Statement by
Michael McMullan
Deputy Director
Center for Beneficiary Choices
Centers for Medicare and Medicaid Services

Medicare Prescription Drug Discount Card and Transitional Assistance Program
before the
House Ways and Means Committee

April 1, 2004

Chairwoman Johnson, Representative Stark, distinguished Committee members, thank you for inviting me here to discuss the Medicare Prescription Drug Discount Card and the Transitional Assistance Program, which were enacted into law on December 8, 2003, as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). In May of 2004, as an important first step towards comprehensive Medicare prescription drug coverage, Medicare beneficiaries will be able to enroll in a Medicare-approved drug card program that will offer discounts on their prescription drugs. This voluntary drug card program will give immediate relief to seniors and persons with disabilities covered under Medicare to reduce their costs for prescription drugs. In addition to the expected savings from the drug discount card, certain low-income beneficiaries will qualify for additional assistance in the form of a $600 annual credit. CMS is very proud to have a significant role in this important first step towards a comprehensive Medicare prescription drug benefit, which is slated to begin on January 1, 2006. CMS is working diligently to meet the aggressive deadline to implement the drug card and transitional assistance program. To this end, the Secretary last week announced the approval of 28 general and special cards, and 43 exclusive cards. We are confident drug card sponsors will begin marketing and enrollment efforts on May 3, 2004, with beneficiaries beginning to see discounts beginning June 1, as scheduled. We are also launching aggressive education campaigns to help beneficiaries choose the best card to fit their needs, and are planning strict monitoring efforts to ensure that card sponsors are not changing prices for unwarranted reasons.


Currently, Medicare beneficiaries who lack outpatient drug coverage pay among the highest prices for prescription drugs, as much as 20 percent higher than people with drug coverage according to a study of drug pricing prepared by the Department of Health and Human Services' Office of the Assistant Secretary for Planning and Evaluation. Under the Medicare Prescription Drug Discount Card Program, we expect beneficiaries to save an estimated 10 to 15 percent off the retail price on their overall prescription drug costs, and up to 25 percent on some drugs. The drug card will pass savings on to beneficiaries in the form of price concessions. While not a drug benefit, the voluntary drug card program is an important first step in providing Medicare beneficiaries with the tools they need to better afford the cost of prescription drugs.


CMS has already begun implementation of the drug card program. We received 106 applications by the January 30, 2004, deadline. Five applications were withdrawn or merged by the applicants, leaving a total of 101. To be considered for the program, organizations were required to complete a detailed application concerning their qualifications and the design of their proposed drug discount card program. Applicants that did not receive our approval have a right to request a reconsideration within 15 days from the notice of initial determination. Any reconsideration determination will be final and binding on the parties and not subject to judicial review.

CMS solicited applications by potential drug discount card sponsoring organizations on December 15, 2003, and applicants were due back on January 30. We evaluated each application against the requirements to operate a drug card program, and the sufficiently complete and correct applications were approved. A number of the applications were disapproved if, for example, they did not fulfill entirely a key requirement, such as providing a contract or letter of agreement (signed by both parties) when the sponsor indicated a plan to contract out a key function such as administering the $600 credit. Because of the short timeframe to implementation, we are providing such applicants with a two-week window to correct such deficiencies, and we will review this information on a rolling basis to determine if these applications can be approved.

We have approved 28 general card applications (of the 55 general applications considered). As approved sponsors can offer more than one card program, this results in 28 national approved programs and 19 regional approved programs. Twenty-seven potential sponsors were rejected based on failing to completely satisfy fundamental requirements of the solicitations, including liabilities exceeding assets and the failure to demonstrate the capacity to manage transitional assistance. CMS also approved 43 (of 44) exclusive card applications, associated with 84 Medicare managed care organizations, to provide the drug card as an integrated part of the Medicare Advantage benefit package available to beneficiaries enrolled in those plans. The recommended approvals allow for a manageable number of cards from which people with Medicare will select, and reflects the high standards attributed to the use of the Medicare name. The 28 general card applicants represent card programs that would be administered by insurers, pharmacy chains, and pharmacy benefit managers. We expect that beneficiaries can begin to enroll in these card plans in May and begin using their drug cards in June 2004.

We also awarded a "special approval" to: three applicants to provide access to the $600 credit through long-term care pharmacies; two applicants to provide discounts to residents of the territories; and one applicant to service Federally recognized Indian tribe and tribal organization pharmacies. The MMA requires CMS to have one additional contractor for the tribal pharmacies. We have re-issued a solicitation to receive additional applications to meet this requirement, and several organizations have responded with a notice of intent to submit a proposal.

