Medicare Drug Benefits: Questions and Answers

This fact sheet explains what is known about the new law and outlines what you can expect as its various provisions kick in.

By Cameron Huddleston, Contributing Editor, Kiplinger.com

April 28, 2004

It will be another two years before retirees can take advantage of the most of medicare's prescription drug benefits. And because private-sector insurance companies will administer regional systems, premiums, deductibles and benefits will vary from one location to the next.

Although medicare prescription drug coverage has been signed into law, many questions remain. This fact sheet will explain what is known about the new law and outline what you can expect as its various provisions kick in.

• When will medicare's prescription drug coverage be available?



• What will my savings be?



• Will the premiums, deductibles and coverage amounts change?



• What happens if I enroll late?



• Who will benefit most from the drug coverage?



• When can I get the discount card and how much would it save me?



• Will I still be able to use my other discount cards?



• What if I need expensive medications now?



• Who will be eligible for coverage?



• What will be my drug coverage options under medicare?



• What if my medigap policy already provides drug coverage?



• What will happen to my employer's retirement prescription drug benefits?



• Will medicare cover all of my prescriptions?



• What else is included in the new law?



• What are health savings accounts?

When will medicare's prescription drug coverage be available?

Open enrollment will begin November 15, 2005 and run through May 15, 2006. The benefits are scheduled to begin January 1, 2006.

There will be some interim steps to help defray the cost of drugs, including a drug discount card. Low-income beneficiaries, those earning less than $12,124 a year or married couples with incomes less than $16,363, also will get $600 in prescription drug assistance in 2004 and 2005.

What will my savings be?

That will depend on the drugs you take, the amount you spend on them, the plan you choose and your income level, says Tricia Neuman, vice president and director of the Medicare Policy Project at the Kaiser Family Foundation.

In the first year of the program, beneficiaries are expected to pay a $35 monthly premium and $250 deductible. Those eligible for both medicaid and medicare will receive full premium subsidies.

Once you meet your deductible, the coverage is broken into three levels:

So if your prescription costs exceed $5,100, the drug benefit program will offer you significant savings, says Jay Nawrocki, an analyst who specializes in medicare issues for CCH, Inc., which analyzes health and entitlement law for the healthcare industry. But if you don't spend more than $670 (the premium plus deductible), you'll lose money, he says. On average, medicare recipients paid $999 in out-of-pocket prescription costs in 2003 and are expected to spend $1,454 by 2006, according to the Kaiser Family Foundation. So most won't see huge savings from the new benefit.

Use our calculator to estimate your annual prescription drug savings.

Will the premiums, deductibles and coverage amounts change?

Yes. Because the coverage will be administered by private drug plans, even these initial numbers are just estimates. Premiums, and deductibles will vary by region and will change based on the per-capita drug spending.

According to the Kaiser Family Foundation, the $35 monthly premium enrollees are expected to pay in the first year could increase to about $58 a month by 2013. The $250 deductible is expected to reach nearly $450 by 2013. The initial coverage limit of $2,250 will increase to an estimated $4,000 by 2013, and the $5,100 threshold for 95% drug coverage will rise to nearly $9,100 by 2013.

And all of this assumes that you enroll during the initial open enrollment period or when you become eligible for medicare.

What happens if I enroll late?

Enrollment in the drug coverage is voluntary, but the longer you wait to sign up the more it will cost you. If you decide to sign up after your enrollment period passes, your premium will increase about 1% for each month you've been eligible for coverage. So say you decide to hang on to your employer's drug coverage after you retire in 2006, then a year later decide to switch to medicare's plan, your monthly premium would be $39.20 ($35 plus 12%) for life.

Who will benefit most from the drug coverage?

The new rules clearly benefit low-income beneficiaries and those with very high prescription drug costs. Nevertheless, most medicare beneficiaries will see some reduction in their drug costs. Use our calculator to see how much you could save.

When can I get the discount card, and how much would it save me?

Enrollment for the discount cards, which will cost $30, begins May 3, 2004, and continues through December 31, 2005. The Bush administration estimates those who use the card will save 15% to 25% on prescription drugs.

You must be enrolled in medicare and not enrolled in any other health insurance program to be eligible for an interim discount card.

The cards will be offered through 28 sponsors.

Beneficiaries will only be able to sign up for one medicare-approved card and would be required to keep it for up to one year before they would be able to switch during an open enrollment period.

Find out more about selecting a drug discount card.

Will I still be able to use my other discount cards?

Yes, but you could not use your medicare card and another discount card together. But hang onto your other discount cards, they could offer better discounts on some drugs.

You can use the medicare Web site to compare cards and drug discounts.

What if I need more expensive medications now?

Medicare will pay for medications given during hospitalization and those that can't be self-administered.

Who will be eligible for coverage?

Individuals entitled to Part A medicare or enrolled in Part B supplemental insurance will be eligible for the new Part D drug benefit coverage.

What will be my drug coverage options under medicare?

You'll have three coverage choices. You can stay in medicare without signing up for drug benefits. You can stay in medicare and enroll in a stand-alone drug plan. Or you can enroll in a private health plan with drug coverage and medicare health services.

What if my medigap policy already provides drug coverage?

You can keep that policy. If you want to enroll in Part D, though, you have two choices:

• You can drop the drug coverage from your current policy and pay a lower premium.



• Or you can switch to a guaranteed issue policy without drug coverage.

No new medigap policies providing drug coverage will be sold after January 1, 2006.

What will happen to my employer's retirement prescription drug benefits?

That remains to be seen. Opponents of the law say it provides employers a reason to stop providing drug benefits to retirees. Proponents, on the other hand, point to the law's employer subsidies and believe they will be enough to encourage continuation of private coverage. Under the law, employers that have retiree health plans will receive a tax-free subsidy of up to $1,330 per retiree starting in 2006 when the medicare changes take affect.

Will medicare cover all of my prescriptions?

Part D will not cover weight loss, fertility, cosmetic or hair-growth drugs, nor will it cover non-prescription drugs, vitamins, barbiturates or benzodiazepines.

What else is included in the new law?

• The law drops the cap on outpatient physical therapy costs through 2006



• Medicare Part B will cover initial physical exams and screenings for diabetes and cardiovascular disease for new enrollees.



• The deductible for Part B rises to $110 from $100 in 2005 and will increase each year up to $166 in 2013.



• Part B premiums will be tied to income starting in 2007. Currently all Part B enrollees pay 25% of their premium (the government subsidizes 75%). Individuals earning $80,000 or more ($160,000 for couples) will gradually see their share of the premium climb to as much as 80% in 2013.



• The law establishes a "Comparative Cost Adjustment Program" in 2010 to test competition for six years between private plans and traditional medicare in six metropolitan areas. At least two private plans will enroll 25% of medicare recipients.



• It also creates a new tax shelter, health savings accounts. Workers up to age 55 who sign up for high-deductible health insurance will be able to contribute up to $2,250 pre-tax ($4,500 for families) to HSAs to pay for qualified medical expenses. Those 55 and older will be able to make an additional $500 catch-up contribution in 2004 and up to $1,000 by 2009. Also, money left over in an HSA at the end of the year can be carried over to the next year -- unlike Flexible Spending account money that must be forfeited if not used.
  
  Qualified medical expenses include retiree health insurance premiums, COBRA premiums, prescription drugs and long-term care.

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