in Part D.

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Example 6: Enrollee’s annual drug costs equal $4,500
Medicare Part D standard coverage, 2006
Deductible
$250
Coinsurance (= 25% of $2,000a)
$500
Expenditures above $2,250 coverage limit
$2,250
Premium
$420
Total payments
$3,420
a. Equal to the coverage limit ($2,250) minus the deductible ($250).
In Example 6, the enrollee’s cumulative drug costs for the year equal $4,500.
The enrollee’s payments would be calculated in a similar manner as in the previous
example. Under Part D, the total out-of-pocket costs would be $3,420.
Example 7: Enrollee’s annual drug costs equal $6,000
Medicare Part D standard coverage, 2006
Deductible
$250
Coinsurance (= 25% of $2,000a)
$500
Expenditures between $2,250 coverage
limit and $5,100b
$2,850
Coinsurance (=5% of $900c)
$45
Premium
$420
Total payments
$4,065
a. Equal to the coverage limit ($2,250) minus the deductible ($250).
b. The level of cumulative expenditures at which enrollee spends $3,600 out-of-pocket is $5,100.
c. Equal to total drug expenditures ($6,000) minus $5,100.
Example 7 illustrates a situation in which an enrollee’s payments exceed the
bill’s out-of-pocket protection threshold of $3,600 (excluding premiums). In this
example, the enrollee’s cost-sharing would have otherwise exceeded this limit. With
total drug expenses of $6,000, the enrollee would have paid $4,500, in cost-sharing
(excluding premiums) without the plan’s out-of-pocket protection.13 However,
because $4,500 exceeds the plan’s out-of-pocket protection threshold, the enrollee
would pay only 5% of the spending above the $3,600 out-of-pocket protection
threshold. With a $250 deductible, a 25% coinsurance rate up to $2,250 in total
spending, and 100% cost-sharing above the $2,250 coverage limit, an enrollee would
13 Without the out-of-pocket protection, the beneficiary would have to pay a $250
deductible, $500 in coinsurance up to coverage limit of $2,250, and the full $3,750 between
$2,250 and $6,000 for a total of $4,500.

CRS-14
reach the $3,600 limit on out-of-pocket payments once the enrollee’s drug expenses
exceeds $5,100 for the year. Of the additional $900 of spending above the out-of-
pocket protection threshold in this example, the enrollee would be responsible for
paying only $45.
Example 8: Enrollee’s annual drug costs equal $12,000
Medicare Part D standard coverage, 2006
Deductible
$250
Coinsurance
(= 25% of $2,000a)
$500
Expenditures between $2,250 coverage
limit and $5,100b
$2,850
Coinsurance (=5% of $6,900c)
$345
Premium
$420
Total payments
$4,365
Note: Assumes all cost-sharing applies to the out-of-pocket maximum.
a. Equal to the coverage limit ($2,250) minus the deductible ($250).
b. The level of cumulative expenditures at which enrollee spends $3,600 out-of-pocket is $5,100.
c. Equal to total drug expenditures ($12,000) minus $5,100.
In Example 8, the enrollee’s cumulative drug costs for the year equal $12,000.
The enrollee’s payments would be calculated in a similar manner as in the previous
example. This enrollee would pay $4,365.
Beneficiaries Receiving the Standard Benefit
Figure 2 and Figure 3 illustrate beneficiaries’ out-of-pocket payments plus
premiums at different levels of total drug spending, based on the cost-sharing
requirements listed in Table 1. Figure 2 displays total prescription drug spending
up to $2,000, while Figure 3 shows spending up to $12,000.14 The figures assume
that all cost-sharing applies to each plan’s out-of-pocket maximum and does not
account for the reduced cost-sharing for low-income beneficiaries. The structure of
the benefit and cost-sharing in Part D standard coverage produces many changes in
coinsurance rates and out-of-pocket costs as total annual drug spending increases, as
can be seen in the kinks and corners in the figures.
Breakeven. The breakeven point is the point where the amount that an
individual pays for a plan’s cost-sharing and premiums is equal to what would have
been paid in drug costs in the absence of any drug coverage. The line in the Figure
2 and Figure 3 labeled “No drug coverage” represents the amount that an individual
14 CBO projects that 4.5% of beneficiaries will spend more than $12,000 on prescription
drugs in 2006. See CBO, March 2003 baseline projections, not including the impact of Part
D.

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would pay if he or she did not have any insurance coverage for prescription drugs.
The breakeven point is where this line is crossed by the line representing out-of-
pocket spending under Part D standard coverage. In the figures, the line segment to
the right of the “No drug coverage” line represent levels of drug spending where the
enrollee pays less in out-of-pocket expenses and premiums than if they had no drug
coverage; the line segment to the left of this line represent levels of drug spending
where the enrollee pays more in out-of-pocket expenses and premiums than if he or
she had no drug coverage. Based on the premium and cost-sharing outlined in Part
D standard coverage, the breakeven point is at $810 in total annual drug spending.
While the breakeven point is one factor in a beneficiary’s decision whether to
participate in this insurance plan, other factors, such as attitudes toward risk and
uncertainty, are also important. Many beneficiaries will be making their decision
about whether to purchase the insurance based on their expected annual prescription
drug costs and their attitudes towards risk. All other things being equal, the higher
the breakeven point, the less likely beneficiaries will be to join voluntarily.

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Figure 2. Annual Out-of-Pocket and Premium Spending, by Total Drug Spending, Up to $2,000, 2006
Source: Congressional Research Service (CRS).
Note: The figure assumes that all cost-sharing applies to the plan’s out-of-pocket maximum. The figure does not reflect the plan’s reduced cost-sharing for low-income beneficiaries.

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Figure 3. Annual Out-of-Pocket and Premium Spending, by Total Drug Spending, Up to $12,000, 2006
No drug coverage
$8,000
$6,000
Part D standard coverage
$4,000
Breakeven point
t-of-Pocket and Premium Spending
of $810
u $2,000
O
$0
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
Total Drug Spending
Source: Congressional Research Service (CRS).
Note: The figure assumes that all cost-sharing applies to the plan’s out-of-pocket maximum. The figure does not reflect the plan’s reduced cost-sharing for low-income beneficiaries.