The Medicare Part D Benefit, Payment, & Coordination of Benefits

1. The Medicare Part D Benefit, Payment, & Coordination of Benefits Rebecca Paul Medicare Plan Policy Group Center for Beneficiary Choices CMS Union Forum Conference Call May 26, 2005 Note: AFSCME has reorganized these slides from the original presentation to include a separate section for union plan sponsors.

2. MMA overview • Signed by the President December 8,2003 • Legislation addresses a number of areas: • Adds prescription drug benefit • Creates drug discount card • Authorizes changes to Medigap • Establishes Health Savings Accounts • Includes FFS provider payment reforms • Addresses many other issues

3. MMA Overview (con’t) • Title I of the “Medicare Prescription Drug, Improvement, and Modernization Act of 2003” creates the new Medicare Drug Benefit (Part D) • Participation in Part D is voluntary and optional • Generally, coverage will be provided by: • Private prescription drug plans (PDPs) • Medicare Advantage plans that offer both prescription drug and health coverage (MA-PD plans) • Title II of MMA establishes the Medicare Advantage program

4. Eligibility and Enrollment • Must be entitles to Medicare Part A and/or enrolled in Part B • Reside in plan’s service area • Enroll in Part D, higher premium for delay in enrollment • Initial enrollment: Nov 15, 2005 - May 15, 2006 • Enrollment 2006 and beyond: Nov 15 – Dec 31

5. Options for Employers and Unions That Currently Offer Retiree Coverage of Prescription Drugs • Tax-free retiree drug subsidy that pays 28% of certain retiree drug costs, if coverage is at least as good as Part D defined standard prescription drug benefit. • Set up their own separate supplemental plans • Obtain customized coverage for their retirees through special arrangements with Part D sponsors. • Become Part D plans through direct contracting with CMS

6. What is a Part D Drug? (§423.100) • A Part D drug includes any of the following if used for a medically accepted indication: • A drug dispensed only by prescription and approved by the FDA • A biological product dispensed only by a prescription, licensed under the Public Health Service Act (PHSA), and produced at establishment licensed under PHSA • Medical supplies associated with the injection of insulin (e.g., syringes, needles, alcohol swabs, swabs) • A vaccine licensed under the PHSA

7. What is a Part D Drug? (§423.100) • What is excluded as a Part D drug? • Drugs for which payment “as so prescribed and dispensed or administered” to an individual is available under Parts A and B • Drugs/classes of drugs which may be excluded under Medicaid, except for smoking cessation agents: • (1) Agents when used for anorexia, weight loss, or weight gain; (2) agents when used for cosmetic purposes/hair growth; (3) agents when used for symptomatic relief of cough & colds; (4) prescription vitamins & mineral products (except prenatal vitamins & fluoride preparations); (5) nonprescription drugs; (6) covered outpatient drugs when manufacturer seeks to require associated tests or monitoring as a condition of sale; (7) barbiturates; and (8) benzodiazepines

8. What is a Covered Part D Drug? (§423.100) • Refers to the subset of Part D drugs that: • Are included on a Part D plan’s formulary • Are treated as being included on a Part D plan’s formulary as a result of a coverage determination or appeal

9. Dispensing Fees (§423.100) • Dispensing fees will be limited to only those costs associated with the transfer of possession of a drug, including: • Checking computer for coverage information, performing quality assurance activities, filling the container, providing completed prescription to customer, delivery, special packaging, and overhead • Dispensing fees will not include fees for administration, professional services, or supplies and equipment

10. Benefit Design (§423.104(d)) • Defined standard benefit in 2006: • $37 estimated monthly premium • $250 beneficiary deductible • Beneficiary cost-sharing of 25% between $251 and $2,250 in total drug expenditures • Beneficiary cost-sharing of 100% of drug costs between $2,250 and $5,100 in total drug expenditures (“the coverage gap”) • After $3,600 in true out-of-pocket (TrOOP) spending, or $5100 in total drug expenditures, beneficiary must pay only the greater of $2/$5 copays or 5% coinsurance • Actuarially equivalent standard coverage varying defined standard benefit cost-sharing (e.g., by using tiered cost-sharing designs) may also be offered