All applications of contractors that currently administer State pharmacy assistance programs will receive a Medicare approval, covering: IA, IL, KS, MA, MD, MI, NH, NY, OH, OR, PA, RI, SC, VT, and WV. States have the ability to exclusively contract with a Medicare approved card program. If a state's current contractor did not apply for an approval, the state may work with another (approved) card sponsor.

To ensure that beneficiaries have convenient access to their neighborhood pharmacies, card sponsors will not be permitted to limit their services to mail-order programs. Instead, all approved cards must include an extensive national or regional network of retail pharmacies, which must meet minimum requirements. For example, in urban areas, at least 90 percent of Medicare beneficiaries must live within two miles of a participating pharmacy. In suburban areas, 90 percent of Medicare beneficiaries must live within five miles, and in rural areas, 70 percent of beneficiaries must live within 15 miles of a participating pharmacy.

Drug card sponsors will be required to provide information to beneficiaries on the program's enrollment fee, which cannot exceed $30 per year, and to publish discounted prices available through their cards. In addition, Medicare will ensure that beneficiaries have at least two choices of approved general cards in each state, with the state being the smallest service area permitted under this program. If a card sponsor's service area includes additional states, the entire additional state must be included. Medicare will also provide reliable, easy-to-compare information that will show beneficiaries which programs are in their area, and allow beneficiaries to choose the discount card program that best meets their needs. Medicare will also inform enrollees that prescription drug card sponsors must protect personal and medical information consistent with the privacy requirements of the Health Insurance Portability and Accountability Act.


To qualify for the drug discount card, Medicare beneficiaries must be entitled to or enrolled under Part A and/or enrolled under Part B, but may not be receiving outpatient drug benefits through Medicaid, including 1115 waivers. In addition to receiving discounts through the drug card, beneficiaries with incomes that do not exceed 135 percent of the federal poverty level ($12,569 for individuals, $16,862 for couples for 2004) will get a Federal credit of up to $600 per year to purchase their prescription drugs. The Federal government will also pay the full annual enrollment fee, which is not to exceed $30, for these cardholders with low incomes.

To enroll, beneficiaries will submit basic information to the selected approved discount card sponsor of their choosing about their Medicare and Medicaid status. Those beneficiaries requesting the $600 credit also must submit income and other information about retirement and other health benefits to the card sponsor, and attest to truthfulness of the information. CMS will verify this information and notify the approved discount card program of the beneficiary's eligibility and enrollment outcome. If a beneficiary is found to be ineligible for a drug card, the card sponsor will send written notice to the beneficiary explaining why he or she was found to be ineligible. For beneficiaries who are eligible, sponsors will send a welcome package, including their new drug card, so that they can begin obtaining discounts and, if receiving the $600 credit, using these funds to purchase prescription drugs, upon receiving their cards. Individuals found to be ineligible for either the discount card or the $600 credit may request reconsideration if they still believe they qualify.

An eligible beneficiary can enroll in an approved discount card program at any time. After the initial election in 2004, beneficiaries will have the option, for 2005, of choosing a different card program during the second election period between November 15 and December 31, 2004. In addition, a beneficiary may change cards under certain circumstances if, for example, the beneficiary enters a long-term care facility, moves outside of the area served by the beneficiary's approved program, or enrolls in or drops a Medicare managed care plan that is also providing an exclusive drug discount card program in which the beneficiary was enrolled.


In addition to providing a discount off the price of prescription drugs, MMA creates the Transitional Assistance program, which provides up to $600 in an annual credit for Medicare beneficiaries whose incomes do not exceed 135 percent of the federal poverty level ($12,569 for individuals, $16,862 for couples for 2004). When applying the $600 toward prescription drug purchases, beneficiaries at or below 100 percent of poverty will pay 5 percent coinsurance, and beneficiaries between 100 and 135 percent of poverty will pay a 10 percent coinsurance. The credit, in conjunction with the discount card, will give these most vulnerable beneficiaries immediate assistance in purchasing prescription drugs they otherwise may not be able to afford. For example, Medicare beneficiaries without prescription drug insurance on average would pay about $1,300 for prescription drugs in 2004. The expected savings of approximately 10 to 15 percent translates to $140 to $210. This savings added to the $600 credit will be of substantial help to those who need it most.


To help explain the drug discount card to beneficiaries and help them navigate among cards to choose the card that best fits their needs, CMS has a number of education and outreach efforts underway. Print, radio, and television advertisements will highlight the upcoming changes to the Medicare program, including the addition of the drug discount card. The advertising campaign - presented in both English and Spanish - also includes Internet-banner ads and a 10-minute pre-recorded informational radio interview to educate beneficiaries about the upcoming drug discount cards.

