GREENWICH POST    March 11, 2004

Y OUR W EALTH

Demystifying Personal Insurance, Part 13 (Final): 

The New Medicare Drug Benefit

The Medicare Drug Benefit idea has a long and tortured history.  With the recent enactment of the Medicare Act of 2003, we have a flawed, gap-toothed realization of this long-sought dream.  [See Medicare Act, 68 Fed. Reg. 69840 (Dec. 15, 2003).]

            The new law unfolds in two stages.  In the first stage, which is transitional, all Medicare beneficiaries under Part A or B (about 42 million seniors and disabled people) will have the right to purchase drug discounts cards, which will provide a discount on prescriptions of about 10% to 25%.  These cards will cost a maximum of $30 per person per year and should be available (from a host of competing private companies) starting in April of this year.  At www.medicare.gov , you will soon find comparisons of the competing plans, their drug "formularies," and the maximum costs posted under each plan for particular drugs sold in your area.  In addition, for those with income below $12,390 ($16,720 for couples) in 2004, the enrollment fee will be paid by the government, and the card will provide up to $600 in federally subsidized prescription assistance.

            Beginning in January of 2006, Medicare Part D will take effect; Part A or B beneficiaries will have three options:

1.  To stay in traditional Medicare and not sign up for the drug benefit

2.  To stay in traditional Medicare and also enroll in a stand-alone Prescription Drug Plan (PDP)

3.  To sign up for a Medicare Advantage Plan (MA-PD).

            Failure to enroll when initially eligible could result in substantial penalties if you enroll later, based on an actuarial calculation of uncovered back months; it's unclear if pre-existing conditions will be penalized.  The initial enrollment period will be from November 15 th 2005 to May 15, 2006.  There will be an annual option to change plans; this enrollment period will run from November 15 th to December 31 st .

            The annual premium for the new drug benefit under the second option is expected to be $420 in 2006.  There will be an annual deductible amount of $250.   After you reach the deductible, the plan will cover 75% of drug costs up to $2,250.  After that point, enrollees pay all costs up to $3,600.  This uncovered interval between $2,250 and $3,600 is the notorious "gap." After $3,600--apparently considered a catastrophic expense under the legislation--the plan pays 95% of the cost of all prescriptions.

            Since enrollment in a PDP will cost $420, and there is a $250 deductible, after which there is a 25% co-pay, the breakeven point is $810 in otherwise uncovered prescription expenses per year, or $67.50 per month (all numbers given are for 2006). 

            There is a handy Medicare Drug Care calculator at http://www.kaisernetwork.org/static/kncalc.cfm (the Kaiser Family Foundation).   You input one number, which is your expected annual drug cost. The calculator then determines: your out of pocket costs under the PDP; your costs including the $420 annual premium; and the percentage costs paid out of pocket (not including the annual premium).

            The third option, MA-PD, will have a varying cost.  The MA-PD is more likely than the PDP to offer supplementary benefits.  See www.tn-elderlaw.com/telb/040106.html .  Because of the complexity of the patchwork solution Congress has enacted, the $250 deductible, the co-pays, and the yawning "gap," the private insurers will enjoy an opportunity here.  Those with existing "Medigap" insurance with a prescription drug benefit will be guaranteed issuance of Medigap A,B,C or F; their existing plans cannot be renewed.  Under the Act, the federal government will subsidize employers and union plans that already provide a retiree drug benefit to encourage them to continue it.

            My firm will be recommending to its Medicare eligible clients to enroll in either a PDP or MA-PD plan in order to receive the valuable catastrophic coverage.

            The Act envisions the development of competing private Medicare plans, starting in 2010, some structured as traditional fee for service plans and others as HMO's.  The Department of Health and Human Services needs to work this out in regulations; the scheme could bog down in a variety of ways.

            The Act changed other aspects of Medicare.  New Medicare beneficiaries will be eligible for a voluntary free physical.  All participants can seek free screening for cardiovascular disease and some at-risk participants can receive free diabetes screening.  There is also a new program intended to help those with chronic illnesses manage their diseases.  

            In this presidential election year, both political parties are touting the new Medicare drug benefit as an important advance.

            For related information on federal programs, see our February 12 th article on Medicare, Medicaid and Long-Term Care, published on our Website at www.GreenwichFinancial.com .  This article completes our series on personal insurance.  If you wish to have a booklet that reprises the series, What You and Your Family Need to Know About Personal Insurance, please give me a call or send an e-mail.

Andy Szabo, CFA , is Managing Director of Greenwich Financial Management Inc. , a Registered Investment Advisor, which advises individuals and companies on investments, insurance and employee benefits.  Questions or comments welcome by phone (203-531-2877) or e-mail: Szabo@GreenwichFinancial.com .