11. Standard Benefit in 2006 Out-of-pocket Threshold Catastrophic Coverage Total Spending $250 $2250 $5100 75% Plan Pays Coverage Gap 80% Reinsurance $ + Deductible ≈ 95% Total Beneficiary Out-Of-Pocket 25% Coinsurance $250 $750 $3600 TrOOP 15% Plan Pays 5%Coinsurance Direct Subsidy/ BeneficiaryPremium BeneficiaryLiability Medicare Pays Reinsurance

12. Benefit Design (§423.104(e) and (f)) • Alternative coverage: • Basic alternative coverage is actuarially equivalent to the defined standard benefit • Enhanced alternative coverage has an actuarial value greater than the defined standard benefit • Enhanced alternative coverage includes supplemental benefits, which are limited to: • Further cost-sharing reductions (e.g., filling in the coverage gap, lowering the deductible) • Coverage of drugs excluded as Part D drugs

13. TrOOP/Incurred Costs (§423.100) • TrOOP (true out-of-pocket costs)/”incurred costs” is the amount a beneficiary must spend on covered Part D drugs to reach catastrophic coverage. It is based on the standard benefit design: $250 deductible + $500 beneficiary coinsurance during initial coverage + $2,850 coverage gap = $3,600 • The above numbers are for 2006 and will increase by law in subsequent years • Part D premium is not part of TrOOP

14. TrOOP/Incurred Costs (§423.100) • Payments count toward TrOOP if: • They are made for covered Part D drugs (or drugs treated as covered Part D drugs through a coverage determination or appeal) • They are made by: • The beneficiary • Another “person” on behalf of a beneficiary • CMS as part of the low-income subsidies • A State Pharmaceutical Assistance Program (SPAP)

15. TrOOP/Incurred Costs (§423.100) • Payments DO NOT count toward TrOOP if they are made by: • A group health plan • Insurance or otherwise • Another third-party payment arrangement • Examples of entities whose wraparound coverage does not count toward TrOOP: • MA plans • PACE organization • SCHIP program • Medicaid, including 1115 waiver programs • VA or TRICARE • Indian Health Service • AIDS Drug Assistance Programs (ADAPs) • Federally Qualified Health Centers (FQHCs)

16. TrOOP/Incurred Costs (§423.100) • Part D plans are required to ask beneficiaries what third-party coverage they have (if any) because this information is necessary for proper TrOOP calculation • Material misrepresentation of the supplemental coverage that a beneficiary has may constitute grounds for termination of coverage from Part D

17. Implementing TrOOP • CMS will implement new electronic COB system for tracking of TrOOP expenditures • Solution CMS will use was developed with technical input from a variety of experts and builds on existing technologies providing electronic support for pharmacy transactions nationwide • CMS recently issued RFP describing specifications and features for tested technologies for this system

18. Today’s Online Claims Adjudication Process 2) Pharmacist queries health plan’s computer to communicate prescription and verify eligibility, coverage, and cost-sharing terms. 1) Beneficiary presents prescription and health plan card to pharmacist. 4) Pharmacist dispenses drug and collects co-pay. 3) Health plan performs drug utilization review (e.g. safety checks) and verifies eligibility, coverage, and applicable co-pay.

19. Claims Adjudication Process With TrOOP COB 2) Pharmacist queries Medicare plan’s (primary payer) computer to communicate prescription and verify eligibility, coverage and cost-sharing terms. 4) Pharmacist queries secondary payer’s computer (e.g. employer or SPAP). 1) Beneficiary presents prescription and health plan card(s) to pharmacist. 5) Secondary payer identifies share of remaining beneficiary cost it will pay. Record of contribution goes to Medicare plan for TrOOP calculation and to CMS for audit purposes. 3) Medicare Plan performs drug utilization review (e.g. safety checks) and verifies eligibility, coverage, and applicable co-pay. Plan alerts pharmacy to presence of secondary payer. 6) Pharmacist dispenses drug and collects any co-pay that remains after all payers have paid.

20. Low Income Subsidy – Two General Categories • Full Subsidy – Individuals are eligible for full premium subsidy and cost sharing subsidy (for deductibles and coinsurance). • Other low-income subsidy – Individuals are eligible for a partial premium subsidy and a reduced cost sharing subsidy.

