The Original Medicare Benefit

The Medicare benefit was the first federally-funded insurance program for
citizens over the age of 65. It was signed into law by President Lyndon B. Johnson on
July 30, 1965 as an amendment to the Social Security Act.1 This new benefit became
active on July 1, 1966, when 19 million beneficiaries were enrolled.1 Two million more
beneficiaries were added in 1972 when the Medicare benefit was amended to include
those less than 65 years of age with long-term or permanent disabilities, such as
amyotrophic lateral sclerosis (ALS, a.k.a. Lou Gehrig's disease) or end-stage renal
disease. The number of Medicare beneficiaries has steadily increased to 39.7 million in
1997 and to 45 million in 2008.2'3 By 2030 it is projected that 78 million beneficiaries
will receive coverage though Medicare.4 Though Medicare is thought of as primarily a
benefit for seniors, 16% (approximately 7 million) of all beneficiaries were eligible to
receive Medicare benefits by a criterion other than age as of 2006.3
Traditional Medicare coverage originally consisted of two distinct parts: Part A
and Part B. Over time, additional coverage options and/or services have been added.

Medicare Part A
Medicare Part A includes coverage for inpatient services such as hospital stays,
skilled nursing care, home health and hospice.5 Part A is primarily funded (86%) through
paycheck deductions via the Medicare tax (2.9% of gross income) of which half is paid
by employers.6 Beneficiaries (or spouses of beneficiaries) who have paid Medicare taxes
for at least 40 quarters are not charged a premium for Part A. United States residents or
citizens who are eligible for Part A, but have not paid into Medicare for the minimum 40
quarters, are charged a monthly premium up to $443 per month in 2009.
The criterion for Medicare eligibility determines the enrollment process for Part
A. Beneficiaries eligible based on age are automatically enrolled with benefits starting
on their 65th birthday. Likewise, beneficiaries eligible due to ALS are automatically
enrolled the month their disability benefits begin. Those with end-stage renal disease
become eligible for Part A on the first day of the fourth month of their dialysis treatment
and must voluntarily enroll in this benefit. Beneficiaries with eligibility due to other
disabilities are automatically enrolled after receiving 24 months of Social Security
benefits.

In terms of providing coverage for prescription medications, Medicare Part A
only covers those administered during an inpatient stay, certain medications used in
conjunction with dialysis (e.g. heparin), and outpatient medications for pain relief and
symptom management for use during hospice care.

Medicare Part B
To complement the inpatient services provided by Part A, Medicare Part B
includes coverage for various outpatient services. These include doctor visits, outpatient
care, laboratory tests, durable medical equipment, and preventative services (including
some screening exams and vaccinations). Beneficiaries are permitted to have one free
physical exam once they become eligible, however they must pay co-insurance for any subsequent doctor visit. The typical co-insurance is 20% of the total cost of the care
given, but may not exceed the Part A hospital deductible. This benefit is partially
funded through monthly premiums charged to its enrollees. In 2009, beneficiaries with
Part B coverage will pay a premium of $96.40 per month.5 Beginning in 2007, the Part B
premium was increased for single beneficiaries with a gross income of $85,000 or more
($170,000 if married).1'5 In contrast, low income single beneficiaries may have their
premiums waived if their income is less than $16,245 ($21,855 if married and living
together) and their assets are less than $12,510 ($25,010 if married and living together) in
assets, as set by Social Security.

Beneficiaries are automatically enrolled in Part B when they become eligible for
Medicare Part A. Beneficiaries with other medical coverage (e.g. from an employer,
pension, or Veterans Affairs) can opt out of Part B in order to avoid these costs.
However, if at any point they lose these benefits, the beneficiary must re-enroll within
three months of losing such coverage.5 If they decide to opt back in at a later date by
enrolling during the January 1 to March 31 annual general enrollment period, they will
incur a 10% premium penalty for each 12 month period without Part B coverage.5
Prescription drug coverage is limited for this benefit as well. Part B includes
coverage for: (1) injectable medications given in a doctor's office; (2) certain oral cancer
drugs if used in the treatment of cancer (e.g. it will cover methotrexate if used for cancer,
but not rheumatoid arthritis); (3) immunosuppressants used for a transplant received at a
Medicare-approved facility; (4) oral anti-emetics if used within 24-48 hours (depending
on specific medication) of chemotherapy; (5) medications for the treatment of anemia for
beneficiaries undergoing dialysis; and (6) medications used in conjunction with certain types of durable medical equipment (e.g. albuterol for use with a nebulizer) for home use.

