Order Code RS21583
Updated December 29, 2003
CRS Report for Congress
Received through the CRS Web
Medicare Prescription Drug Plans:
Comparison of Actuarial Values
Chris L. Peterson
Analyst in Social Legislation
Domestic Social Policy Division
On December 8, 2003, the “Medicare Prescription Drug 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 prescription drug benefit that begins in 2006. This report
compares the actuarial values of the prescription drug benefit under the law’s standard
coverage and the coverage available to certain low-income beneficiaries. The actuarial
values of private drug coverage presently available to seniors were also estimated. The
actuarial values of the Part D coverage for low-income beneficiaries were greater than
all of the private plans that were modeled. The actuarial value of the prescription drug
benefit in the Part D standard coverage was greater than the prescription drug benefit in
the individually purchased Medigap supplemental plans but was less than the typical
prescription drug benefit in employment-based coverage and in the plan with the
greatest enrollment among federal employees, retirees and dependents.
Generally, the “actuarial value” of a health insurance plan refers to the average
amount that the plan would pay in benefits per person in one year for a particular
population. Since the actuarial value reflects only what is paid out in benefits, it does not
take into account any premiums paid. When comparing different plans, the actuarial
value assesses the relative generosity of the benefits, holding constant other factors that
may affect the amount actually paid in benefits. For example, a health insurance plan may
happen to have enrollees who are sicker on average than those in another plan. The
actuarial values should not make the first plan appear to be more generous because it has
paid more in benefits simply because its enrollees are sicker and therefore more costly on
average. Thus, plans’ actuarial values are derived by modeling each plan’s benefits and
cost-sharing in a standardized population, using a standardized set of utilization and price
factors, and without taking into account differences in coverage resulting from utilization
or cost controls.
Model Description and Assumptions. The computer model used to produce
the actuarial values in this report was created for the Congressional Research Service
(CRS) by the Hay Group, an employee benefit and actuarial firm. The model is based on
Congressional Research Service ˜ The Library of Congress
the health care utilization and expenditure data from the 1998 Medicare Current
Beneficiary Survey (MCBS), which is a nationally representative survey of beneficiaries
in fee-for-service (FFS) Medicare.1 For this report, expenditures on prescription drugs
and all other health care services were each updated to 2006 levels of spending,
accounting for changes in price and utilization.2
To compare the actuarial values of Medicare prescription drug plans, the
standardized population used in the model is the FFS Medicare population. Thus, the
actuarial values reflect only the benefits and population in FFS Medicare and not those
in Medicare managed care plans. The values are estimates of what Medicare would pay
per person in a year assuming 100% enrollment by the Medicare FFS population in the
plans being valued. For comparative purposes, other factors that may affect the actual
amount paid by a plan in benefits (e.g., use of pharmacy benefit managers (PBMs), which
some plans in this report may use) are disregarded or held constant. Although expected
enrollment, use of PBMs, the health status of enrollees, and other factors are used in
calculating total expected costs — in cost estimates, for example — they are not factors
in comparing the generosity of benefits using actuarial values.3 With access to a
prescription drug benefit, a beneficiary may also, for example, treat a condition with a
long-term maintenance drug therapy. The model does not take account of changes in
costs associated with such benefit substitution.
The actuarial values do not include out-of-pocket beneficiary cost-sharing (for
example, deductibles and copayments), although the model does adjust for the impact of
such cost-sharing on utilization. For example, one plan may pay for half of enrollees’
prescription drug costs while another plan pays for 90% of those costs. If the coinsurance
is the only difference in the plans, one would expect enrollees in the 90% plan to use more
prescription drugs because the price they pay out of their own pocket is lower than for
those in the 50% plan. In order to estimate how much more utilization of prescription
drugs enrollees in the 90% plan would have compared to those in the 50% plan,
assumptions must be made about the impact cost-sharing has on utilization in general.
The standardized factors in the model that adjust health care utilization for changes in
cost-sharing were developed by the Centers for Medicare and Medicaid Services (CMS)
based on the RAND Health Insurance Experiment that took place in the 1970s and early
1980s. The RAND findings are still the best available data for evaluating how different
levels of cost-sharing influence health care utilization.
According to the 2003 Medicare trustees’ report, approximately 84% of Medicare beneficiaries
were in the fee-for-service program in 1998; the rest were enrolled in private managed care plans.
The data were trended based on projections in the 2003 Medicare trustees’ report and the March
2003 baseline projections of the Congressional Budget Office (CBO). It must be noted that the
trend used for “other health care services” is a single number applied to all the categories of
non-prescription drug spending, which may not be reflective of increases in some categories of
non-prescription drug spending.
Although the actuarial values do not reflect expected enrollment, they are influenced by the
standardized population chosen for the analysis. If it were possible, for example, to include
beneficiaries in Medicare managed care plans, the results could differ, to the extent that the
managed care population differs from the FFS population.
Proposed Medicare Prescription Drug Benefits and
Estimated Actuarial Values
The model calculates the actuarial value of the current Medicare fee-for-service
program as approximately $7,750 in 2006. This valuation includes all current Part A and
Part B covered benefits and excludes most outpatient prescription drugs. As previously
mentioned, this amount excludes beneficiary cost-sharing and any impact from premiums.