21. Full Subsidy – Who are we talking about? • Full benefit dual eligible individuals • Individuals enrolled in Medicare Savings Programs • Supplemental Security Income • Individuals with income below 135% FPL and assets at or below $6,000 (individual) or $9,000 (couple)

22. Full-Subsidy Coverage • Full premium assistance up to the premium subsidy amount • Only required to pay a $1 or $2 co-payment for generic/preferred or a $3 or $5 co-payment for non-preferred, depending on income. • Cost sharing up to an out-of-pocket threshold. At that point catastrophic takes effect and they have no cost sharing. • No coverage gap.

23. Other Low-Income Subsidy – Who Are We Talking About? • Income below 150% FPL • Resources do not exceed $10,000 (individual) or $20,000 (couple) • Do not meet the requirements for the full subsidy.

24. Other Low-Income Subsidy Coverage • $50 deductible • 15% coinsurance • No coverage gap • Catastrophic coverage after $3,600 in out-of-pocket drug expenditures. $2/$5 co-payment after out-of-pocket threshold is reached. • Premiums subsidy of 100% or sliding scale, depending on income.

25. ReinsuranceGovernment pays 80% of costs in the catastrophic coverage Deductible 25 % co-insurance Catastrophic Coverage Total Spending $250 $2250 $5100 $ + 80% ≈ 95% 15% CMS Pays (reinsurance) Plan Pays Beneficiary Pays

26. The Standard Benefit • Organization projects cost for standard benefit based on population assumed to enroll • Standard benefit excludes beneficiary cost sharing, reinsurance and low-income cost-sharing subsidies

27. Coordination of Benefits (§423.464(a) and (f)) • Plans must permit the following entities to coordinate benefits: • State Pharmaceutical Assistance Programs (SPAPs) • Medicaid programs (including 1115 waiver programs) • Group health plans • FEHBP plans • TRICARE and VA • IHS • Rural Health Centers • Federally Qualified Health Centers • Other entities as CMS determines

28. End of Main Presentation This presentation is now continued … • The following slides will be most useful for Union Plan Sponsors. They detail specifically the ways in which plans are paid by CMS. • These slides have a level of detail that is not needed for most union representatives and bargainers to understand the new Medicare law.

29. Payment overview • Four components of payment • Direct subsidy • Reinsurance • Low income cost sharing • Risk corridors • Direct subsidy determined in bid • Reinsurance and low income cost sharing • Interim prospective payment based on bid • Final payment based on actual costs • Risk corridors determined based on actual costs

30. Plan Standardized Bid • Organization projects cost for standard benefit based on population assumed to enroll • Standard benefit excludes beneficiary cost sharing, reinsurance and low-income cost-sharing subsidies • Projected costs adjusted by the projected risk score of population to get standardized bid

31. Total Bid National Weighted Average Drug Bid Mechanics Step 1 – Compilation of the National Weighted Average (benchmark) Supplemental (if any) Reinsured Basic Bid At Risk Bid

32. Bidding / Premium Overview Drug plans and Medicare Advantage plans submit bids for the drug benefit. Beneficiaries pay 25.5% of the benchmark +/- the difference between the bid and the benchmark. On average, Medicare pays 74.5% of the benchmark. The bids form a national weighted average bid Plan 1 Premium $25 Plan 1 Bid $125 Plan 2 Premium $30 Plan 2 Bid $130 Plan 3 Premium $35 Plan 3 Bid $135 Fed Share $100 Nat’l Avg. $135 + Plan 4 Premium $40 Plan 4 Bid $140 Plan 5 Premium $45 Plan 5 Bid $145

33. National Weighted Average National Weighted Average Drug Bid Mechanics Step 2 – Calculation of the Beneficiary Premium - Bene Premium +/- = [25.5%*]X Standardized Bid Adjustments (if applicable): Low-income subsidy Late enrollment penalty Supplemental Premium MA rebate (if any) Supplemental (if any) * Adjusted to factor the reinsurance back in.

