Performance of Medicare: An Audit

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The greatest change in the Medicare program since its inception in 1965 was set in motion with the introduction of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) that was implemented on January 1, 2006. The Medicare Modernization Act (MMA) includes “provisions for subsidies to provide drug coverage to eligible persons with modest assets and incomes.

Medicare beneficiaries with low income and modest resources, including beneficiaries eligible for full Medicaid benefits, are provided with a substantial premium and cost-sharing subsidies under Medicare. However, it is argued that in the new national Medicare drug benefit, beneficiaries with high medication expenditure will face significant gaps in coverage after exceeding the annual dollar limits or caps. Newspapers report that “insurance companies involved in prescription drug benefit have overcharged subscribers and taxpayers by several billion dollars. Though pharmaceutical prices are reported to have soared for many years and exceeded other health care costs timely involvement of the federal government has helped keep the pharmaceutical prices under control.

Of overview to Medicare Drug Plans

The Centers for Medicare and Medicaid Services (CMS) under the U.S department of Health and Human Services (HHS) runs the Medicare drug plans (also called Part D plans), which is an important source of access to prescription drug coverage offered by private plans. Medicare, with four parts A, B, C, & D, is a federal government program that provides health insurance coverage to people age 65 or older and specific categories under the age 65, partnering with private insurers. The insurance coverage under the four parts isMedicare is: Part A—helps cover inpatient hospital care including critical access and inpatient rehabilitation facilities; Part B—helps cover medically-necessary services, Part C—Medicare Advantage Plans cover like an HMO or PPO, and Part D—Medicare prescription drug coverage for everyone with Medicare.

The Part D coverage is expected to help lower prescription drug costs and protect against higher costs in the future. In order to get Medicare drug coverage beneficiaries must join a plan run by an insurance company or other private company approved by Medicare. Any “Medicare Part A and/or Part B” beneficiaries can join a Medicare prescription drug plan began in January 2006, which is aimed to “help you save money on your prescription drug costs.” (Introducing Medicare’s new coverage for prescription drugs, 2006).

Medicare beneficiaries can avail either stand-alone prescription drug plans (PDPs) or Medicare Advantage prescription drug plans (MA-PD plans). There are 44 million elderly and disabled Medicare beneficiaries eligible to access Part D drug benefits, and nearly 40 per cent Medicare Part D plan enrollees are receiving low-income subsidies as of early 2008. Statistics project that “more than 25 million Medicare beneficiaries are enrolled in Medicare drug plans, including 17.4 million in stand-alone prescription drug plans and 8.0 million in Medicare Advantage drug plans” (Hoadley et al, 2008). Though Medicare drug plans must meet defined requirements its premium and benefit design, gap coverage, formularies, and utilization management rules may vary.

‘Medicare & You 2007,’ the handbook of new developments and considerations for Medicare beneficiaries issued by Centers for Medicare & Medicaid Services (CMS) is a valuable source of information. It encompass subjects such as: beneficiary enrollment, transition medication fills, standard benefits, cost sharing (particularly low-income subsidy (LIS)), Medicare Prescription Drug Plan Finder, beneficiary complaints, detail on drugs that are not classified as part D drug, vaccine coverage under Part D, syringes in long-term-care, donation of unused medications by beneficiaries, National Provider Identification (NPI) numbers, and the preventive services offered by the Medicare program.

“Medicare beneficiaries can join, switch, or drop coverage from a Medicare prescription drug plan (PDP) during the annual coordinated elected period (AEP), which is the only time when all individuals eligible for Medicare prescription drug coverage can join a Medicare PDP, add additional coverage, or leave a Medicare PDP or portion of the coverage.” (Kilian & Stubbings, 2007, p.60). Annual notice of change (ANOC) intimates the beneficiaries about their plan, monthly premium amount, cost-sharing requirements, and a summary of the benefits provided by the plan, including the drug formulary. There are adequate provisions for accommodating drug and formulary changes, and transition fills during the plan period.

Guidelines for choosing a drug plan, information on maintenance medications, preferred pharmacy, and plan options and monthly costs can be obtained from Medicare Prescription Drug Plan Finder The true out-of-pocket (TrOOP) cost, which is defined by CMS as “the expenses that count toward the annual Medicare drug plan” threshold for the year, determines the start of a beneficiary’s catastrophic coverage and the drug plan keeps track of each person’s TrOOPs costs, which will be intimated to the beneficiary monthly.