Part B also covers the pneumonia vaccination, annual flu shots, and the hepatitis
B series vaccine for medium to high risk beneficiaries (e.g. those with hemophilia).
Beneficiaries with permanent gastrointestinal tract dysfunction can receive parenteral nutrition through the Part B benefit as well.

Medicare Part C or Medicare Advantage
The creation of Medicare Part C began in 1973 with the Health Maintenance
Organization (HMO) Act. The Tax Equity and Fiscal Responsibility Act of 1982 and the
Balanced Budget Act of 1997 revised the HMO Act and enabled private insurance
companies to offer more comprehensive coverage to Medicare beneficiaries.1 This
benefit also became known as Medicare Advantage or Medicare HMO. Medicare
Advantage plans offered all the benefits provided by Parts A and B with additional
services or benefits beyond those offered through original Medicare. These benefits can
include expanded vision, dental, and hearing coverage, as well as prescription drugs. To
offset the additional costs associated with providing these added services, Part C
premiums are typically higher than those of Part B.5

Beneficiaries desiring Part C must voluntarily enroll in a plan offered in their
county during the annual open enrollment period from January 1 to March 31. Typically
these plans will have a different payment structure than the original Medicare benefit. As
seen with many HMOs, Medicare Advantage plans may only cover services provided by
contracted providers and require that specialists be seen only via referral from a primary
physician. Beneficiaries who move out of their current county of residence may have to
re-enroll in a different Part C plan if the current plan is not offered in their new county of
residence.

Medicare Part D
Prior to 2006, the basic Medicare benefit did not include comprehensive out-
patient drug coverage. The only exceptions were beneficiaries enrolled in a Medicare
Advantage plan with prescription drug benefits or beneficiaries who purchased limited
prescription insurance through supplemental Medicare plans (e.g. Mutual of Omaha).
However, in 2003 the Medicare Prescription Drug, Improvement, and Modernization Act
(MMA) was signed into law by President George W. Bush.1 This amendment, effective
January 1, 2006, created Medicare Part D (MPD). Additionally, the MMA contained
provisions that would take into account a beneficiary's income both to provide MPD
subsidies for low-income beneficiaries and increased Part B premiums for those with
higher incomes beginning in 2007.'

Leading up to the institution of MPD, out-of-pocket prescription drug spending in
2005 was nearly double that of 1997 with costs averaging 22% of total out-of-pocket
Medicare beneficiary spending.2'6 Beneficiary' spending is highly skewed considering
that the sickest 12% of beneficiaries account for 69% of Medicare spending.6
Within the first few months after the MPD benefit became effective, out-of-
pocket drug costs decreased 13.1%.9 Medicare Part D beneficiaries increased their
utilization of prescription medications by 5.9% during this same period.9 This trend of
increased utilization and decreased out-of-pocket spending varied based on the cost and
type of medication. For instance, the use of the blood thinner warfarin remained
relatively constant between 2005 and 2006.10 This is expected as warfarin is fairly inexpensive. A large decrease in out-of-pocket spending and modest increase in
utilization was seen with higher cost medications, such as clopidogrel (Plavix®, typically
used to maintain patency of arteries following stent placement or post myocardial
infarction).10 Comparatively, a large decrease in out-of-pocket spending and much larger
increase in utilization were observed for less vital, high-cost medications, such as proton-
pump inhibitors for acid reflux or gastroesophageal reflux disease (e.g. Prilosec or
Prevacid®).

