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Leslie Bonacum
Neil Allen

CCH Provides Analysis of Medicare Reform Legislation as Bill Makes Way Through Congress

Prescription Drug Benefit Close To Reality, But Not All Medicare Recipients Fare the Same; Legislation Includes a Bit for Everyone, from Workers to Providers

(RIVERWOODS, ILL., November 21, 2003) – After years of stalled negotiations and languishing proposals, yet another Medicare bill including the much sought after prescription drug benefit is making its way through Congress. With the fate of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 expected to be determined before Thanksgiving, just about everyone is trying to sort out its impact – from senior and disabled citizens eligible for the prescription drug benefit, to wealthier beneficiaries who will be asked to pay more for Medicare coverage, employees able to tap into new Health Savings Accounts and employers being provided tax-free incentives for offering prescription drug benefits to retirees. Hospitals and physicians also would see changes as would the overall healthcare industry, according to CCH INCORPORATED (CCH), a leading provider of healthcare law information and software (

"On its face, the legislation is significant because for the first time since Medicare’s inception in 1965, prescription drugs across-the-board would be covered under the program for some 40 million elderly and disabled Medicare recipients," said CCH healthcare law analyst Jay Nawrocki. "As you start looking at each of the provisions, however, there are others that could potentially have just as great or greater impact on healthcare and the healthcare delivery system moving forward."

Below, CCH provides an overview of key provisions under the legislation.

Prescription Drug Benefits

From April 2004 until the prescription drug benefit program goes into effect in 2006, Medicare recipients would be able to sign up for and use a prescription drug discount card which Health and Human Services estimates will save beneficiaries between 15 and 25 percent per prescription. Low-income beneficiaries, those earning less than 135 percent of the poverty level, will be eligible for up to $600 in prescription drug assistance per year in 2004 and 2005.

When the prescription drug benefit program starts in 2006, Medicare recipients who sign up for the benefit will pay a $35 per month premium on average and a $250 annual deductible. Beneficiaries will be required to pay a 25-percent co-payment on drug costs up to $2,250 and pay for all drug coverage above $2,250 until they have incurred $3,600 in prescription drug expenses. Above that level, beneficiaries will be responsible for the greater of a 5-percent co-payment or a co-payment of $2 for generic drugs and $5 for brand name drugs.

The legislation calls for beneficiaries with incomes up to 150 percent of the poverty level to pay reduced or no co-payments for drugs. The poverty level, which is $8,980 for an individual in 2003, is adjusted annually. Low-income beneficiaries with incomes below 135 percent of the poverty line will have a $2 co-pay per prescription for generic drugs and a $5 co-pay for brand names. Other low-income subsidy-eligible persons will have a $50 deductible, 15-percent cost- sharing for all costs up to the $3,600 out-of-pocket limit and cost-sharing of $2 for a generic drug and $5 for a brand name drug for costs above the out-of-pocket threshold.

According to figures from the Congressional Budget Office, using the combined average cost estimated by the Senate and House, the average Medicare enrollee will spend $3,104 for prescription drugs in 2006. The following two examples, with one beneficiary having the $3,104 average drug costs and one using a higher cost of $10,000 in prescription drugs, show how their payments would change under the new prescription drug benefit, assuming they are not near the poverty line and have no supplemental prescription drug benefits from a former employer.

Beneficiary with Average Prescription Drug Costs


Annual deductible


25% co-payment from $250 to $2,250


Recipient pays from $2,250 to $3,104*


Total recipient pays



Total prescription drug cost


Less recipient pays


Less $35 monthly premium recipient pays


Amount Medicare drug benefit pays


* The recipient pays for drug expenses between $2,250 and reaching the $3,600 total out-of-pocket expense; however, for purposes of this example, the individual’s total costs only reached $3,104.

Beneficiary with Above-average Prescription Drug Costs

Annual deductible


25% co-payment from $250 to $2,250


Recipient pays from $2,250 to $5,100


Subtotal recipient pays*


Add 5% co-payment from $5,100 to $10,000*


Total recipient pays



Total prescription drug cost


Less recipient pays


Less $35 monthly premium recipient pays


Amount Medicare drug benefit pays


* Once the recipient’s out-of-pocket expenses reach $3,600 (excluding the premium), they pay a 5-percent co-payment; there is no ceiling on this, so while this example only shows drug costs of $10,000, a beneficiary with ten times that cost may still be required to pay the 5-percent co-payment.


"The Medicare system was designed to support the health delivery system of 1965," said Nawrocki. "The hope of beneficiaries was that legislation would move the program into the present, where healthcare isn’t delivered as much through long hospital stays or through invasive medical procedures as it is through medications, out-patient procedures and preventative care. Whether the legislation succeeds in doing this will likely be debated for years to come."

