April 19, 2012

CMS Announces 2013 Medicare Part D Amounts

The Medicare Modernization Act (MMA) requires the Centers for Medicare & Medicaid Services (CMS) to announce each year indexed Medicare Part D standard defined benefit and Retiree Drug Subsidy (RDS) amounts that reflect the increase in drug costs.1 On April 2, 2012, the Centers for Medicare & Medicaid Services (CMS) announced the indexed amounts for 2013.2

This Capital Checkup features charts comparing the 2013 numbers to the 2012 numbers. It also reviews changes to the Part D benefit, which were made by the Affordable Care Act,3 and illustrates the impact of those changes on the 2013 benefit.

RDS Amounts

For 2013, plan sponsors eligible for the RDS will receive 28 percent (unchanged from 2012) of Part D prescription drug expenses between $325 and $6,600. The table below compares those numbers to the numbers for 2012.

RDS Amounts
  2012 2013
Cost Threshold* $320.00 $325.00
Cost Limit** $6,500.00 $6,600.00
The cost threshold is the minimum amount of covered Part D drug expenses that must be incurred by an individual before a plan sponsor is eligible to receive the RDS based on the individual’s claims.
The cost limit is the maximum amount of covered Part D drug expenses for which a plan sponsor may claim the RDS for each individual.

Standard Benefit Design Parameters

The table below compares the standard benefit design parameters for a Part D plan for 2013 to the amounts for 2012.

Standard Benefit Design Parameters
  2012 2013
Deductible $320.00 $325.00
Initial Coverage Limit* $2,930.00 $2,970.00
Out-of-Pocket Threshold** $4,700.00 $4,750.00
Total Covered Part D Drug Spending before Catastrophic Coverage*** $6,657.50 $6,733.75
After an individual pays the deductible, he or she is in the initial coverage period during which he or she pays 25 percent of drug costs and the Part D plan pays 75 percent of costs. Once Part D drug expenses (paid by the individual and by the Part D plan) total the initial coverage limit ($2,970 for 2013), the individual is responsible for a certain percentage of charges based on whether the drug is generic or brand until the individual has reached the out-of-pocket threshold.
The out-of-pocket threshold is the amount that the individual must pay on his or her own before catastrophic coverage begins. This gap between the initial coverage limit and catastrophic coverage is referred to as the “donut hole.”
Once an individual reaches the catastrophic portion of the benefit, the Part D plan covers approximately 95 percent of the Part D drug expenses incurred. Cost-sharing is set at the greater of 5 percent coinsurance or fixed copayments (see below). This amount is set by CMS. It is not a total of other amounts listed in this table.
Copayments in Catastrophic Coverage Portion of Benefit
  2012 2013
Generic/Preferred Multi-Source Drug* $2.60 $2.65
Other Drug $6.50 $6.60
For Part D plans that charge copayments in the catastrophic portion of the benefit (instead of 5 percent coinsurance), the amount of the copayment for a generic drug or for a preferred multiple source drug (i.e., generally one for which there are two or more products that are therapeutically and pharmaceutically equivalent) is set at a lower amount than the amount for any other drug.

Part D Changes Introduced by the Affordable Care Act to Be Effective in 2013

The Affordable Care Act made significant changes to the Medicare program, including for Medicare beneficiaries enrolled in a Part D plan. In 2013, seniors who hit the “donut hole” will receive improved coverage on their brand-name drugs. Manufacturers will continue to cover 50 percent of the cost of the brand-name drugs and the plan will pay another 2.5 percent, providing seniors with total coverage of 52.5 percent in the donut hole. Therefore, seniors will pay 47.5 percent of the costs for brand-name drugs in the donut hole. Coverage of generic drugs in the gap will increase from 14 to 21 percent. By 2020, cost sharing for both brand and generic prescription drugs will be the same during the “donut hole” as during the initial coverage period. Consequently, in 2020, individuals will pay 25 percent of drug costs, and the Part D plan will pay 75 percent.

The following chart shows 2013 cost sharing for individuals in a standard Medicare Part D PDP.

Medicare Part D Cost Sharing in 2013

Implications for Sponsors of Plans that Provide Prescription Drug Coverage for Retirees

Plan sponsors should note the new benefit amounts for planning purposes for 2013 — both with respect to expected RDS income and to the design of any Medicare Part D prescription drug plan that is offered to retirees.

Prior to making benefits designs for 2013 final, plan sponsors may wish to analyze the benefits of contracting with a Medicare PDP as opposed to retaining the RDS. In many instances, contracting with a PDP will produce a greater cost savings than the RDS because the reimbursement that insurers get from CMS can be greater than what plan sponsors obtain in direct subsidies.

Plan sponsors that continue to apply for the RDS should take several actions to make sure that RDS income continues and that they are prepared for potential audits by the HHS Office of Inspector General:

  • Review RDS income and assure it meets expectations,
  • Assure that the contract with the RDS administrator or pharmacy benefit manager accurately reflects charges for RDS and contains all language required by CMS, and
  • Review internal policies and controls to assure that deadlines are met and only appropriate personnel have access to RDS information and the RDS website.

• • •

As with all issues involving the interpretation or application of laws, health plan sponsors should rely on their legal counsel for authoritative advice on the integration of Medicare with their employee benefit plans. The Segal Company can be retained to work with plan sponsors and their attorneys on issues related to Medicare Part D.

In 2013, the Medicare Part D standard defined benefit amounts will increase by 1.40 percent, a rate that is based on drug cost trend of 3.31 percent in 2012, adjusted by CMS for prior year revisions. (Return to the Capital Checkup.)
The announcement (see Part D Benefit Parameters on page 49) and press release are available on the CMS website. (Return to the Capital Checkup.)
The Affordable Care Act is the abbreviated name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-148, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)

Capital Checkup is The Segal Company's periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

Download PDF


Return to Capital Checkup archives