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Highlights from the Medicare Prescription Drug Regulation

Recently, the Administration issued the proposed regulation that will guide the implementation of the drug benefit in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). The regulation is proposed and not final and is subject to comment and change. But it is, arguably, the most important health policy development of the year. This is because the law itself is vague on key issues, raising concerns about how accessible and affordable prescription drugs will be for seniors and people with disabilities on Medicare.[1] The Secretary of Health and Human Services has the regulatory authority to address many of these concerns. Whether and how consumer protections have been strengthened is revealed in the proposed regulation. The list below describes highlights from the Title I (prescription drug) regulation, identifying areas where the proposed regulation improves, remains silent on, or worsens the provisions of the law for beneficiaries.[2]

The “Good.” Some parts of the regulation could make the drug benefit better than it would otherwise have been.

  • Waives the “non-interference” clause, creating the precedent to do so more broadly: The law prohibits the Secretary from “interfering” with price negotiations between private plans and drug manufacturers (1860D-11(i), p. 35-36). However, in an aggressive attempt to limit the “fallback” option (see below), the Administration suggests that its requirement to ensure that payments are “reasonable and equitable” supercedes the so-called “non-interference” clause (Q(4), p. 46734-35; §423.871, p. 46857). This authority could be extended to allow the Secretary to oversee drug prices in all plans to ensure that Medicare gets the best deal for its beneficiaries.
  • Opens the door to sustaining retiree coverage and improving all coverage: The law’s incentives and policies will likely cause some employers to reduce their retiree drug coverage.[3] To prevent employers from dropping their own contributions while gaining the new Medicare subsidies, the regulation uses a definition of “actuarial equivalence” that takes into account employers’ contributions to drug coverage (R(3)(b)(2), p. 46741-42). Since this an entirely new definition of what constitutes an equivalent benefit, the regulation could go further. For example, it could ensure that employers cannot save more than the amount of the new Federal subsidy. A creative definition of actuarial equivalence could also be used in the rest of the program. For example, all plans could be prohibited from making mid-year changes to their formularies or cost sharing unless they certify that such changes do not reduce their benefit’s value – as is required for retiree plans under the regulation (R(3)(b)(1) p. 46740; §423.884(a)(2), p. 46858).
  • Broadens definition of who qualifies for the low-income benefit: The law creates a new Medicare low-income drug benefit that has several levels of coverage (1860D-14, p. 44-51). The proposed regulation takes the option, provided by the law, to include as “full subsidy eligible individuals” people in Medicare Savings Programs (programs in Medicaid that assist certain low-income beneficiaries with Medicare cost sharing and premiums) (P(1), p. 46726; §423.773(c)(3), p. 46854). This expands the number of beneficiaries who will be eligible for more generous drug assistance. The regulation also proposes a more lenient assets test for the low-income drug benefit (P(1), p. 46726; §423.772, p. 46854) – keeping the enrollment barrier of having such a test, but making it easier for individuals who apply to qualify.
  • Provides some, albeit limited, information to beneficiaries before they enroll in plans: The law does not require that plans provide specific information on drug prices, cost sharing, or similar plan features to beneficiaries prior to enrollment (1860D-1(c)(3), p. 11). The regulation appears to extend the type of price information available in the discount care program to the drug benefit in 2006 (B(8), p. 46643). The regulation does not, however, ensure that information such as each drug’s cost sharing and prior authorization policies will be accessible, and how information will be available (e.g., internet only).

The “Bad.” The proposed regulation contains “sins of omission” in which it is silent on or does not address several provisions in the law that could have negative effects on beneficiaries.

