Competition in Medicare Advantage, Part D, and “Extra Help”/ Working together for seniors and taxpayers

Seniors are beginning to get fliers in the mail alerting them to the upcoming open season for enrollment in Medicare Advantage and Medicare Part D prescription drug plans.  Both programs rely on competition and consumer choice to increase options and hold down costs for seniors.  Open season begins October 15 for those planning to enroll or switch plans.

Seniors will have the opportunity to enroll in a private in Medicare Advantage plan that provides more comprehensive coverage, better access to physicians, and often at a lower cost than traditional fee-for-service Medicare.

Many MA plans also cover prescription drugs as part of the benefit, while other seniors opt for free-standing Medicare Part D prescription drug plans.  Either way, private plans negotiate fiercely to get the best prices from physicians, hospitals, and drug companies so they can offer the lowest prices on plans and attract the greatest number of members.

This model has been highly successful, saving both seniors and taxpayers money.  The Part D program has been particularly successful.  In 2008, the base monthly premium for the Part D benefit was $28.[1] The Centers for Medicare & Medicaid Services (CMS) recently announced that the average basic premium for a Part D prescription drug plan will be about $34 a month in 2017.[2]  That is only a $6-a-month increase in nine years.

The competitive-model Medicare prescription drug program has dramatically lowered prescription drug costs for seniors, and the program has saved taxpayers money—with spending 45% lower than initial projections from the Congressional Budget Office.

About 12 million of Medicare’s 55 million beneficiaries receive Low Income Subsidies (LIS), sometimes called Extra Help, for their prescription drug expenses. Individuals with incomes up to 150% of the federal poverty level and with limited assets are eligible. It reduces their out-of-pocket spending for prescription drugs by paying some or all of the Part D monthly premium and annual deductibles and limiting their co-insurance or copayments.[3]

LIS is a critical part of Part D’s competitive structure and bidding process.

“LIS beneficiaries tend to be sicker than non-LIS beneficiaries,” according to CBO.  It finds that LIS beneficiaries often have multiple chronic conditions, higher rates of diabetes, and more impairments than other beneficiaries, including mental illness, and this proposed change would be particularly problematic for them.

LIS beneficiaries are given the option, like all other Medicare beneficiaries, of enrolling in the prescription drug plan of their choice or of getting their drug benefit through a more comprehensive Medicare Advantage plan.  Those who don’t make an active choice are automatically enrolled in a Part D program by CMS.  CMS randomly assigns those LIS beneficiaries to a benchmark Part D plan.  Even those who are automatically assigned to a plan may switch to a different plan of their choice; if the plan costs more than the assigned plan, they must pay the extra cost.

When Congress created the Medicare Part D benefit, members intentionally designed it to help hold down prescription drug costs by encouraging private plans to compete for enrollment based on coverage, premiums, and other benefits.  Part of this competition involves these LIS beneficiaries.

Each year, Part D plans submit bids to CMS that reflect a plan’s expected costs for an average Medicare beneficiary.  CMS takes these bids and calculates the national average, as well as the average in each of the 34 Part D bidding regions.  This regional average becomes the benchmark.

Individuals who are dually-eligible for Medicare and Medicaid and some LIS-eligible beneficiaries are automatically enrolled in a Part D plan by CMS. Other beneficiaries who apply for the LIS benefit must show proof that they qualify under the program’s income and asset tests.[4]

If plans submit a bid that matches or is below the benchmark, these plans become eligible for automatic enrollment of LIS beneficiaries. This auto-enrollment is a strong incentive for plans to bid low.

The incentive to bid low also has a broader impact on the overall Part D program and its costs to seniors and taxpayers: Benchmark plans that bid low help lower the overall average bid for all Part D enrollees, which is the basis for the government’s lower costs under the program.

Working together:  The Medicare Advantage program, the Medicare Part D prescription drug program, and the Low Income Subsidy program work together in a competitive model to give seniors choice and hold down costs.  The model works.  Further congressional meddling would throw off this balance—to the detriment of taxpayers, seniors, and especially vulnerable dual-eligible and LIS beneficiaries.

[1] Congressional Budget Office, “Spending Patterns for Prescription Drugs Under Medicare Part D,” December 2011.

[2] Centers for Medicare and Medicaid Services, “Medicare projects relatively stable average prescription drug premiums in 2017,” July 29, 2016.

[3] The generosity of the subsidy depends upon the beneficiary’s income and assets.  The most generous LIS benefit covers all premium payments and out-of-pocket expenses for beneficiaries enrolled in both Medicare and Medicaid—people who are “dual-eligibles.” The least generous LIS benefit covers a small share of the Part D premium and subsidizes beneficiaries’ out-of-pocket spending so they pay 15% of costs until they reach the catastrophic window, after which they pay 5% of costs.

[4] The least generous LIS benefit is available to people with incomes between 135-150% of poverty and with assets of no more than $11,990 for a single person and $23,970 for a couple.  Assets such as a home and automobile are excluded.

PDF version