These advertisements will direct beneficiaries to 1-800-MEDICARE and Medicare's website, www.medicare.gov, for more information. CMS is working to ensure that customer service representatives at 1-800-MEDICARE have up-to-date information on the drug card, as well as other CMS programs. Based on our analysis, we estimate 1-800-MEDICARE will receive 12.8 million calls in FY2004. This compares to an FY2003 call volume of approximately 5.6 million calls. The 12.8 million calls include an estimated increase of 5.5 million calls as a result of the new Medicare law and 7.3 million calls for routine 1-800-MEDICARE call topics. We plan to increase our CSR level at 1-800-MEDICARE in May 2004 to handle the expected increase in call volume.

An additional feature of the website will be a new price comparison tool, Medicare Price Comparison. Under the drug card program, card sponsors will negotiate drug discounts with both pharmacies and drug manufacturers. The new comparison tool will give beneficiaries, or their representatives, the capacity to find the sponsor-negotiated price for each drug or all their drugs at pharmacies in their area. Pricing information will be available for brand name, generic, and mail-order prescriptions offered through each card sponsor's program. Drug card sponsors will be able to update the drug pricing information on a weekly basis. Starting in late April, beneficiaries will be able to use the comparison tool by going to www.medicare.gov or by calling 1-800-MEDICARE. Customer service representatives at 1-800-MEDICARE also will be able to answer questions about the program, help them compare drug cards on price and network pharmacies, and refer callers to other appropriate resources. They will also mail the results of the comparison to seniors.

CMS also has a number of beneficiary publications planned for 2004 to explain changes in the Medicare program. For example, HHS has prepared a detailed "Guide to Choosing a Medicare-Approved Drug Discount Card" for beneficiaries that explains the program, including eligibility and enrollment information, and provides step-by-step guidance for comparing discount cards and choosing one. The booklet currently is posted at www.medicare.gov, and printed copies will be available for free through 1-800-MEDICARE. CMS also will publish a small pamphlet with an overview of the drug card program and an introduction to the discount cards and the $600 low-income credit. In addition, a brief document that introduces beneficiaries to the discount cards and the Medicare-approved seal will be mailed directly to beneficiary households. This mailing, which will correspond with the television information campaign, is scheduled for late April 2004. Also, as required by MMA, CMS will work with its partners at the Social Security Administration to facilitate a mailing targeted toward low-income Medicare beneficiaries detailing the drug card and transitional assistance program.

To assist in beneficiary education and outreach, CMS increased funding to State Health Insurance Assistance Programs' (SHIPs) grants and REACH from $12.5 million last year to about $21.1 million for fiscal year 2004 - a 69 percent increase above the fiscal year 2003 total. In addition, HHS' budget plan for fiscal year 2005 allocates $31.7 million to SHIPs -- more than double the amount awarded in fiscal year 2003. With the new funding, SHIPs will be able to expand their efforts to work with and reach even more Medicare beneficiaries and increase and enhance their volunteer staff through additional training and resources.

To educate providers and pharmacists, as well as the States and other stakeholders, CMS will sponsor conferences and conduct a number of teleconferences to make the information available nationwide. For example, in-person training will take place at the CMS-sponsored drug card conference, which is scheduled for April 7-8. CMS staff will be available to provide technical assistance and support as the program begins.


The discount card and $600 in transitional assistance can be used to purchase nearly all prescription drugs available at retail pharmacies. Syringes and medical supplies associated with the injection of insulin, such as needles, alcohol, and gauze, are also included. It is anticipated that many approved programs will use formularies to obtain deeper discounts on prescription drugs. If an approved discount card program uses a formulary then the drugs most commonly needed by Medicare beneficiaries must be included. At a minimum, each program must offer a discount on at least one drug in each of the 209 therapeutic categories of prescription drugs. However, even if a prescription drug is not on the sponsor's formulary, the $600 must still be applied to all the covered prescription drugs available at the pharmacy if the beneficiary uses the discount card toward the purchase. Drug card sponsors also may choose to offer discounts on over-the-counter (OTC) drugs, but the $600 cannot be used toward the purchase of OTC drugs. CMS made public on April 1, 2004 the enrollment fee for each drug card on the PDAP website, and the discounted prices will be posted at the end of April.

Medicare approved drug discount card sponsors will negotiate with manufacturers and pharmacies for rebates and discounts off the average wholesale price (AWP) for drugs covered under the drug card program. In order to get the most competitive savings to beneficiaries, some cards will use formularies, which can improve the negotiating leverage sponsors have with pharmaceutical manufacturers.