Like Part C, the MMA allowed private insurance companies to offer prescription
drug coverage to Medicare beneficiaries. The rationale behind the privatization of MPD
was to encourage private insurance companies to negotiate drug prices and allow the
competition to decrease drug prices.11 Ideally, the drug cost savings would then be
passed on to beneficiaries and result in lower out-of-pocket prescription drug costs.
1.3.1 Prescription Drug Plans versus Medicare Advantage Plans
Under the MMA, private insurance companies offer Medicare beneficiaries a
choice in prescription drug coverage between a stand-alone prescription drug plan (PDP)
or a Medicare Advantage Prescription Drug Plan (MA-PD). Beneficiaries enrolled in a
Part C plan without prescription drug coverage must enroll in a stand-alone PDP, switch
to a MA-PD, or incur a late enrollment penalty (see Section 1.3.4). As of December
2008, almost 17.5 million beneficiaries were enrolled in a PDP comprising 63% of all
beneficiaries enrolled in a MPD prescription drug plan and 39.9% of all eligible Medicare
beneficiaries.12 Stand-alone prescription drug plans may vary by region only (Table 1.1),
while MA-PDs may vary between counties within a region or state. With market
competition as a driving factor behind the privatization of MPD, the large number of
Table 1.1 Composition and number of stand-alone prescription drug plans
(PDP) offered in each PDP region from 2006 to 200913,14'15'1?

PDP
PDPs offered in each region has been hailed as a measure of the success of the MPD
benefit.'' As seen in Table 1.1, the number of MPD PDPs offered in each region
increased between 2006 and 2008 and then contracted between 2008 and 2009. Although
this allowed beneficiaries to choose between a myriad of PDPs, many have found that the
process of determining which PDP is best for them is a time-intensive and overwhelming
task.

Monthly Premiums
Similar to Part B, MPD is partially funded through monthly premiums paid by
enrolled beneficiaries.6 This monthly premium is paid to the sponsoring insurance
company. Some MA-PDs include the monthly drug premium into the total monthly
premium for the plan and, in general, have lower premiums than PDPs.5'18 As seen in
Table 1.2, the average monthly premium for PDPs has increased since 2007.
As with much of the MPD benefit, individual PDPs can change the monthly
premium on an annual basis. Between 2007 and 2008, only 25% of beneficiaries saw a
decrease in their current PDP's monthly premium, while 19% had a premium that
Table 1.2 National average monthly premium and the lowest and
highest monthly premiums offered for any stand-alone prescriptioi
drug plan (PDP) from 2006 to 2009 increased by over $10 per month.19 This trend continued between 2008 and 2009 with
only 8% of beneficiaries experiencing a decrease in monthly PDP premium.20 Of the
almost 92% of beneficiaries facing an increase, 27% had at least a $10 increase in their
monthly PDP premium.20 Further variation in monthly premiums is seen in nationally
offered PDPs. The monthly premium for the Humana Complete PDP (a PDP with one of
the highest beneficiary enrollments between 2006 and 2009) varied from under $40 to
over $70 nationally in 2006 and by almost $20 in 2007 depending on the PDP region in
which it was offered.

Medicare Part D Enrollment Process
In contrast to the automatic enrollment into the original Medicare benefit, eligible
beneficiaries must voluntarily enroll into a PDP or MA-PD. New beneficiaries are able
to enroll three months before and up to three months after the month in which they turn
65 years of age.5 For example, if a beneficiary's birthday is in May, enrollment can
occur any time from February 1 to August 31.

