The New Medicare Prescription Drug Law

A key feature of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) is its reliance on private insurers (stand alone-drug insurers and Medicare Advantage plans) to negotiate drug prices and reduce program costs. One of the major tools that they will use to steer enrollees toward preferred drugs are formularies, or defined lists of drugs for which a prescription drug plan will provide coverage. Formularies have become a common feature of existing private employer-sponsored health insurance programs, as well as Medicaid, the federal-state program that provides health coverage to nearly 53 million low-income individuals. [1] Unlike these existing programs, however, the new stand-alone prescription drug insurers are not responsible for the costs for other health services (such as hospital or physician costs) that could rise if their formulary policies are overly restrictive. Additionally, the MMA permits private insurers (both stand alone plans and Medicare Advantage plans) to operate “closed” formularies that are not permitted by Medicaid; allows people with a vested interest to create the formularies; and does not clarify the exact appeals rights that enrollees will have to access needed, prescribed drugs. These policies could result in Medicare beneficiaries being denied access to drugs prescribed by their physicians, and suffering bad health outcomes as a result.

The MMA permits private insurers to cover most outpatient prescription drugs and biologicals. Plans cannot pay for drugs already covered by Medicare Parts A and B [2] and a limited list of drugs for so-called non-essential uses. [3] Prescription drug plans can cover all other FDA-approved medications with a valid prescription, but could limit which drugs they cover by operating formularies. Plans that elect to use formularies must meet the following requirements:

Develop through Committee. Formularies must be developed by a Pharmacy and Therapeutic (P&T) Committee, and the majority of the Committee’s members must be practicing physicians or pharmacists. At least one practicing physician and one practicing pharmacist on the Committee must be independent from the prescription drug plan and have expertise in the care of the elderly or people with disabilities. [4]

Use clinical information. In developing and reviewing the formulary, the P&T Committee must base its decisions on the strength of the scientific evidence and standards of practice, including assessing peer-reviewed medical literature, such as randomized clinical trials, pharmacoeconomic studies, outcomes research data, and other information that the Committee deems appropriate. The P&T Committee must also consider whether including a drug on the formulary has therapeutic advantages in terms of safety and efficacy. [5]

Determine classes and drugs covered in each class. The formulary must include drugs within each therapeutic category and class of covered drugs, although not necessarily all drugs within such categories and classes. The law’s reference to “drugs” appears to mean that prescription drug plans must cover at least two drugs in every class, although plans are able to define for themselves what is a class. The law also provides for the United States Pharmacopeia to be asked to develop model guidelines for therapeutic categories and classes, although plans will not be bound by them. [6]

Update formularies. Except to take into account new drugs and new therapeutic uses of drugs, a prescription drug plan can only change the therapeutic categories and classes at the beginning of each plan year. Plans can change the drugs included or excluded from their formulary, however, at any time. Before removing a drug from the formulary, the plan must provide notice to their enrollees through posting the formulary change on the Internet or providing the formulary to enrollees, upon request.

Formularies have become an important tool in the management of pharmaceutical costs and in efforts to improve the quality of health services received. In some cases, physicians prescribe drugs for conditions and situations that are outdated or contraindicated. There are also large variations in pharmaceutical costs for drugs to treat the same condition, and these costs do not always correlate with the effectiveness of a drug or other clinical criteria. In these situations, formulary policies can serve important public policy goals by conserving health resources and providing higher quality care without any deleterious impacts on individuals. However, the implementation of the MMA’s formulary provisions could create problems.