Standard coverage. Under P.L. 108-173, the Part D prescription drug benefit
will be offered by private entities, either prescription drug plan sponsors or Medicare
Advantage plans. The prescription drug benefit as modeled for the Medicare Part D
standard coverage in 2006 is summarized in Table 1. For purposes of this report, Part D
standard coverage was added to the current Medicare FFS program. This increases the
actuarial value in 2006 by approximately $1,920. This value does not include beneficiary
cost-sharing; thus, total spending on prescription drugs (that is, combined plan and
beneficiary) would be higher.
Prescription drug cost-sharing covered by private health insurance does not count
toward the Part D out-of-pocket maximum. The actuarial values presented in this report
assume that all cost-sharing counts toward the out-of-pocket maximum.
Coverage for low-income individuals. The cost-sharing for prescription drugs
is reduced for beneficiaries with low income and low resources, or assets. Table 1
summarizes the provisions of the coverage for the beneficiaries who qualify based solely
on their income and assets. “Dual eligibles,” Medicare beneficiaries enrolled in their
state’s full Medicaid benefits, may qualify for cost-sharing reduced further than the levels
shown in Table 1.4 Provisions exclusively for dual eligibles were not modeled. Greater
specificity on the eligibility criteria and cost-sharing provisions under Part D is provided
in other CRS reports.5
The actuarial value in 2006 of Part D prescription drug coverage for beneficiaries
with countable income below 135% of poverty and with countable assets below $6,000
for an individual and $9,000 for a married couple was estimated at $3,520.6 This is
Dual eligibles who are institutionalized would pay no premium and have no cost-sharing
whatsoever. 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 reaching the
$3,600 out-of-pocket protection threshold (which for this group includes payments made under
the low-income subsidy provisions).
See CRS Report RL31966, Overview of the Medicare Prescription Drug and Reform
Conference Agreement, H.R. 1, by Jennifer O’Sullivan et al. An analysis of the cost-sharing in
the law’s low-income provisions is presented in CRS Report RL31525, Beneficiary Cost-Sharing
Under the Medicare Prescription Drug Benefit, by Chris L. Peterson and Jim S. Hahn.
“Countable income” and “countable assets” refer to the respective amounts counted for
determining eligibility for Supplemental Security Income (SSI). “Poverty” refers to the federal
poverty guidelines published by the Department of Health and Human Services. For additional
approximately 83% greater than the actuarial value of the Part D standard coverage. The
actuarial value of Part D prescription drug coverage for those who do not qualify in any
other low-income category 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 was estimated at $3,090.7 This is 12% less than the actuarial value of the
coverage available to those who qualify in the under-135%-of-poverty category, but is
61% greater than the actuarial value of the Part D standard coverage.
Under the law’s low-income provisions, individuals with certain levels of drug
expenditures would pay a copayment rather than the typical coinsurance percentage.
Because the MCBS does not contain enough information to model copayment
prescription drug plans, the copayments for 2006 of $2 per generic drug and $5 per brand
drug were converted to effective coinsurance percentages, based on information provided
by the PBM Express Scripts on prescription drug utilization and spending by its members
who are age 65 and older. A 6% average coinsurance was determined to best represent
the 2006 copayments and was used in the model to estimate the actuarial value for the
coverage for low-income Medicare beneficiaries.8
Selected private prescription drug benefits. Actuarial values were also
estimated for prescription drug benefits available in private plans — specifically, the three
Medigap plans that cover prescription drugs, the typical prescription drug benefit in
employment-based coverage, and the prescription drug benefit in the standard option of
the Blue Cross/Blue Shield plan available to federal employees through the Federal
Employees Health Benefits program (FEHB).
In general, there are 10 standardized Medigap plans, which are private insurance
plans that individual beneficiaries may purchase to cover costs not covered by Medicare.
Of those 10 plans, only 3 cover prescription drugs. Between 2% and 3% of Medicare
beneficiaries are enrolled in these three plans, known as H, I and J.9 Plans H and I have
an identical benefit for prescription drugs: $250 annual deductible with 50% coinsurance
until the plan’s annual maximum benefit for prescription drugs is reached, which is
$1,250. The prescription drug benefit in Plan J is the same as Plans H and I except that
the annual maximum benefit for Plan J is $3,000. The actuarial value of the prescription
drug benefit in Plans H and I was estimated to be $780 in 2006; for Plan J, the actuarial
value was estimated at $1,260.
information, see CRS Report RS21675, Medicare Prescription Drug Proposals: Estimates of
Beneficiaries Who Fall Below Income Thresholds, by State, by Chris L. Peterson.
Plans may use a lower asset threshold for determining eligibility in this category.
The law calls for a $2 copayment for plans’ multiple-source preferred drugs. However, the data
from Express Scripts could not provide any separate information on these prescription drugs. If
this could be accounted for, the actuarial value of the low-income coverage could be higher.