Medicare beneficiaries who have prescription drug insurance through an
employer, TRICARE, Department of Veterans Affairs, or pension/retirement benefits
may not be required to enroll in a MPD plan while this coverage remains active. The
necessity of enrollment into a MPD plan is dictated by whether or not the prescription
drug insurance provided is determined to be "creditable". In order to be creditable,
prescription drug insurance must be actuarially equivalent to or exceed that offered
through the MPD standard benefit design (discussed further in section 1.4). Beneficiaries
with creditable coverage are not required to enroll in a MPD plan, and in most instances
would lose their current coverage if they do enroll in a MPD plan. Beneficiaries with
coverage that is not deemed creditable or who lose coverage, whether through expiration
of benefits, decreased coverage of prescription drugs, or job loss, have 63 days to enroll
in a MPD plan without incurring a late enrollment penalty (discussed in section 1.3.4).5
All MPD beneficiaries are able to select and enroll in a PDP during the annual
open enrollment period between November 15 and December 31. During this time
beneficiaries without MPD coverage can enroll in a PDP/MA-PD or those currently
covered by a PDP/MA-PD can switch to a different PDP/MA-PD. The prescription
benefits of the new MPD plan will begin on January 1 of the following year.
Beneficiaries who permanently move from their current region or county of
residence are also permitted a special enrollment period if their current PDP or MA-PD is
not offered in their new service area of residence. This enrollment period begins the first
day of the month prior to the month in which the move will occur and up to two months
after the month of the move. For example, if a beneficiary moves in mid March, the
enrollment period would start on February 1 and end on May 31.

Late Enrollment Penalty
Another aspect of MPD that is similar to Part B is that most eligible beneficiaries
without creditable prescription drug coverage who fail to enroll in a MPD plan during the
specified enrollment period will be charged a late enrollment penalty when they do enroll
in a plan. The late enrollment penalty encourages beneficiaries with little or no
prescription drug utilization to enroll in a plan in order to balance the costs of the 90% of
seniors who do regularly use at least one prescription medication.22 The late enrollment
penalty is calculated by determining the number of months the beneficiary went without
creditable or MPD coverage multiplied by 1% of the national base beneficiary premium.5
This penalty amount is added to the monthly premium of the beneficiary's chosen PDP.
The penalty is assessed indefinitely and is recalculated annually based on the new
national base beneficiary premium amount. For example, if a beneficiary turned 65 on
May 16, 2006, the enrollment period would expire August 31, 2006. If they did not
enroll in a MPD plan until the 2008 open enrollment period (November 15 to December
31 of 2007), a 16% penalty would be incurred, as this coverage would not take effect
until January 1, 2008. If the beneficiary enrolled in a PDP with a $25 monthly premium,
an additional $4.50 would be added (16% multiplied by $27.93, the national base
beneficiary premium in 2008, rounded to the nearest 10 cents23) to this premium and the
beneficiary would be expected to pay $29.50 each month for their PDP. If in 2009 the
beneficiary remained in a PDP with a $25 monthly premium, the penalty would be
recalculated to $4.90 per month (national base beneficiary premium is $30.36 in 20095),
and the total monthly cost of the beneficiary's chosen PDP would equal $29.90.
Despite the late enrollment penalty, beneficiaries who do not currently take any
prescription medications on a regular basis may still be unlikely to enroll in a MPD plan
due to the belief that delaying enrollment may save money in the long run. At the
inception of MPD, Winter et al., attempted to estimate the likelihood that Medicare
beneficiaries would or would not enroll in a MPD plan.22 While this study concluded that
virtually all beneficiaries could benefit from enrollment, it found that some may require
assistance in order to enroll in the optimal plan for their prescription needs, while others
may not enroll due to low annual prescription drug costs. The authors indicated that the
decision to enroll would be based on the comparison of the beneficiary's current out-of- pocket prescription drug costs to the cost of paying MPD monthly premiums and co-pays (estimated at $444 for 2006).22 This apparent threshold of prescription drug cost
expenditures was shown to increase based on the age of the beneficiary, as older
beneficiaries would be less impacted by paying a late enrollment penalty once they do
enroll in a MPD plan.22 A secondary effect of not having beneficiaries with low
utilization enroll is that MPD plans may not be financially viable without this beneficiary
base and thus would necessitate charging significantly higher monthly premiums or
receiving larger government subsidies.