Closed formularies could lead to access problems. Closed formularies could potentially exclude high-cost drugs without regard for the unique needs or circumstances of individuals. Under open formularies, plans can manage utilization by denying access to certain drugs (such as higher cost drugs or drugs shown through clinical evidence to be less effective in most cases than a preferred drug) until an individual has met specific procedural requirements (such as receiving prior authorization or failing to benefit from a preferred drug). Closed formularies do not make such accommodations for normal, individual-level variations in responses to pharmaceuticals. The MMA provides for an exceptions process where an individual, with their physician’s support, can petition a private plan to cover a non-formulary drug or charge the lowest cost-sharing (i.e. cost-sharing for the preferred drug in a class) for a non-preferred drug. However, private insurers retain full discretion to approve or deny all such requests. This creates the risk that needed drugs may not be accessible in a timely or affordable manner under the new Medicare benefit, as the formal appeals process could take several weeks to be resolved.

Formulary decisions are not sufficiently independent. The MMA requires that P&T Committees include at least one practicing physician and one practicing pharmacist who are independent from the prescription drug plan. The law places no minimum or maximum constraints on the size of the P&T Committee. Therefore, the value of having two independent participants could be diluted to the point of being meaningless if plan employees are permitted to dominate the P&T Committee, and outvote the two independent committee members. Since the MMA relies on P&T Committees to ensure that formularies are developed based on current clinical evidence and standards of clinical practice, it is imperative that P&T Committee decisions are not unduly influenced by a plan’s management or financial interests.

Financial incentives could lead to excessively restrictive formularies. The MMA places prescription drug plans at-risk for limiting drug costs. For the law to be successful at limiting costs to Medicare and for plans to maximize their profitability, prescription drug plans will have strong incentives to limit spending. While this is intended to put pressure on plans to reduce prices, these incentives may lead plans to avoid persons with high-cost conditions or limit drug spending by developing restrictive formularies. [7], [8] Plans could achieve this goal by keeping essential medications, such as latest generation mental health drugs, off of their formularies.

There is a potential for arbitrary formulary limitations, such as no coverage for off-label uses. Plans could also develop formulary policies that impose arbitrary dispensing limits (such as providing coverage for only 3 prescriptions per month) or that limit access to prescription drugs for off-label uses. Off-label prescribing is a practice where a physician prescribes a prescription medication for a use that is not an indication that was approved by the Food and Drug Administration (FDA). Although the MMA clearly states that Medicare prescription drug plans are permitted to cover drugs for off-label uses, the law contains no provisions that would prevent plan formularies from limiting coverage to only “on-label” uses. Many uses for prescription drugs, while not FDA approved, are therapeutically important. Persons with rare conditions have been especially likely to take drugs for non-FDA approved uses because studies have not been conducted to evaluate drug efficacy or safety in those cases. Moreover, for conditions where the standards of clinical practice are evolving rapidly, evidence of the clinical benefits of new uses of drugs is frequently not available in the “real time” needed to treat individuals with life threatening conditions.

There are no guarantees that plans will cover breakthrough drugs or life-saving drugs. Because plans have incentives to keep costs down, they may delay or deny coverage of new and expensive drugs. The plan-stacked P&T Committee may decide that a new drug belongs in an old class of drugs, and prefer an older and less effective drug instead. For persons with cancer, multiple sclerosis, Alzheimer’s disease, HIV/AIDS, and other life-threatening and progressively disabling conditions, access to the latest medications is important because they can prevent further disability and help the individual stay alive. New drugs are especially important to persons who have failed on all currently available treatments.

Dual eligibles could be worse off. For over 6 million dual eligibles (i.e. , low-income people with disabilities and elderly individuals enrolled in both Medicare and Medicaid), Medicaid prescription drug coverage will end when the new Medicare prescription drug coverage program begins. Drug coverage for dual eligibles will shift from Medicaid to private Medicare prescription drug plans, and dual eligibles will not have the choice to retain their Medicaid prescription drug coverage instead of signing up for a Medicare prescription drug plan. Dual eligibles have poorer health status and more extensive prescription drug needs than most other Medicare beneficiaries. [9] Coverage of medically necessary drugs is particularly critical because most dual eligibles are quite poor, and thus, unable to pay out-of-pocket for non-covered drugs. For these individuals, closed formularies pose special risks. Both their ability to navigate an appeals process and afford needed drugs in the interim is limited. This could result in serious reductions in access, even in states with limits on their Medicaid prescription drug benefits. [10]

