Medicare Part D’s Importance Extends Way Far than Just its Benefits

Editor’s note: To mark the 10 years since Medicare Part D enrollment began, Health Affairs invited Marsha Gold to reflect on the program and its impact.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA) expanded Medicare to include a drug benefit starting in 2006. Yet while the benefit expansion is important on its own, arguably the greater significance of the legislation rests in how Congress used the carrot of a new and important benefit to introduce fundamental changes in Medicare.

The impact of these changes have become more apparent over time: private health plans, and the companies that offer them, are now more central to the way Medicare operates and Medicare beneficiaries receive coverage. I’ve been analyzing these trends for many years — and for the past two years I’ve also relied solely on Medicare for my own health benefits. Here’s how I see impact of the Medicare’s expansion to include Part D under the MMA.

Part D Filled A Critical Hole In Medicare’s Safety Net

When the Medicare drug benefit was introduced in 2006, the share of beneficiaries without drug coverage declined and it has continued to drop. Ninety percent of Medicare beneficiaries now have drug coverage. Before 2006, Medicare had no outpatient drug benefit.

Though Medicare was the primary payer, beneficiaries mainly relied on other programs they may have been eligible for such as Medicaid, employment-based retiree health plans, or the Veterans health programs. Some Medigap plans or private Medicare health plans included limited drug coverage. The MMA modernized Medicare in a way that provided coverage more consistent with dominant forms of employment-based coverage.

Some Beneficiaries Gained More Than Others From The Expansion

Beneficiaries without other sources of subsidized drug coverage benefitted most by the Part D expansion. These were not necessarily the lowest-income beneficiaries (who may have qualified for Medicaid) but they also were not, on average, the highest income (who were more likely to have access to employment-based retiree plans). Part D made it practical for any beneficiary, regardless of income, to purchase relatively comprehensive drug benefits — a choice previously unavailable to beneficiaries in the individual market.

The MMA attempted to encourage employers to maintain subsidized retiree drug coverage by offering a subsidy to those providing such at least actuarially equivalent benefits. While take up rates on the subsidy were initially high, over time they have declined — expanding the market for Medicare Part D. Affected beneficiaries could experience a reduction in the value of their pharmacy benefits as many employer plans have more comprehensive coverage.

While low-income subsidies (LIS) financially protected beneficiaries dually eligible for Medicare and Medicaid, they complicated the Part D program and also meant that low-income beneficiaries faced a much more demanding set of choices to understand than they were used to in Medicaid. (The MMA also eliminated the largest remaining acute care benefit in Medicaid.)

It also has become apparent over time that Part D’s catastrophic coverage has its limits. Heavy users of Part D who do not qualify for the LIS, particularly those requiring high-cost drugs, spend considerably more out of pocket. The issue of how to structure financial protection will only grow in importance ashigh-cost specialty pharmaceuticals continue to emerge.

Part D’s Structure Differs Fundamentally From Traditional Medicare Benefits (And Also From Commercial Health Coverage) 

Traditional Medicare Part A and B provides a uniform national benefit with fixed cost sharing and a uniform premium. While private organizations participate as intermediaries and carriers to pay bills and support the program, policy is set nationally and beneficiaries basically can see any provider who agrees to terms and participates in the program (as most do).

Part D, in contrast, is offered through private companies who compete for business within 34 market areas comprising one or more states. Plans must adhere to a minimum benefit structure and set of requirements but have considerable flexibility in structuring benefits, including the content of their formulary, cost sharing (often differing across five tiers of drugs), utilization management policies, and preferred pharmacies.

While some worried whether firms would participate in this new offering, it has proven popular. Although participation rates have declined and some turnover in firms has occurred, in 2016 beneficiaries have, on average, a choice of 26 plans, with a low of 19 and high of 26 plans depending on the region. (These figures exclude additional choices available for those wishing to integrate Part D with traditional Medicare benefits through Medicare Advantage (MA) plans, as discussed later.)

Part D’s structure allows much more variability than traditional Medicare. It even differs from employment-based coverage which may also use private plans and tiered benefits and formularies but rarely offers such choice in plans, including choices that change annually and require detailed reassessment.

I can speak from personal experience that, despite bringing much more knowledge of the program to bear than the average beneficiary, I found that, even using the Medicare’s Plan Finder tool, it is very difficult to navigate one’s options in this environment. Despite a relatively stable health history, I’ve found it hard to anticipate all the drugs I may be prescribed in a year or how a plan covers them.

Cost sharing has been much higher than I anticipated, some higher-cost “generics” may be in brand name tiers, and the administrative burdens of consulting with pharmacists and physicians when drugs are “off formulary” has been high. Without Part D, I, like other similarly situated beneficiaries, would be considerably worse off. But it is not unreasonable to consider how much is gained by such complexity and choice.

Part D Expanded Private Plans’ Role In Medicare

The enactment of Part D meant that all Medicare beneficiaries, even if they received their benefits through the traditional Medicare program, had to enroll in a private plan for their drug benefits. This differed from historical practices in which private plan enrollment was a voluntary alternative.

Instead, the choice for beneficiaries is one of adding a private drug plan to traditional Medicare (and potentially buying Medigap plan for additional coverage) or choosing an integrated single plan through Medicare Advantage that combines an integrated Part A and B benefit with a drug plan.

In comparing freestanding Part D plans with integrated MA and Part D plans the playing field is not level, in part because the payment structure provides an advantage to integrated offerings. To protect Medicare Advantage in anticipation of the drug benefit in 2006, the MMA modified MA payment for Part A and B services, resulting in rates that substantially exceeded payments under traditional Medicare.

Higher rates meant that integrated plans were better able to expand the overall benefit package, including making benefits and cost sharing for Part D more attractive than free standing plans. Even though Congress subsequently modified Medicare Advantage payment as part of the Affordable Care Act, Medicare Advantage plans still have a leg up as traditional Medicare is not authorized to offer its own drug benefit, as some have proposed.

Since the MMA was enacted, Medicare Advantage enrollment has grown rapidly, even as payments were reduced and some early options for expansion (the private fee-for-service plans) were made less attractive when the Medicare Improvements for Patients and Providers Act (MIPPA) of 2008 was enacted, requiring most private fee-for-service plans to have networks. Almost a third of all Medicare beneficiaries were enrolled in Medicare Advantage in 2015. Among those enrolled in Part D (December 2015), 39 percent are now in a Medicare Advantage plan.

The future of Medicare’s structure remains to be determined. Those advocating private sector models may look to Part D and the MMA as a vehicle for further moving the program towards a private sector mode. After all, almost 40 million Medicare beneficiaries are in private prescription drug plans, an increasing share of them also integrated within Medicare Advantage.

Yet while such growth may signal a “tipping point” for the program, the fact remains that there is considerable regional diversity in Medicare Advantage’s role and its ability to attract both to plans and beneficiaries. Thus, the option for enrolling in traditional Medicare and choosing a free standing Part D plan probably will remain the dominant model in most markets absent legislative change.

However the future evolves, it seems clear by this point that the enactment of Part D within the context of the MMA was an important event that is likely to have a long standing influence over both the Medicare program and the way its beneficiaries receive benefits.