The cost-minimization strategy of delayed enrollment was examined by Atherly
and Dowd in order to determine the lifetime cost of enrolling while healthy versus
postponing enrollment until sick (and requiring prescription medications). This study
determined that men and women would pay 6.5% and 10% more, respectively, by
delaying enrollment until contracting a drug-intensive disease.24 While this delay is
partially due to the late enrollment penalty, the limited annual enrollment period also
influences this potential cost increase as beneficiaries may not have benefits until the year
after a drug-intensive disease is contracted or occurs.24 Because this study assumed a $30
monthly premium, the cost of immediate enrollment may be even less, as each region
(except Alaska) has at least one plan with a monthly premium under $20 in 2009.'

Formulary Requirements
Despite giving over prescription coverage to private insurance companies, the
MMA set certain formulary standards for any prescription drug coverage offered to
beneficiaries. This legislation set minimum requirements for formularies, as well as
excluded certain classes of medications from MPD coverage. In terms of inclusivity, the
MMA indicated that all formularies must include at least two distinct chemical entities
from each class of medications where more than one distinct chemical entity exists. This
does not permit a formulary to consider two different strengths, salt forms, or dosage
forms to be different medications. Moreover, formularies are required to include all or
substantially all medications within six classes of medications including: antidepressants,
anticonvulsants, antipsychotics, antineoplastics, immunosuppressants, and antiretrovirals.
Since 2008, all MPD plan formularies must also contain all commercially available
vaccines not covered by Part B.

Conversely, the MMA also excludes various classes of medications from MPD
coverage. These classes include: erectile dysfunction medications, medications for hair
growth or cosmetic purposes (e.g. acne or skin-bleaching medications), benzodiazepines,
barbiturates, over-the-counter medications, cough and cold products, prescription
vitamins or minerals, fertility promotion medications, and weight-loss or weight-gain
medications (excluding those used for AIDS wasting or cachexia from a chronic disease
or cancer). While excluded by the MMA, these medications can be on a MPD plan
formulary; however the cost of these medications does not count towards a beneficiary's
true out-of-pocket (TrOOP) costs (discussed in Section 1.4).
Each year, MPD plans are allowed to change which drugs are covered on their
formulary (within the guidelines given above). It has been shown that plans increased
formulary coverage between 2006 and 2007, followed by a decrease in formulary
coverage in 2008.25 The number of brand name prescription medications on PDP
formularies similarly increased in 2007 and decreased in 2008.25 Conversely, the inclusion of generic medications on PDP formularies has steadily increased since 2006.
These changes are attributable to numerous brand name medications becoming available
in generic form.25 Additional analysis of formulary coverage within a single MPD region
(CA) has indicated that while medications may be on formulary, paying a reasonable co-
pay (defined as $35 or less) for a medication that does not require a prior authorization
varies greatly between MPD plans.26

The Standard Benefit
While the MMA permitted private insurance companies to provide prescription
drug coverage, these companies were given a general structure for the MPD benefit.
First, all PDPs must offer prescription drug coverage that is at least as good as, or
"actuarially equivalent" to, the standard benefit (Table 1.3). The standard benefit
includes four coverage levels based on total drug costs: deductible, initial coverage, gap
Table 1.3 The Medicare Part D Standard Benefit
All coverage levels are based on total drug costs. The true out-of-pocket (TrOOP)
amount is the amount a patient must spend prior to reaching catastrophic coverage.

The patient pays 5% of total drug cost with the annual minimum co-pay for
generic/brand name medications ($2.40 generic / $6.00 brand name in 2009)

Catastrophic coverage is subsidized by the Centers for Medicare and Medicaid
Services at 80% of drug costs
coverage, and catastrophic coverage. Each year the coverage begins on January 1 and
total drug costs reset and begin accruing once again.