Require open formularies. Legislative changes could require private plans to operate open formularies similar to those in Medicaid. While some may argue this would limit the ability of private plans to negotiate cost savings from pharmaceutical manufacturers, open formularies do not weaken a plan’s ability to use tiered cost sharing, prior authorization and other tools to restrict access to drugs when this is appropriate and evidence-based. For example, for many classes of drugs, it would be clinically appropriate for a plan to use “reference pricing” where all Medicare-covered drugs are on the formulary, but individuals pay the difference in price between the preferred drug and the drug that their doctor prescribes. [11] Such a system, however, should be carefully limited to classes for which individual drugs are close substitutes for each other, and would not be appropriate in cases (such as HIV/AIDS antiretroviral drugs) where drugs within a class are less interchangeable. Open formularies provide a safety valve so that individuals and their physicians can demand exceptions to routine formulary practices when it is clinically indicated. For dual eligibles and other low-income Medicare beneficiaries, it can be especially important to ensure that all needed drugs are on the formulary, as cost-sharing protections ensure access to all formulary drugs. The MMA protects dual eligibles and other low-income Medicare beneficiaries by limiting cost-sharing to no more than $3 per prescription for a preferred drug and $5 per prescription for non-preferred drugs, with an even lower limit for dual eligibles with income below the poverty level.

Ensure that P&T Committee decisions are based on clinical evidence. Through regulations and administrative monitoring, the federal government can assure that P&T Committee formulary decisions are based on clinical evidence. The law requires P&T Committees to base their decisions on the strength of the scientific evidence and standards of practice, including assessments of peer-reviewed medical literature, such as randomized clinical trials, pharmacoeconomic studies, outcomes research data, and other information that the Committee deems appropriate. Federal officials should require plans to comply with federally-promulgated and other commonly-accepted standards of clinical practice. For example, the standard of care for the treatment of HIV/AIDS is guided by federal treatment guidelines that are evidence-based, and updated regularly. Through regulation, federal officials should develop a process whereby the Secretary annually publishes a list of clinical practice guidelines for a range of conditions with which private plan formularies must be consistent. Additionally, regulations should prohibit private plans from using cost-sharing levels and other features of a prescription plan benefit to create barriers to access to drugs that have been shown through clinical research to produce superior results. Federal officials should also commit resources to monitoring and evaluating P&T Committee practices and private plan benefit features on an ongoing basis and making recommendations for administrative and legislative improvements, when necessary.

Limit the ability of plans to drop drugs from the formulary throughout the year. The MMA provides for an annual election period when Medicare beneficiaries are permitted to change prescription drug plans. Plans are permitted, however, to change their formularies at any time. For individuals with a broad range of conditions, treatment interruptions can be extremely harmful. Furthermore, for many individuals, the sole criterion for selecting a prescription drug plan is to ensure that specific drugs are covered. The MMA should be changed to prohibit plans from dropping drugs from their formularies, except with advance notice prior to the annual plan election period or in exceptional circumstances, such as if new clinical evidence indicates that use of a drug is unsafe or ineffective. Additionally, Congress and federal officials should develop supplemental safeguards for persons with conditions, such as HIV/AIDS or mental illness, where treatment interruptions pose unique dangers to the individual or have serious public health implications.

