Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JANET REHNQUIST 

INSPECTOR GENERAL 

MAY 2002 

OEI-03-00-00430 

MEDICARE HMO PRESCRIPTION 

DRUG BENEFITS 

Information Available to Beneficiaries on 

Dollar Limits 
OFFICE OF INSPECTOR GENERAL

http://www.oig.hhs.gov/ 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as amended, 

is to protect the integrity of the Department of Health and Human Services (HHS) programs, as well as 

the health and welfare of beneficiaries served by those programs. This statutory mission is carried out 

through a nationwide network of audits, investigations, and inspections conducted by the following 

operating components: 

Office of Audit Services 

The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by conducting 

audits with its own audit resources or by overseeing audit work done by others. Audits examine the 

performance of HHS programs and/or its grantees and contractors in carrying out their respective 

responsibilities and are intended to provide independent assessments of HHS programs and operations in 

order to reduce waste, abuse, and mismanagement and to promote economy and efficiency throughout the 

Department. 

Office of Evaluation and Inspections 

The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management and program 

evaluations (called inspections) that focus on issues of concern to the Department, the Congress, and the 

public. The findings and recommendations contained in the inspections reports generate rapid, accurate, 

and up-to-date information on the efficiency, vulnerability, and effectiveness of departmental programs. 

Office of Investigations 

The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative investigations of 

allegations of wrongdoing in HHS programs or to HHS beneficiaries and of unjust enrichment by 

providers. The investigative efforts of OI lead to criminal convictions, administrative sanctions, or civil 

monetary penalties. The OI also oversees State Medicaid fraud control units which investigate and 

prosecute fraud and patient abuse in the Medicaid program. 

Office of Counsel to the Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to OIG, rendering 

advice and opinions on HHS programs and operations and providing all legal support in OIG’s internal 

operations. The OCIG imposes program exclusions and civil monetary penalties on health care providers 

and litigates those actions within the Department. The OCIG also represents OIG in the global settlement 

of cases arising under the Civil False Claims Act, develops and monitors corporate integrity agreements, 

develops model compliance plans, renders advisory opinions on OIG sanctions to the health care 

community, and issues fraud alerts and other industry guidance. 
EXECUTIVE SUMMARY 

PURPOSE 

This report describes (1) elements that can help Medicare beneficiaries assess the value of a 

health maintenance organization’s (HMO’s) prescription drug benefit, and (2) how HMOs 

convey information about dollar limits on drug benefits to beneficiaries. 

BACKGROUND 

The 1997 Balanced Budget Act established the Medicare+Choice program. Under this

program, the Centers for Medicare & Medicaid Services (CMS) contracts with a greater

variety of health plans, which increases health plan options for Medicare beneficiaries. This

report focuses on HMO plans under contract with CMS. In addition to providing benefits

covered by the Medicare fee-for-service program, the HMO plans may provide extra benefits

such as a drug benefit that covers outpatient prescription drugs. The HMO plans can limit their

drug benefit in various ways. One way is to limit coverage to a certain dollar amount. Of the

HMO plans that offered an extra drug benefit in 2001, 87 percent limited the dollar amount

of coverage. Plans can also limit the drug benefit by charging beneficiaries coinsurance or

copayments, by only covering certain types of drugs (i.e., brand name or generic drugs), or

only covering drugs on a formulary.

Beneficiaries can receive information about plans’ drug benefits from a number of sources. 

One tool a beneficiary can use to compare drug benefits is the Summary of Benefits. The

CMS, which administers the Medicare+Choice program, mandates that each plan have a

Summary of Benefits so that beneficiaries can use them to make informed choices. In addition

to reading the Summary of Benefits, beneficiaries can phone the HMO plans and speak to

customer service representatives to get information about the drug benefit. Beneficiaries with

Internet access can also gather plan information by using the Medicare Compare database

located on the Medicare website (www.medicare.gov).

Beginning in 2000, HMO plans submitted information about their benefits to the new CMS

database called the Plan Benefit Package database, which is a part of CMS’ Health Plan

Management System. For this report, we analyzed information provided by plans to the Plan

Benefit Package database. We also called customer service representatives and reviewed

Summaries of Benefits for a sample of HMO plans that limit drug benefits.

Medicare HMO Prescription Drug Benefits i OEI-03-00-00430 
FINDINGS 

Comparing the dollar limits on drug benefits can be a daunting task 

There are a number of elements that beneficiaries should review when comparing and assessing 

plans’ limits on drug benefits. Medicare beneficiaries enrolled in HMO plans with dollar limits 

on drug benefits received drug coverage ranging from $200 to $12,000 in the year 2001. 

While the amount of the dollar limit on a plan’s drug benefit is an important element when 

comparing plans, other elements can significantly affect the value of a plan’s drug benefit. 

These elements include the time period of the dollar limit, whether the plan allows beneficiaries 

to carry forward unused dollars, the types of drugs covered under the limit, whether drug 

formularies are used, the pricing method the HMO uses to determine the dollar amount applied 

to the limit for each prescription, and whether the HMO deducts copayments before applying 

the prescription’s dollar amount to the limit. 

The information that HMOs provide to beneficiaries about certain elements of the 

drug benefit is inconsistent, incomplete, and confusing 

Medicare beneficiaries can obtain a variety of information about HMO drug benefits. 