Deductible
According to the standard benefit, PDPs may charge a deductible up to the annual
maximum amount (Table 1.3). Since the start of Medicare Part D, the maximum
allowable deductible that PDPs could offer has increased almost 20% from $250 in 2006
to $295 in 2009. From January 1 of each year until the PDP's deductible is met,
beneficiaries are responsible for 100% of their prescription drug costs. However,
considering that this deductible amount is only a maximum allowable deductible
according to the standard benefit, many PDPs have a reduced or $0 deductible. Over the
last four years of the MPD benefit, approximately one-third of all PDPs have charged the
full deductible amount and between 55% and 60% have completely waived it.16'21
Considering that seniors who were surveyed indicated that the deductible amount was the
most important plan parameter considered when choosing between multiple insurance
plans, it is not surprising that plan sponsors may adopt a $0 annual deductible as a means
to entice plan enrollment.27

Initial Coverage
The second caveat to the actuarial equivalence of a given PDP concerns the initial
coverage level that is entered once total drug costs have reached the deductible limit.
Based on the standard benefit, this coverage level provides that beneficiaries pay a fixed
25% co-insurance for prescription drug costs. For example, a $100 drug would cost the
beneficiary $25 out-of-pocket, with the PDP paying the remainder during the initial
coverage level. Prescription drug plans are allowed to charge tiered co-pays instead of
co-insurance as long as the co-pay amounts are shown to be at least as good as
(actuarially equivalent) this 25% co-insurance. Since 2006, only about 10% of PDPs have
offered co-insurance during the initial coverage level while the remaining PDPs have
charged tiered co-pays.16'21

Typically PDPs offer multiple tiers for generic and brand name medications
during the initial coverage, as well as a specialty tier reserved for injectable or high cost
medications (e.g. biologicals). Prescription drug plan co-pays for generic medications
have remained relatively constant between 2006 and 2008 at around $5.28 Preferred
brand name medication co-pays have slowly increased to just under $30 in 2008, while
co-pays for non-preferred brand name medications have risen to over $70.28 Average
specialty tiered medication co-insurance remained at approximately 30% of the total drug
cost for both 2007 and 2008.28

Gap Coverage
When total drug costs reach the limit of the initial benefit (Table 1.3), the
beneficiary enters into gap coverage, a.k.a. the "donut hole." As defined by the standard
benefit, beneficiaries are responsible for 100% of drug costs during gap coverage until
their true out-of-pocket cost (TrOOP) reaches the annual limit. True out-of-pocket cost is
not equivalent to a beneficiary's total out-of-pocket MPD costs, as it excludes monthly
premiums, non-formulary medications, spending on Medicare excluded medications, and
expenditures on prescriptions filled at non-preferred pharmacies. Beneficiaries are sent a
periodic statement (usually every month) by their PDP that indicates their year-to-date
TrOOP spending.

Prescription drug plans are allowed to offer coverage during the gap for brand
name and/or generic medications. As a general trend, the number of PDPs offering
coverage during the gap has decreased and the number of drugs covered has likewise
decreased.29 In both 2006 and 2007, all regions had at least one PDP that covered all
formulary generic and brand name medications during the gap. This additional
coverage during the gap was associated with increased monthly premiums. For example,
in 2007 the monthly premium of PDPs without gap coverage averaged $30.17, while
those with gap coverage for generic medications or brand and generic medications
averaged $51.11 and $93.46, respectively.21 Due to the enrollment of a large number of
beneficiaries with high prescription drug costs (adverse selection), PDPs with complete
gap coverage left the market (e.g. Sierra Rx Plus) or no longer offered complete gap
coverage in 2008.29 In light of this adverse selection, only one PDP in Region 11 in 2008
and only three PDPs in 2009 (one each in regions 11, 13, and 16) offered gap coverage
for only a few brand name medications.29 The percent of PDPs offering generic coverage
during the gap has similarly decreased, with more PDPs restricting coverage to only
preferred or select generic medications in 2008 and 2009.29 Despite this reduction in
coverage, the monthly premiums of PDPs offering gap coverage in 2008 and 2009
averaged greater than $30 per month more than those without such coverage.20'28
The creation of this unique portion to the MPD benefit structure has been
considered to be a cost-containment strategy to keep beneficiaries cognizant of high
prescription drug costs.30 Considering that research has shown that medication adherence
decreases as patient cost-sharing increases31, the effect of this gap in coverage can have
negative effects on beneficiaries who may forgo filling their medications due to the
increased economic burden. The effect of increased cost-sharing resulting in a change in
utilization has been observed in MPD beneficiaries who reached the gap. Of these
beneficiaries, three-quarters stopped taking at least one medication and one-quarter
switched to a different medication in the same class (typically generic).32 It was reported
that 20% of the beneficiaries taking a bisphosphonate for osteoporosis stopped taking it
upon reaching the coverage gap, potentially increasing the risk for fractures and total
healthcare costs. Beneficiaries taking medications for Alzheimer's disease were the
least likely to stop taking their medications upon entering the gap. Even after exiting
the gap, 57% of beneficiaries who switched medications in the gap remained taking those
same medications while in catastrophic coverage.32