Beneficiaries will be guaranteed a percentage savings (or discount) on each purchase they make with their card. Individual prices may change, as AWP moves up and down, but the discount rate to which the card entitles them will not move, unless the sponsoring organization can satisfactorily report to CMS a good cause for such a move. The attached chart outlines how this process works. CMS expects to receive detailed information from program sponsors concerning specific discounts in the near future.

It is true that drug prices under the drug card may change. But this is not different from the way drug pricing works in the market place today. In typical industry practice, a pharmacy benefits manager guarantees, by contract, a certain discount off of the average wholesale price (AWP) to its payers. Within the universe of the thousands of prescription drugs on the market, there are changes in AWP in response to price shifts in labor and raw ingredients, as well as to supply and demand. However, taken individually, the AWP for the vast majority of drugs either does not change or changes several times a year by a modest amount.

Once a card is selected, beneficiaries are committed to their card for the calendar year (with a few exceptions). This is a key program design feature to improve the discounts to beneficiaries under a drug discount card. Historically, drug discount cards have not included discounts from manufacturers because sponsors could not guarantee market share. By having committed beneficiaries, Medicare approved sponsors are able to guarantee a certain patient population. This guarantee increases their negotiating leverage with manufacturers and improves their ability to secure discounts and rebates, which are passed on to the beneficiaries. Because approved programs will be competing for Medicare beneficiaries to be able to increase their negotiating power, the programs will have an incentive to pass negotiated savings along to the beneficiaries in the form of the lowest possible drug prices.

While approved discount card programs may update their prices and lists of offered drugs on a weekly basis, CMS will monitor drug price changes to ensure that prices do not deviate from expected market changes, such as those in average wholesale price. While we do not anticipate that sponsors will be changing prices for unwarranted reasons, CMS will nonetheless closely monitor changes in prices over time for each drug that a card sponsor offers:

  • If a card sponsor's drug prices change in an amount that is not consistent with the expected change due to AWP, then the sponsor must report it and provide a rationale.

  • Also, CMS will routinely check for price changes from week to week compared to what is expected, based on changes in AWP. Price changes that are not expected will be flagged and evaluated.

  • If the price change is not due to legitimate changes in their operating environment, such as losing a manufacturer contract, or unexpected costs of operating the call center, then a card sponsor could be sanctioned by CMS.

  • Sanctions could include prohibiting further marketing and enrollment, monetary penalties, and terminating the card program.


Although the drug discount card program has not yet been implemented, some Medicare beneficiaries have already received calls as well as in-person solicitations from individuals/companies posing as Medicare officials attempting to gain personal information from beneficiaries for identify theft.

A beneficiary should NEVER share personal information such as their bank account number, social security number or health insurance card number (or Medicare number) with any individual who calls or comes to the door claiming to sell ANY Medicare related product.

Beneficiaries who are contacted by these false card companies should remember that Medicare-approved cards will not be available until May. The names of approved card sponsors have been made public and the companies will begin to market their cards through commercial advertising and direct mail beginning this month. Medicare-approved card sponsors will not market their cards door-to-door or over the phone.

In response to these complaints, CMS is coordinating information with customer service representatives at 1-800-MEDICARE, the call centers at the Medicare contractors and the State Health Insurance Assistance Programs (SHIPs). CMS has already informed the public through a press release about how to protect themselves from fraud. OIG referrals have been made for two complaints where we had specific enough information to make a fraud referral.

CMS is continuing to explore methods to limit the scope of these scams and develop a process to work with the appropriate law enforcement agencies to avoid further spread of this type of activity. CMS' office of Program Integrity is hosting a law enforcement fraud and abuse meeting this month. The primary participants will include the Department of Justice, Federal Bureau of Investigation, and the DHHS' Office of the Inspector General. Participants from other agencies that have dealt with issues of Prescription Drug fraud will also be invited. The primary topic of this meeting will be the discussion of the drug discount card program and how to prevent and deter fraud, waste and abuse in this area.


Thank you again for the opportunity to testify today about this new important transition toward a prescription drug benefit for Medicare beneficiaries. This voluntary drug discount card program will provide immediate assistance in lowering prescription drug costs for Medicare beneficiaries until the new Medicare drug benefit takes effect on January 1, 2006. We recognize the importance of the discount cards and the low-income credit to Medicare beneficiaries, who, for too long, have gone without outpatient prescription drug coverage. We at CMS are dedicated to meeting the deadlines set out in the historic Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and are working expeditiously to satisfy the May 3 and June 1, 2004, effective dates for enrollment and implementation, respectively. Thank you again for this opportunity, and I look forward to answering any questions you might have.

Last Revised: April 5, 2004