How Is Medicare Part D Financed?

Part D is a prescription drug plan for seniors and disabled residents receiving Medicare. It is available to beneficiaries enrolled in Part A and/or Part B, which covers doctor's visits and hospitalizations. It can be purchased as a stand-alone plan or part of a Medicare Advantage Plan, which combines medical, hospitalization and drug coverage through a private insurance plan. Part D is optional, except for beneficiaries receiving Medicare and Medicaid benefits, for which it's mandatory.

History

Medicare Part D was passed in 2003 under President George Bush as part of the Medicare Modernization Act and took effect on Jan. 1, 2006. Before passage, Medicare, the single-payer system enacted by President Lyndon Johnson in 1965 to provide health care for the elderly, provided no prescription drug coverage.

Financing

Approximately 75 percent of drug coverage is financed by the federal government and 25 percent by beneficiaries through monthly premiums, co-payments, co-insurance and deductibles. As opposed to traditional Medicare, in which the government directly pays providers for services, Part D coverage is privatized--meaning government tax-payer funds and contributions from beneficiaries are passed on to private insurers to manage benefits.

Doughnut Hole

Part D contains a coverage gap, commonly known as the "doughnut hole." When beneficiaries reach a certain annual limit in the cost of their prescription drugs, they have to pay 100 percent of the costs. Subsequently, if their costs exceed a certain limit, then catastrophic coverage kicks in and takes care of 95 percent of the costs. In 2010, the doughnut hole begins at approximately $2,830 and ends at $6,440. According to the Medicare Rights Center, the gap was implemented to ease the financial burden on beneficiaries with the most exorbitant drug costs.

Controversy

Medicare Part D has attracted substantial controversy from major health advocacy organizations, including the Commonwealth Fund, the Center for Medicare Rights and Families USA, as well as the Centers for Medicare and Medicaid Services, the government organization responsible for administering government health benefits. Criticism centers on effects of the plan's privatization. Instead of the government negotiating prices with drug companies, price controls are left up to the market, which critics argue makes the prices and the program overall too expensive. There is also no standardization of coverage and benefits. Private insurers have created hundreds of different plans with different formularies, co-pays, premiums and deductibles, which critics argue confuse members in trying to choose a plan.

Reform

President Barack Obama's health care legislation mandates that the coverage gap be eliminated by 2020. In the interim, enrollees' share of costs while in the gap will gradually decrease. By 2020, members will pay 25 percent of drug costs, the same amount they currently pay before entering the "doughnut hole."