Higher Income Beneficiaries Will Pay More for Part B Coverage

While many beneficiaries will be paying less for prescription drugs, some may find they’re paying more for Supplemental Medical Insurance Benefits, commonly known as Medicare Part B. Under a less-mentioned provision of the Act, these premiums will be tied to income, requiring beneficiaries who make more than $80,000 ($160,000 if joint income tax filers) to pay more for coverage. Under the new premium rate structure, which phases in over five years starting in 2007, high income beneficiaries will have to pay as much 80 percent of the premium compared to today where all beneficiaries, regardless of income level pay just 25 percent of the premium while Medicare picks up the remaining 75 percent.

"Because it won’t be until 2007 that these varying rates start to take effect and it will be 2012 before they’re fully in force, many people haven’t really paid too much attention to their impact," said Nawrocki. "For example, if this program were fully in place today, a beneficiary who earns $85,000 and currently pays the flat $58.70 monthly premium would see that premium increase to 35 percent, or $82.18; and someone earning more than $200,000 would see their premium increase to 80 percent, or $187.84 per month."

Income Level for Singles*

Percent of Premium Recipient Pays Under New Plan*

$80,000 to $100,000


$100,000 to $150,000


$150,000 to $200,000


over $200,000


* Income levels would be double for taxpayers filing jointly; premium increases start in 2007 and phase in over 5 years.

Nawrocki added that the litmus test will be whether this provision can last longer than the last attempt to require high income beneficiaries to pay more for their coverage, noting that the Medicare Catastrophic Coverage Act of 1988 had called for the supplemental premium to increase by as much as $66 per month based on income. However, amidst a public outcry, that Act was repealed in 1989 before ever going into effect.

Medicare to Compete with Private Providers

In another controversial element of the Act, private health plans will be allowed to compete directly with the traditional fee-for-service Medicare program – at least on a trial basis. Starting in 2010 and lasting for six years, a demonstration program allowing this competition will take place in up to six Metropolitan Statistical Areas (MSAs) where at least two private plans have enrolled at least 25 percent of Medicare beneficiaries. Part B premiums for beneficiaries remaining in the traditional fee-for-service Medicare program could not go up or down by more than 5 percent annually as a result of the demonstration.

"Proponents of this provision believe that, more than anything, open competition can help eliminate the waste they perceive to be part of the current Medicare system, while opponents are concerned that the private health plans will attract the healthy, lower-costing beneficiaries, leaving the sicker, more costly individuals in the traditional Medicare program," said Nawrocki.

Other Provisions

While the bulk of provisions are focused on the delivery of benefits to Medicare beneficiaries, several other groups also will realize changes from the new legislation.

  • Employers Gain Tax-free Subsidy – Organizations that maintain a retiree prescription drug plan will receive a tax-free subsidy of up to $1,330 per individual retiree once the new drug benefit starts in 2006.
  • Employees Offered New Health Savings Accounts (HSAs) – This provision allows workers up to age 65 to make pre-tax contributions of as much as $2,250 ($4,500 for families), indexed for inflation, to cover healthcare needs. Individuals age 55 to 65 can make an additional catch-up contribution of as much as $500 annually in 2004, annually increasing until it reaches $1,000 in 2009. Unlike existing Flexible Spending Accounts, HSAs will be portable and assets can accumulate over the years, offering recipients the opportunity to draw on them for tax free-distributions not only to cover current healthcare costs but also healthcare costs in retirement.
  • Physicians Realize Increased Medicare Reimbursements – Medicare rules had called for lowering payments to physicians for services by 4.5 percent in each year, 2004 and 2005. However, under the new legislation, Medicare is now increasing its reimbursement for eligible costs to physicians by 1.5 percent in each of these years.
  • Hospitals Pushed to Prove Quality Service – The Act calls for updates to the hospital payment rate to be set at the current 2004 rate. For the first time, Medicare also is encouraging hospitals to provide information showing how they are improving the quality of Medicare patient care. Under the legislation, hospitals that do not furnish this quality data can see their Medicare payments reduced by 0.4 percent in 2005, 2006 and 2007.
  • Approved Neighbors to the North Can Furnish Prescription Drugs – Individuals will be allowed to continue to purchase prescription drugs from Canadian providers, however, only from those providers the U.S. government certifies as safe. The ability to import prescription drugs may be limited by the difficulty of the certification process.


For more than 50 years, CCH INCORPORATED has regularly tracked, reported, explained and analyzed health and entitlement law for healthcare providers, insurers, attorneys and consumers. CCH is the premier provider of Medicare and Medicaid information. CCH is a Wolters Kluwer company. The CCH Health group site can be accessed at

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Editors Note: Additional analysis of the Medicare legislation as it progresses, as well as details on the Medicare program, its history, coverage and examples on how it works are available to the media at CCH healthcare analysts also are available to provide individual analysis to reporters.



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