Depue & Stubbings (2008, p.50-60) points out that the third year of Medicare Part D program involved continued refinement with an emphasis on offering improved choices to beneficiaries, such as ‘free first fill’ program and ‘limited gap coverage’ in the ‘donut hole’ as part of changes in the standard benefit.

However, for 2008 the standard benefit design cover phase for different thresholds have been changed as follows: annual deductible from $265 to $275; initial coverage limit from $2,400 to $2510; TrOOP costs before entering catastrophic cover change moved from $3,850 to $4,050; and the cost share is the greater of $2.25 for generics and $5.60 for brands or 5% of drug cost. (Depue & Stubbings, 2008, p.50-60). It is expected that new schemes introduced in 2008 will be more helpful for low-income beneficiaries in reducing out-of pocket expenditure.

Low-income subsidies

The Medicare Modernization Act (MMA) includes “provisions for subsidies to provide drug coverage to eligible persons with modest assets and incomes of 150% of the federal poverty line (FPL) or less,” and also includes a provision for private companies to offer approved drug discount cards to provide temporary assistance for prescription costs until the MMA benefit begins on 1 January 2006. (Havdra, et al, 2005, p.600-608).

Analysis of out-of pocket expenses of low-income Medicare population by Havrda, D.E., et al (2005, p.600-608) revealed that the population without prescription coverage, “pharmaceutical company programs offered considerable savings and were superior to the Medicare drug discount card; month-to-month medication costs may vary substantially for persons ineligible for such (low-income) subsidies; and pharmaceutical company assistance may be better alternative.”

Low-income subsidies (LIS) are “intended to reduce or eliminate enrollees’ out-of-pocket expenses associated with the drug benefit, including premiums, deductibles, copayments, and costs in the coverage gap (also called the ‘doughnut hole’)” (KFF fact sheet, 2008). Medicare beneficiaries with low income and modest resources, including beneficiaries’ eligible for full Medicaid benefits, are provided with substantial premium and cost-sharing subsidies under Medicare. Based on income and asset, persons who qualify for Medicaid besides Medicare, are termed dual eligible, and are covered under low-income subsidies (LIS).Beneficiaries of Medicare Savings Programs and those only eligible for SSI cash assistance are automatically deemed eligible for LIS.

Other low-income Medicare beneficiaries with income below 150% of federal poverty level (FPL) and limited resources are also eligible for premium and cost sharing subsidies. Though eligibility for premium and cost-sharing assistance is based solely on income of the applicant the resource levels counted for low-income subsidies under Part D are more generous than those used for SSI and Medicaid. Dual eligibles and other deemed eligible for low-income subsidies are exempt from paying Part D pan premiums or deductibles, but pay $1.05 or $2.25 for generic drugs and $3.10 or $5.60 for brand-name drugs, depending on their income.

According to CMS 12.5 million Medicare beneficiaries are eligible for low-income assistance under Part D in 2008, whereas 2.6 million will be deprived of this benefit. Beneficiaries qualifying for low-income subsidies are permitted to switch plans throughout the year must also enroll in a Medicare drug plan, for the subsidies to take effect. It is crucial to validate currency of membership through re-applying to concerned agencies every year. Otherwise, the beneficiaries would not receive low-income subsidies under Part D.

As per Social Security Administration’s (SSA’s) estimate and recent survey, 2.6 million eligible beneficiaries, including half of all seniors potentially eligible, are not receiving low-income subsidies. The reason may be that some of the beneficiaries with income below poverty are having excess assets, making them ineligible, as income and resources are the main criteria to qualify for Low-income subsidies. It is suggested that “identifying beneficiaries who are eligible for this assistance and implementing policies that guard against churning from plan to plan are critical to the success of the program”( KFF fact sheet, 2008).

How to handle Coverage gap?

Tseng et al (2004) argue that in the new national Medicare drug benefit, beneficiaries with high medication expenditure will face significant gaps in coverage after exceeding the annual dollar limits or caps “but are not high enough to qualify for catastrophic coverage” (Tseng, et al, 2004, p.952-960). The coverage gap occurs because “the benefit pays 75% of prescription costs for beneficiaries until their total drug costs exceeds $2250 and then provides no further coverage for the rest of the year unless total drug costs exceed $5100” (cited by Tseng, et al, 2004).