Provide for access to non-formulary drugs for persons with serious or complex conditions. For new drugs or drugs used to treat rare conditions, scientific evidence may not be available to justify to a P&T Committee that it should add it to the plan’s formulary. For individuals who have failed to benefit from all other available treatments, and persons with life-threatening conditions, a looser standard for coverage of drugs is necessary. If closed formularies are permitted, persons with serious or complex conditions, or at a minimum, persons with conditions that in the absence of treatment are expected to result in death, should be exempted from formulary restrictions and should have access to all FDA-approved drugs with a valid prescription. This is especially important when private plans have incentives to deny coverage for high-cost drugs, and clinical evidence is unavailable to support the denial of access to a new treatment. Plans that use open formularies should be required to provide for standing exceptions to tiered cost-sharing requirements so that individuals do not need to request exceptions repeatedly for drugs used on an on-going basis.

Permit Medicaid to supplement gaps in Medicare drug coverage. Because of their poorer health status and their lower incomes, dual eligibles are particularly vulnerable to not having their prescription drug needs met by private Medicare prescription drug plans. They are uniquely situated as the cohort of Medicare beneficiaries most at risk by the MMA because they are losing current protections provided through Medicaid. Congress should modify the law to permit state Medicaid programs to voluntarily supplement gaps in Medicare’s drug coverage. States advocated for the ability to provide wraparound drug coverage through Medicaid before the Medicare prescription drug law was enacted, and it is consistent with the manner in which Medicaid already supplements Medicare coverage for other services for dual eligibles, such as cost-sharing and long-term services.

Jeffrey S. Crowley is Project Director for the Health Policy Institute at Georgetown University

[1] CBO March 2004 Baseline, see
[2] Drugs covered by Medicare Parts A and B include injectable drugs, immunosuppressive drugs used by organ transplant recipients, epoetin alfa (which is used by persons with cancer and end-stage renal disease and other conditions to treat anemia), and certain vaccines. Medicare also covers oral cancer drugs if they are also available in injectable form. Oral cancer drugs not available in injectable form, however, are not currently covered by Medicare and prescription drug plans will be permitted to cover these drugs.
[3] Except for smoking cessation drugs, the MMA prohibits Medicare prescription drug plans from covering drugs that may be restricted from coverage by state Medicaid programs. Medicaid programs that choose to cover prescription drugs are permitted not to cover the following drugs (and their medical uses): 1) Drugs when used for anorexia, weight loss, or weight gain; 2) drugs when used to promote fertility; 3) drugs when used for cosmetic purposes or hair growth; 4) drugs when used for the symptomatic relief of coughs and colds; 5) drugs when used to promote smoking cessation; 6) prescription vitamins and mineral products, except prenatal vitamins and fluoride preparations; 7) nonprescription drugs; 8) covered outpatient drugs which the manufacturer seeks to require as a condition of sale that associated tests or monitoring services be purchased exclusively from the manufacturer or its designee; 9) barbiturates; and, 10) benzodiazepines.
[4] §1860D-4(b)(3)(A) of the Social Security Act, as added by P.L. 108-173.
[5] §1860D-4(b)(3)(B) of the Social Security Act, as added by P.L. 108-173.
[6] §1860D-4(b)(3)(C) of the Social Security Act, as added by P.L. 108-173.
[7] Report to Congress: New Approaches in Medicare (see Chapter 1), Medicare Payment Advisory Commission, June 2004.
[8] Huskamp, H.A. and Keating, N.L. , The New Medicare Drug Benefit: Potential Effects of Pharmacy Management Tools on Access to Medications, Harvard Medical School prepared for the Henry J. Kaiser Family Foundation, July 2004.
[9] Dual Eligibles: Medicaid’s Role in Filling Medicare’s Gaps, Kaiser Commission on Medicaid and the Uninsured, March 2004.
[10] Crowley, J.S. , The New Medicare Prescription Drug Law: Issues for Dual Eligibles with Disabilities and Serious Conditions, Kaiser Commission on Medicaid and the Uninsured, June 2004.
[11] Huskamp, H.A. , Rosenthal, M.B. , Frank, R.G. , and Newhouse, J.P. , “The Medicare prescription drug benefit: how will the game be played?,” Health Affairs (Mar/Apr 2000): 8-23.

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