  • Fails to limit “cost management tools” that could reduce access: The law contains no explicit limits on the types of cost management tools that plans could use. The proposed regulation affirms plans’ flexibility in designing and using such tools, although it solicits comments on whether this could cause access problems (C(4)(b), p. 46661). It could have authorized the Secretary to disapprove plans that use potentially harmful practice such having entire classes of drugs with no single drug available at a preferred or low cost sharing level.[4] In addition, it could have, but didn’t, create a meaningful appeals process to ensure that cost management tools do not limit access to needed medications (see below). As a consequence, drug plans might constrain access through practices such as limiting prescriptions to 30-day supplies, constraining the number of prescriptions that may be filled in a month, and aggressive prior authorization that discourages physicians from prescribing certain drugs.
  • Does not use authority to ensure strong access to pharmacies: The law allows the Secretary to strengthen the pharmacy network requirements to ensure access for vulnerable populations (1860D-4(b)(1)(C)(iv), p. 20). The proposed regulation does not do so, allowing private plans exclude nursing home or Indian Health Service pharmacies from their networks, potentially increasing costs and/or reducing access for beneficiaries (C(4)(a), p. 46656-57). In addition, the regulation proposes that there be no appeal rights for beneficiaries filling prescriptions at non-network pharmacies – meaning those that are neither in the plan’s pharmacy network nor covered under extenuating circumstances (e.g., emergency while traveling) (M(2), p. 46718).
  • Allows questionable marketing that could encroach on beneficiaries’ privacy: The Secretary is permitted by the law to both create marketing standards and provide “identifying information” to private plans to facilitate “efficient marketing” (1860D-1(b)(4), p. 10). The proposed regulation weakens rather than strengthens consumer protections against questionable marketing practices. It suggests allowing pharmacies to market specific plans and almost automatically approving marketing materials for plans whose materials have been previously approved (B(9), p. 46643; §423.50(a)(2), p. 46814). In addition, the proposal neither limits what “identifying” information will be given to private plans for marketing purposes nor constrains how such data will be used (B(10), p. 46644). This means that an individual’s income and possibly health information may be passed from Medicare to drug insurers and Medicare managed care plans to help them “efficiently” market.
  • Does not provide exceptions to the late enrollment penalty: Although literally voluntary, the new drug benefit imposes a late enrollment penalty on those who do not enroll when they are initially eligible to do so, unless they have “creditable” coverage (i.e., non-Medicare drug coverage that is equivalent in value) (1860D-13(b), p. 41-43). The regulation proposes several new special enrollment periods for individuals under extenuating circumstances (B(3)(b)(v), p. 46640-41), but does not create similar exceptions to the late enrollment penalty. As such, beneficiaries who wait to enroll in the drug benefit or qualify for one of these special enrollment periods will pay a higher premium for the rest of their lives, irrespective of the reason for the delay.
  • Fails to ensure simple enrollment for low-income beneficiaries: Although the regulation broadens eligibility for low-income drug benefit assistance, it does not ensure simple and automatic enrollment for eligible individuals. Although a model application, eligibility determination process will be developed, the regulation does not appear to require states to use it (P(2), p. 46727). Individuals applying through Social Security offices do not have to be screened for eligibility for Medicaid, even though qualifying for Medicaid increases the amount of low-income assistance. The proposed regulation also fails to delineate the process for moving the 6.4 million Medicaid-Medicare dual eligibles from drug coverage through Medicaid to Medicare (B(2), p. 46639). Success of this transition is critical since Medicaid drug coverage ends for these individuals on January 1, 2006.

The “Ugly.” The following are policies that the proposed regulation affirmatively makes worse from the perspective of Medicare beneficiaries.