Since majority of medication costs arise from treatment of chronic health problems, any attempt to decrease medication use to overcome exceeded caps and coverage gap will have negative health impact to the beneficiary. Investigation by Tseng and colleagues (2004) found that the beneficiaries in the “donut hole”, who exceeded the cap and who have no coverage available for total drug expenditure, resorted to reducing the use of essential medications in order to avoid exceeding their benefit cap

Criticism of Medicare Part D and necessity for audit

Article published in McClatcy Newspapers report that “insurance companies involved in prescription drug benefit have overcharged subscribers and tax payers by several billion dollars” according to the inspector general for the Department of Health and Human Services (Goldstein, 2009). The report also adds that 80 percent of participating insurance companies owe the program an estimated $4.4 billion for 2006 alone. Because the Medicare has not conducted financial audits of 158 out of 165 schemes for 2006, the first year of the program, it is argued that delay in determining the actual liabilities of private insurers will adversely affect future performance of the prescription drug program.

According to Inspector General Daniel Levinson ‘a quarter of all bid audits done for the year 2006 and 2007 had errors that resulted in higher profits for the insurance companies, higher costs for Medicare and higher premiums or fewer benefits for the beneficiaries” (Goldstein, 2009). The report implies that it is crucial to conduct audit to safeguard the interests of beneficiaries and successful implementation of the program.

Synthesis of CMS data by Hoadley et al (2008) for 47 national stand-alone prescription drug programs (PDPs) offered in 2008 showed “relatively minimal changes in PDP formularies since 2006” even with increased cost sharing. Key findings of the study of Hoadley and colleagues (2008) points out that: there is regional variation in number of PDPs; shift in benchmark plan policy destabilized low-income subsidy (LIS) beneficiaries; switching to a different plan increased average monthly premium burden; and gap coverage plan and cost sharing for generics and brand-name drugs are inadequate. It is also criticized that though “significant policy changes to the fundamental nature of the Medicare program” was envisaged through the Medicare Modernization Act (2003) “the legislation falls short on its effort to improve quality and control costs.” (The Medicare modernization act of 2003: Summary. (n.d), p.19).

Studies also point out that Part D plan formularies typically include more drugs than CMS standards, and most national PDPs cover a vast majority (at least 90 percent) of the generic sample drugs while only 28 percent cover high share of brand-name drugs. Hoadley et al (2008) showed that more than a quarter of stand-alone Part D plans and half of Medicare Advantage plans offer some type of gap coverage, mainly for genetic drugs.

Only one stand-alone PDP and 17 percent of all Medicare advantage drug plans offer coverage for at least some brand-name drugs in the gap. Among the commonly used ten brand-name drugs majority are listed on the formularies of approximately all PDPs, yet ‘utilization management restrictions may limit a beneficiary’s access to the drug. Utilization restrictions are found to expand its hold during 2008 as 30 percent of the 169 sample drugs were subjected to some use restriction. In this context it will be more appropriate to analyze the prescription drug policy initiative undertaken so far by the federal government.

Intervention to control drug costs

Though pharmaceutical prices are reported to have soared for many years and exceeded other health care costs, the timely response of federal government to escalating costs by becoming increasingly involved in pricing and payment dynamics has helped keep the pharmaceutical prices under control. Private health insurers are reported to be paying the largest portion of prescription drug costs. With the introduction of Medicare outpatient prescription drug benefit under Modernization Act it is predicted that prescription drug expenditures in the public and private health insurance sectors have equalized by 2007 and thereafter “the public sector will pay the majority of these costs” (AMCP Guide, 2007).

“Because PDPs are at risk for the drug costs of their beneficiaries, they are primarily concerned with controlling drug spending within the parameters of appropriate therapeutic use of these agents” (AMCP guide, 2007, S14). Since Medicare ASPs are publicly available information it has the potential for providing reliable information about a drug and maintaining more transparency in the calculation of drug costs and control of net drug spending by beneficiaries.

It is argued that, “payment for prescription drugs has been based on benchmark prices that do not necessarily reflect the actual acquisition costs paid by providers, primarily pharmacists, physicians, and hospitals,” has led policy makers to believe that Medicare and Medicaid have paid more than is necessary for prescription drugs, contributing to excess spending in public programs” (AMCP guide, 2007). With the introduction of Medicare Modernization Act, Average Sales Price (ASP) is taken as the basis for payment for most drugs covered under Medicare medical benefit that is based on manufacturer reported actual selling price data and includes the majority of rebates, volume discounts, and other concessions offered to all classes of trade.