Calculated by CRS from information in the March 2003 report to Congress of the Medicare
Payment Advisory Commission (MedPAC), http://www.medpac.gov/publications
/congressional_reports/Mar03_Ch5.pdf. These prescription drug plans will not be available to
new Medicare beneficiaries after December 31, 2005.
More than half of workers covered by their employer’s health plan have three-tier
prescription drug coverage. Three-tier coverage is where there are separate copayment
amounts for generic drugs, the plan’s preferred brand-name drugs, and non-preferred
brand-name drugs. In 2002, the average copayments in these plans were $9 for generic
drugs, $17 for preferred drugs, and $25 for non-preferred drugs. As previously discussed,
for modeling purposes, it is necessary to transform the copayment amounts into average
coinsurance rates. However, because the preferred and non-preferred designations for
prescription drugs vary by plan, it is not possible to calculate a single coinsurance rate.
Instead, minimum and maximum rates were calculated by assuming that (1) all brandname drugs are preferred, and (2) all brand-name drugs are non-preferred. This yielded
a coinsurance range of 32% to 43%. Also, most employment-based plans do not have a
separate out-of-pocket maximum for prescription drugs. They do, however, have an outof-pocket maximum for total health care spending — an average of $2,000 for individual
coverage. This was entered into the model as the out-of-pocket maximum for prescription
drugs. However, enrollees in these plans would probably have other health care spending
and therefore reach the out-of-pocket maximum before spending $2,000 on prescription
drugs. As a result, the actuarial value of a typical employment-based health plan,
estimated to be between $2,070 and $2,470 in 2006, could be slightly underestimated.10
The FEHB plan in this analysis is the Blue Cross/Blue Shield (BCBS) standard
option plan for 2004. Nearly half of all FEHB policyholders are enrolled in this plan, and
about half of those enrollees are federal annuitants. The actuarial value of the prescription
drug portion of the plan was estimated at $2,720 in 2006, assuming all prescription drugs
are purchased through a preferred retail pharmacy, where the coinsurance is 25%. At nonpreferred retail pharmacies, the coinsurance is 45%. Through mail order, there is a $10
copayment for generic drugs and a $35 copayment for brand-name drugs. If the use of
non-preferred pharmacies and mail-order drugs were known and modeled, the actuarial
value may be different. Like most employment-based plans, the BCBS standard option
does not have a separate out-of-pocket maximum for drugs. Its overall out-of-pocket
maximum is $4,000 for care through preferred providers. By simply using the plan’s
overall out-of-pocket maximum, the actuarial value could be slightly underestimated.
Discussion. The actuarial values reflect not only plans’ benefits but also the
assumptions used to trend to 2006. The trends can substantially change the dollar
amounts of actuarial values but tend to have a smaller impact on the relative values of the
plans. Thus, comparisons of the actuarial values are best represented by calculating the
differences in percentage terms rather than dollar terms. For example, it is preferable to
say that the actuarial value of the Part D standard coverage is approximately 52% greater
than that in Medigap plan J, rather than to cite the $660 difference.
The actuarial value of prescription drugs in Part D standard coverage is higher than
in Medigap Plan J. However, beneficiaries with total drugs expenses of $3,250 to $6,680
would pay less out of pocket in cost sharing in Plan J than in the Medicare standard option
(excluding premium costs). Thus, enrollees with certain levels of drug spending may
actually have lower out-of-pocket expenses in a plan with a lower actuarial value.
The information on employment-based health plans is based on the 2003 annual survey of
employer health benefits published by the Kaiser Family Foundation and the Health Research and
Educational Trust (http://dev.kff.org/insurance/ehbs2003-2-set.cfm).
Table 1. Summary of Prescription Drug Benefits As Modeled, Actuarial Values for Medicare Beneficiaries, 2006
Selected Part D prescription drug benefits (P.L. 108-173)
Selected private prescription drug benefits
Those ineligible for
countable income below
150% of poverty
plus assets test
below 135% of
drug benefit in
H and I
drug benefit in
Medigap plan J
drug benefit in
deductible is met
limit to out-ofpocket maximum
Beyond out-ofpocket threshold
Source: Congressional Research Service
Note: Actuarial values assess relative generosity of insured benefits. Factors that may affect the actual amount paid by a plan in benefits (e.g., use of pharmacy benefit managers, which
some of these plans may use) are disregarded or held constant. Comparisons of actuarial values are best represented by calculating differences in percentages.
Individuals would qualify for this category if they had countable income below 135% of poverty but did not meet the assets test for the 135% of poverty category but did for the 150%
of poverty category. Beneficiaries who are also eligible for Medicaid may be eligible for further-reduced cost-sharing; those actuarial values were not modeled.
Based on data from “Employer Health Benefits: 2003 Annual Survey,” from the Kaiser Family Foundation and Health Research and Educational Trust. The coinsurance rates are
averages based on the 2002 prescription drug copayments reported in the survey and adjusted using data from Express Scripts, a pharmacy benefits manager (PBM).
Also using data from Express Scripts, these copayments were transformed to an average 6% coinsurance rate. The law also calls for a $2 copayment for plans’ multiple-source preferred
drugs. However, the data from Express Scripts could not provide any separate information on these prescription drugs.