  • Weakens Medicare’s already-limited ability to influence which drugs are covered: One of the only tools embedded in the law to ensure access to a wide range of medications is the Secretary’s ability to disapprove a plan whose design or benefits “substantially discourage enrollment of certain beneficiaries” (1860D-11(e)(2)(D), p. 32). The preamble suggests that it will only consider whether this discrimination occurs on the basis of health status, not other factors (F(6)(b), p. 46680). This suggests, for example, that a plan that puts all high-cost drugs on the top tier of its formulary is not discriminatory since no disease condition is singled out. The regulation also does not include a clear description of the factors that will be used in evaluating plans’ designs, increasing plans’ ability to challenge any disapproval.
  • Creates a potentially meaningless appeals process: The law gives the Secretary the authority to define the appeals process for plan enrollees who need drugs that are not on the formulary or are covered but with a high copayment (1860D-4(g),(h), p. 27-28). However, the proposed regulation sets no standards for approval of such requests. It gives plans – that have an incentive to maintain their formulary – sole authority to decide when an exception to the formulary is granted (M(5)(a), p. 46719; §423.578(a),(b), p. 446843-44). Independent review entities must abide by those rules (M(5)(c), p. 46721). Under the regulation, plans also determine what a physician needs to do to prove that a drug is needed – which could prove onerous (M(5)(a), p. 46719). In some respects, this proposed appeals process is less beneficiary-oriented than that of Medicaid (which, for example, requires automatic emergency supply pending an appeal) and the Medicare Advantage program (which, for example, requires automatic referral to the next level of appeals upon a denial).
  • Creates double standard on out-of-pocket spending: The law creates a catastrophic benefit that begins after a defined level of beneficiary out-of-pocket spending, and narrowly defines what counts as “out-of-pocket” spending (e.g., no insurance payments) (1860D-2(b)(4)(C)(i), p. 14). The proposed regulation appears to allow contributions from private programs like drug companies’ assistance programs to count as out-of-pocket spending for the purpose of eligibility for the catastrophic benefit, but does not do the same for spending from the Veterans Administration, Indian Health Service, or State AIDS Drug Assistance Programs (C(2)(a), p. 46650). This type of differentiation will disadvantage vulnerable populations and the programs that serve them.
  • Does nothing to mitigate against mid-year changes: The law allows the private plans delivering the drug benefit to change their cost sharing, pharmacy networks, and formularies during the year if they provide notice of doing so (1860D-4(b)(3)(E), p. 22), even though their enrollees can change plans only during the annual open enrollment period (1860D-1(b)(1)(B), p. 9). The proposed regulation prohibits plans from making changes to their formularies until after 30 days into the year, and requires 30-day advanced notice for changes that affect cost sharing (C(4)(b), p. 46661; §423.120(b)(5), p. 46819). However, it fails to take a number of steps that could ensure beneficiaries have access to needed drugs. For example, it could require that a plan’s exceptions policy include a different standards and simplified process for accessing drugs whose cost sharing has increased. It could also extend the retiree health plan policy to prescription drug plans, which requires that mid-year changes happen only after 90 days notice and submitted proof that the value of the drug coverage has not declined. Moreover, the regulation’s policy of limiting formulary changes for part of the year (from the beginning of the annual coordinated election period and 30 days after the beginning of the next year) suggests that authority exists to restrict formulary changes for longer periods of time (e.g., allowing changes only once; prohibiting them altogether) (C(4)(b), p. 46661; §423.120(b)(6), p. 46819).
  • Creates limited oversight: The law allows the Secretary to request information and conduct audits (1860D-2(d)(3), p. 17), but the regulation allows private plans running the drug benefit to largely police themselves. While Medicare provides guidance, plans are given the authority to set their formularies, set their cost sharing (since they conduct their own “actuarial value” determinations), set their process and standards for appeals, set drug prices, and attest that they are complying by Medicare rules. Even the minimal role that Medicare has in overseeing such plan decisions may be farmed out to an accreditation organization (§423.165, p. 46821-22). Given the large Federal investment in the drug benefit, this regulation raises questions about the ability of Medicare to conduct effective oversight.
  • Adds to the law’s already-burdensome requirements for fallback plans: The law enumerates policies to encourage organizations to be risk-bearing plans and rather than non-risk bearing “fallback” plans that ensure access in areas without risk-bearing plans (1860D-11(g), p. 33-35). The proposed regulation creates a “higher bar” for fallback plans relative to risk-bearing plans by linking their payment to achievement of a minimum level of price discounts (Q(4), p. 46734). It also proposes barring organizations that bid as a fallback plan from being part of a risk-plan’s bid for four years (including the year of the bid) (Q(2)(a), p. 46732). This raises the question of whether any organization will apply to be a fallback plan — and what will happen if neither a risk-based nor fallback plan enters a particular region.

Jeanne M. Lambrew is a senior fellow at the Center for American Progress and associate professor in the Department of Health Policy at The George Washington University School of Public Health and Health Services.



[1] For a description of the law and issues in it, see Lambrew JM. (July 22, 2004). Working Paper: Fifty Concerns about the Medicare Law and Ideas on How to Fix Them. Washington, DC: The Center for American Progress; Moon M. (May 2004). How Beneficiaries Fare Under the New Medicare Drug Bill. New York: The Commonwealth Fund; Dallek G. (July 2004). Consumer Protection Issues Raised by The Medicare Prescription Drug, Modernization, and Improvement Act of 2004. Menlo Park, CA: The Henry J. Kaiser Family Foundation; Huskamp HA, Keating NL. (July 2004). The New Medicare Drug Benefit: Potential Effects of Pharmacy Management Tools on Access to Medications. Menlo Park, CA: The Henry J. Kaiser Family Foundation.
[2] The references to the law use the page numbers in U.S. House of Representatives, Committee on Ways and Means. (November 21, 2003). Medicare Prescription Drug, Improvement, and Modernization Act of 2003: Conference Report to Accompany H.R. 1. Washington, D.c=: U.S. Government Printing Office.; the references to the regulation use the page numbers in Department of Health and Human Services, Centers for Medicare & Medicaid Services. (August 3, 2004). “42 CFR Parts 403, 411, 417, and 423: Medicare Program: Medicare Prescription Drug Benefit,” Federal Register 69(148): 46632-863.
[3] Congressional Budget Office. (July 2004). A Detailed Description of CBO’s Cost Estimate of Medicare Prescription Drug Benefit. Washington, DC: CBO.
[4] In March, the CMS administrator said that practices such as “limits on the number of prescriptions, limiting the maximum daily dosage, limiting the frequency of dispensing a drug, limiting the number of refills” will not be permitted. See the Record of Questions Submitted by Senator Max Baucus from the Senate Finance Committee Hearing on the Nomination of Mark B. McClellan, to be Administrator of the Center for Medicare and Medicaid Services, March 8, 2004