34. National Average Monthly Bid Amount • Bids will be aggregated to generate a single national average monthly bid amount • Weights will be based on prior enrollment • For 2006 plan years, • MA plan bids weights will be based on prior year enrollment • PDP weights will be based on an allocation of those not in the MA weights across all PDPs in the region

35. Basic premium calculation • Basic beneficiary premium amounts to 25.5% of the national average bid amount adjusted for reinsurance • Plan specific premiums will equal the basic beneficiary premium adjusted for 100% of the variation between the plans standardized bid and the national average bid amount

36. Government Payment to Plans 1) Direct Subsidy Risk Adjustment Factor At Risk Bid Direct Subsidy - Bene Premium X = 2) Reinsurance 3) Low-income premium and cost-sharing assistance

37. Direct subsidy payments • Monthly direct subsidy made at the individual level • Direct subsidy = (Standardized Bid x Individual Risk score) – Beneficiary Basic Premium • Sum for all beneficiaries enrolled equals monthly organizational payment

38. Risk Adjuster Basics • Capitated payment is adjusted according to the expected cost of the enrollee. • Expected cost is derived from enrollee characteristics: • Enrollee’s characteristics are assigned risk factors that are added to produce a total risk factor • Model includes over 80 disease coefficients, age-sex adjustments, and interactions between age and disease interactions and sex-age-originally disabled statuses

39. Risk Adjustment Implementation • Low income & long term care factors are multipliers (derive risk score, then multiply by one of these factors if they apply for the payment month) • Diagnoses from either MA or from Medicare FFS • New Enrolleemodel used for people new to Medicare with insufficient data for risk adjustment. This model is based solely on demographics • Payment notice from information on 45 day notice

40. ReinsuranceGovernment pays 80% of costs in the catastrophic coverage Deductible 25 % co-insurance Catastrophic Coverage Total Spending $250 $2250 $5100 $ + 80% ≈ 95% 15% CMS Pays (reinsurance) Plan Pays Bene Pays

41. Interim Reinsurance Payments • Final reinsurance payment will be based on 80% of allowable reinsurance costs after beneficiary has $3,600 of true out-of-pocket spending • Amounts estimated in the bidding process will be used as an interim payment • Reconciliation will occur after the plan year

42. Calculating Reinsurance Subsidy • Plans identify beneficiaries that reach or exceed out-of-pocket threshold on claims • CMS identifies allowable reinsurance costs from claims • Sum by plan • Multiply by 0.80 • Subtract rebate savings attributed to reinsurance costs • Part of reconciliation in 2007

43. Low Income Subsidy – Two General Categories • Full Subsidy – Individuals are eligible for full premium subsidy and cost sharing subsidy (for deductibles and coinsurance). • Other low-income subsidy – Individuals are eligible for a partial premium subsidy and a reduced cost sharing subsidy.

44. Reconciliations • Enrollment • Risk Adjustment • Low-Income Cost Sharing • Reinsurance

45. Government Keeps 80% Plan Keeps 20% Government Keeps 75% Plan Keeps 25% Plan Pays 25% Government Pays 75% Plan Pays 20% Government Pays 80% Risk Corridors + 5% + 2.5% Plan Pays 100% Spending Target Plan Keeps 100% - 2.5% - 5%

46. Calculating Risk Corridor Payment • Calculate target Amount + Direct Subsidy + Negative Premium + Beneficiary Basic Premium + A/B Rebate Allocated to Part D Basic Premium • Administrative Costs (% from Bid) • Calculate risk corridor thresholds • Calculate adjusted allowable risk corridor costs • Determine where costs fall with respect to risk corridor thresholds • Calculate payment adjustment

47. Adjusted Allowable Risk Corridor Costs Add Covered Part D drugs from claims (Ingredient Cost, Dispensing Fee, and any Sales Tax) Then Subtract • From claims - patient cost-sharing liabilities, LICS, and enhanced alternative benefits (drug costs and cost-sharing) • From bid - induced utilization (enhanced alternative plans) • Reinsurance subsidy • From rebate report - Part D covered rebate dollars

48. Coordination of Benefits (§423.464(a)) • COB must ensure effective coordination with regard to: • Payment of premiums and coverage • Payment for supplemental prescription drug benefits • Coordination elements include: (1) enrollment file sharing; (2) claims processing, payment, and reconciliation reports; and (3) application of protection again high out-of-pocket expenditures • CMS will establish COB requirements before the statutory deadline of July 1, 2005

49. Coordination of Benefits (§423.464(a) and (f)) • Plans must permit the following entities to coordinate benefits: • State Pharmaceutical Assistance Programs (SPAPs) • Medicaid programs (including 1115 waiver programs) • Group health plans • FEHBP plans • TRICARE and VA • IHS • Rural Health Centers • Federally Qualified Health Centers • Other entities as CMS determines