Catastrophic Coverage
Contrary to its name, catastrophic coverage has the best cost-sharing structure of
all four coverage levels. Once a beneficiary's annual TrOOP limit is reached (Table 1.3),
the beneficiary is only responsible for 5% of the cost of a medication with a minimum co-
pay amount for generic and brand name medications ($2.40 and $6.00 in 2009,
respectively). The Kaiser Family Foundation reported that only 4% of MPD
beneficiaries reached this coverage level in 2007.32 Beneficiaries reaching the coverage
gap earlier in the year typically reached catastrophic coverage sooner and on average
spent the majority of the year there.32

Empirical Patient-perspective Research
Considering the far-reaching implications of the MPD prescription drug benefit
on Medicare beneficiaries, there are relatively few empirical studies examining the
annual trends in MPD PDPs and out-of-pocket costs paid by beneficiaries. The first of
such studies examined the affordability of PDPs across the nation for 2006. After
adjusting by median income, Davis et al. concluded that there was wide variation in PDP
costs both nationally and between the four hypothetical patient profiles used to generate
the MPD costs. As discussed previously, other studies have been conducted that
indicate increased utilization and decreased co-pays in early 2006 compared to 2005
attributable to the MPD benefit.9'10 Using similar pharmacy claims data, Gruber (2009)
showed that only six to nine percent of beneficiaries were enrolled in the least expensive
PDP in 2006.3 However, to date no studies have described the annual variation in MPD
PDP costs or estimated the total out-of-pocket prescription drug costs paid by MPD
beneficiaries.

In part, this lack of empirical data may be due to the fact that MPD claims data
have not been publicly released or that studies using such data have yet to be published.
A second method of obtaining total out-of-pocket prescription drug costs is more time-
intensive, but is publicly available through the use of the Plan Finder Tool on the
Medicare website (www.medicare.gov). In order to estimate a beneficiary's total out-of-
pocket costs, medication names, doses, and quantities regularly taken along with
beneficiary-specific parameters (e.g. zip code of record) must be entered into the Plan
Finder Tool. By using this method, it is possible to obtain the estimated annual costs
(EAC) of all PDPs (and MA-PDs) offered in any MPD region. This is also the only
method available to directly compare PDP costs for beneficiaries attempting to re-
evaluate the annual PDP offerings during the open enrollment period.
The EAC is the most objective measure of a beneficiary's total out-of-pocket
costs for a given year. The EAC includes all monthly premiums and co-pays/co- insurance for all medications in all coverage levels over the course of the year. As such,
the EAC is a more accurate measure of a beneficiary's out-of-pocket costs as compared
to TrOOP, since EAC includes the cost of non-formulary and Medicare-excluded drugs
and monthly premiums.

Research Objectives
In order to expand the empirical research which has examined the total out-of-
pocket costs of MPD beneficiaries, three studies were conducted with similar global
research objectives. First, each study adopted a patient-perspective approach to
calculating MPD prescription drug costs. In order to accomplish this objective, all cost
data were obtained from the official Medicare website, www.medicare.gov. Second, due
to the annual variation in PDP offerings, data from multiple years were examined to
observe between-year trends in out-of-pocket prescription drug costs.

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