The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ("The Act") established a fourth part to the Medicare Program, called Part D, to help seniors pay for the high cost of prescription medications. Part D is set to begin January 1, 2006 and is available to anyone who currently has Part A or Part B. The initial enrollment period began November 15, 2005.

Since the enrollment date began on November 15, 2005, and the January 1, 2006 coverage date is fast approaching, we are taking this opportunity to explain the portions of the Act that provide for the Medicare prescription drug benefit, otherwise known as Medicare Part D.

First and foremost, participation in Medicare Part D is voluntary. The income level and assets of potential participants ("beneficiaries," in Medicare parlance) determine the level of prescription assistance they will receive.

Beneficiaries with incomes over 150% of the Federal Poverty Level ("FPL") are not eligible for low-income subsidies, but Medicare will still pay for a portion of these beneficiaries' drug costs. The 2005 FPL for a family with three persons is $16,090 (with higher amounts for Alaska and Hawaii). This Alert will focus on individuals whose income exceeds the 150% threshold.

Beneficiaries must enroll in a specific drug plan to be covered by Medicare Part D, which, according to its provisions, will not cover barbiturates, benzodiazepines, weight loss and weight gain medications. Drug plans are not required to make available every covered medication, but they are required to make available at least two medications in every therapeutic class. Six drug classes of special concern have been specified in which all drugs will be available (on formulary): antineoplastics, anti-HIV/AIDS drugs, immunosuppressants, antipsychotics, antidepressants and anticonvulsants. Plans may also offer more comprehensive coverage through enhanced or supplemental coverage.

As indicated in the dateline provided at the end of this Alert, the enrollment process began October 13, 2005 with approved drug plans identified at the Medicare Web site.

Drug plans will contract with certain pharmacies to participate in their pharmacy network. These drug plans may, but are not required to, contract with federally-qualified health centers, rural health centers or other federally-funded safety net providers.

Beneficiaries who do not qualify for low-income subsidies may change plans once a year.

The following chart illustrates the costs that will be covered by a Medicare Part D beneficiary (again for an individual at 150% of the FPL).

Medicare Part D Beneficiary's Cost

Income

Asset Test

Premium1

Deductible

Co-pay

Coverage Gap2

Catastrophic Coverage

150% FPL and above

None

$32.50 per month

$250

After deductible, 25% of up to $2,000 in additional drug costs

No coverage for drug costs between $2,250 and $5,100

After $5,100 in total drug costs paid by beneficiary and Medicare, co-pays of $2/generic and $5/brand (or 5% of drug costs)

1 Expressed as a monthly premium of your specific drug plan; the premium varies depending on the plan you choose, and some estimates put the monthly premium at about $37 in 2006.

2 Once a beneficiary reaches $2,250 in drug costs (i.e., the combination of what Medicare and the beneficiary have paid) he or she is at the coverage gap or "doughnut hole." Beneficiaries will reach the doughnut hole once they have spent $750 out-of-pocket (the $250 deductible and 25% of the next $2,000 in costs). Once a beneficiary reaches the doughnut hole, Medicare stops covering his or her drug costs until the beneficiary spends another $2,850 on medication. These costs may be paid by the beneficiary or another person or entity, as long as that entity is not an insurance plan. For example, charities, a relative, a church or a service organization can pay these drug costs and they will count toward the beneficiary's total drug costs.

Illustrative Chart of Savings

Annual Prescription Costs

Cost to You if not Enrolled in Medicare Part D3

Cost to You if Enrolled in Medicare Part D4

Cost Covered by Medicare Part D

$0

$0

$390

$0

$2,000

$2,000

$1,078

$1,312

$5,000

$5,000

$3,890

$1,500

$7,900

$7,900

$4,130

$4,160

$10,000

$10,000

$4,235

$6,155

$20,000

$20,000

$4,735

$15,655

3 Assuming you have no health insurance coverage for prescription drug costs.

4 Including an annual premium cost of $390, on average.

As the illustrative chart indicates, your prescription costs are higher when you have no health insurance coverage than they would be if you were enrolled in Medicare Part D, unless you are fortunate enough to incur prescription costs of $770 or less. More significantly, assuming you do incur prescription costs, and that those costs are outside the coverage gap, or doughnut hole, described above, Medicare Part D pays for more of those costs than you do. As the chart also indicates, and again when your prescription costs are outside the coverage gap, the higher your catastrophic coverage costs, the lower your overall percentage of those costs, including the annual premium cost of $390, as summarized below.

Prescription Cost Comparison1

Annual Prescription Costs Levels

Your Share

Medicare Share

Your Maximum Payment at Each Level

$0 - 250

100%

0%

$250

251 - 2,250

25%

75%

500

2,251 - 5,100

100%

0%

2,850

Over 5,100

5%

95%

No limit

1 Excludes annual premium of about $390.

In order to determine whether you should enroll in a specific drug plan to be covered by Medicare Part D or maintain coverage in a medical insurance plan in which you are currently enrolled, you should (1) estimate what your projected prescription drug costs will be and (2) compare your insurance premiums and out-of-pocket expenses under your current medical insurance plan with those same expenses under Medicare Part D. We will be happy to help you "crunch the numbers" for this analysis so that you can make an informed decision.

Keep in mind that some state pharmacy assistance programs that have previously assisted Medicare beneficiaries with their drug costs may continue to do so. Each state will determine whether or to what extent it will provide a program of state benefits.

The following dates are provided to give you a quick view of the Medicare Part D timetable:

  • October 13, 2005: The Web-based Medicare Prescription Drug Plan Finder (at www.medicare.gov or 1-800-633-4227) became available to the public.
  • November 15, 2005: Enrollment began for Medicare Part D.
  • January 1, 2006: Medicare Part D coverage begins for those who joined by December 31, 2005. Medicaid no longer pays for prescription coverage.
  • May 15, 2006: Last day to enroll in Medicare Part D without incurring monthly penalty (1% of monthly premium cost). Beneficiaries enrolling after this date will have to pay a penalty for every month they delay enrolling. This penalty will be added to monthly premiums for as long as the beneficiary is enrolled in Part D.
  • November 15 - December 31, 2006: Annual open enrollment period for Medicare drug plans for the following calendar year (2007).

If you have any questions about the information in this Alert or would like to learn more about our highly personalized and confidential tax preparation, planning and consulting services, please contact Michael A. Gillen, Director of Tax Accounting, or the practitioner with whom you are regularly in contact.

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