The enactment of Deficit Reduction Act of 2005 (DRA) mandated use of ASP for the calculation of the federal upper limit (FUL), the maximum amount of federal matching funds the federal government will pay to State Medicaid programs for eligible general and multiple-source brand drugs. ‘Medicare’s payment for drugs depends upon the treatment setting’ and the payment rate for the majority of drugs is ASP plus 6%. Since PDPs and MA-PDs are typically offered by Pharmacy Benefit Managers (PBMs) and commercial health plans with each sets having own premiums, benefit, structure, drug formularies, pharmacy networks, and terms of payment there is no standard payment formula and hence Part D drug payment varies by individual plan. Another important factor with Part D is that there is no direct Medicare reimbursement for drugs as the revenue is derived from beneficiary premiums, copayments, or coinsurance.

Under these circumstance Veterans Health Administration’s (VHA) closed formulary implemented in 1997 on drug prices, market share, and drug spending was effective at “shifting prescribing behavior towards the selected drugs, achieving sizable price reductions from manufacturers, and greatly decreasing drug spending” will be worth experimenting (Huskamp, Epstein & Blumenthal, 2003, p.149-158).

The cost savings achieved by formularies are through steering the patients towards lower-price products by using financial incentive, and by increasing bargaining power with drug manufacturers and stimulating price competition among brand-name drugs. “Formularies that provide stronger financial incentives for patients and their physicians to choose drugs preferred by the plan or organization (for example, closed formularies) generally have a greater ability to direct the volume of prescriptions among competing products(…) according to price and thus extract larger price discount from manufacturers” (Huskamp, Epstein & Blumental, 2003).

Huskamp and team found that the ‘VHA National Formulary has been effective at changing prescribing patterns and moving market share to closed drugs within closed classes despite a flexible waiver process’ and was associated with reduction in average outpatient pharmacy spending leading to more than $80 million savings during approximately two year period of introduction of formulary. However, drug manufacturers argue that the National Formulary had negatively affected quality of care, which was not conclusively proved. The unrest might be the reflection of large losses of market share encountered by drug manufacturers if their product is not selected by the VHA.


“Clinicians, elected and appointed government leaders, business executives, and patients all seek lower healthcare expenditure with no adverse impact on quality, access, and technology development. Understanding pharmaceutical payment and the factors that affect payment is an important step in achieving the aforementioned goals” (AMCP Guide, 2007).

By conducting timely audit, bringing adequate changes based on audit findings, imposing penalties on erring insurance companies, and employing corrective measures Medicare Prescription drug program could be transformed more cost effective and more enrollee friendly. Identifying eligible beneficiaries; constant scrutiny of its operation; and implementing economically viable policies; are crucial for the success of the program.


  1. Depue, Ronnie., & Stubbings, Joann. (2008). Medicare part D: Selected issues for plan sponsors pharmacists and beneficiaries in 2008. Journal of Managed Care Pharmacy, 14 (1), 50-60.
  2. Introducing Medicare’s new coverage for prescription drugs. (2006). Centers for Medicare and Medicaid Services.
  3. Havdra, Dawn. E., et al. (2005). Impact of Medicare modernization act on low income persons. Annals of Internal Medicine. 143(8). P.600-608. Web.
  4. Hoadly, J., Hargrave, W., & Cubanski, J. (2008). Medicare prescription drug plans in 2008 and key changes since 2006: Summary of findings. Kaiser Family Foundation.
  5. Huskamp, Haiden. A., Epstein, Arnold. M., & Blumenthal, David. (2003). The impact of a national prescription drug formulary on prices market share and spending lessons for Medicare. Health Affairs: The Policy Journal of the Health Sphere, 22 (3), 149-158.
  6. KFF fact sheet. (2008). Medicare: Low-Income Assistance Under The Medicare Drug Benefit.
  7. Kilian, Janet., & Stubbings, Joannn. (2007). Medicare part D: Selected issues for pharmacists and beneficiaries in 2007. Journal of Managed Care Pharmacy, 13 (1), 60.
  8. The Medicare modernization act of 2003: Summary. (n.d.). National Institute of Health Policy. 19.
  9. Tseng, Chien Wen., et al. (2004). Cost lowering strategies used by Medicare beneficiaries who exceed drug benefit caps and have a gap in drug coverage. Journal of the American Medical Association. 292, 952-960. Web.

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