However, we found that many HMO plans did not provide beneficiaries with the specific 

method being used to calculate the dollar amount applied to the limit for each prescription. 

When we telephoned plan representatives to ask them how they generally determined the 

amount applied to the dollar limit for prescription drugs, fewer than half provided the answer. 

Furthermore, when we asked them for specific prices for four commonly used drugs, 90 

percent said they could not or would not provide the information. Even when information 

regarding the pricing method was provided in the CMS Plan Benefit Package database, 

Summary of Benefits, or by the plan’s customer service representative, the information in one 

source was not always consistent with what a plan reported in another source. Dollar amounts 

and time periods reported by some plans were also not always consistent across sources. In 

addition, few HMOs provided information to beneficiaries about whether copayments are 

deducted from the prescription prices applied to the dollar limit. 

Incomplete, inconsistent, and confusing information about a drug benefit’s dollar limit makes it 

difficult for beneficiaries to know exactly what the drug benefit includes. It also may make it 

difficult to compare the value of drug benefits provided by different plans, thereby preventing a 

beneficiary from making an informed choice. 

RECOMMENDATIONS 

Our prior studies have shown that prescription drug coverage is one of the main factors that 

attracts beneficiaries to enroll in a managed care option under Medicare. Thus, every 

Medicare HMO Prescription Drug Benefits ii OEI-03-00-00430 
practical effort should be made to help beneficiaries compare drug benefits among various 

plans. In order for beneficiaries to make informed choices regarding the value of a plan’s 

prescription drug limit, they need accurate, comprehensive, and comparable information about 

the plan’s drug benefit. To this end, CMS has taken numerous steps to ensure that beneficiaries 

receive information about drug plans in both the Summary of Benefits and the Medicare 

Compare database available on the Internet. We recommend that CMS also consider the 

following: 

< Enhance and validate the drug limit information that is collected from plans for the Plan 

Benefit Package database. 

< Enhance current educational efforts to ensure the plans’ drug benefits are clearly 

explained. 

AGENCY COMMENTS 

The CMS reviewed our draft report. They agreed with our draft recommendations: (1) to 

enhance and validate the drug limit information currently collected in the Plan Benefit Package 

database, and (2) to provide beneficiaries with education regarding drug benefits. However, 

they felt our suggestions for how to provide such education were inappropriate. They also 

commented that we did not adequately acknowledge the drug benefit information that is already 

being provided to beneficiaries. 

We acknowledge CMS’ concerns, and have substantially revised our recommendations to 

respond to their comments. We have also modified our introduction and finding sections to 

reflect CMS’ comments concerning the types of drug benefit information already being 

provided to beneficiaries and the inherent complexity of this information. 

However, we continue to believe that pricing information is a key element when comparing 

plans’ drug benefits. We understand that “drug benefit offerings in the pharmaceutical industry 

are complex and it is difficult for anyone (i.e., not only Medicare beneficiaries) to understand . . 

. .” It is precisely for that reason that we continue to believe that beneficiaries need to 

understand and know pricing information to make an informed decision. The CMS suggested 

that beneficiaries would better understand a drug benefit and be able to compare it across plans 

if they could see what it would cost to obtain a prescription for one or two popular drugs. We 

agree that providing plans’ actual prices for drugs would assist beneficiaries in making informed 

choices about the value of a plan to them. We encourage CMS to work toward making actual 

prices available to Medicare beneficiaries. 

Medicare HMO Prescription Drug Benefits iii OEI-03-00-00430 
TABLE OF CONTENTS 

PAGE

EXECUTIVE SUMMARY ...................................................... i

INTRODUCTION ............................................................. 1

FINDINGS

Assessing the Value of HMO Drug Benefits With Dollar Limits ...................... 5

HMO Information About Dollar Limits ......................................... 8

RECOMMENDATIONS ...................................................... 11

APPENDICES

A. Pricing Methods Used by HMO Plans with Dollar Limits in 2001 .................. 13

B. Centers for Medicare & Medicaid Services’ Comments ......................... 14

ACKNOWLEDGMENTS ..................................................... 17

Medicare HMO Prescription Drug Benefits iv OEI-03-00-00430 
INTRODUCTION 

PURPOSE 

This report describes (1) elements that can help Medicare beneficiaries assess the value of a 

health maintenance organization’s (HMO’s) prescription drug benefit, and (2) how HMOs 

convey information about dollar limits on drug benefits to beneficiaries. 

BACKGROUND 

Health Plan Options for Medicare Beneficiaries 

The 1997 Balanced Budget Act established the Medicare+Choice program. Under this 

program, the Centers for Medicare & Medicaid Services (CMS) contracts with a greater 

variety of health plans. Beneficiaries are now able to choose between the traditional fee-forservice Medicare program, private fee-for-service plans, and managed care plans. Managed 

care plans include those offered by HMOs, preferred provider organizations, and providersponsored organizations. This report focuses on HMO plans under contract with CMS. 

Medicare HMO Drug Benefit 

In addition to providing benefits covered by the Medicare fee-for-service program, HMO plans 

may provide extra benefits such as outpatient prescription drugs. According to a February 

2000 report by the Office of Inspector General (OIG) entitled Medicare+Choice HMO Extra

Benefits: Beneficiary Perspectives (OEI-02-99-00030), receiving extra benefits is a major 

incentive for beneficiaries to join HMO plans. When the OIG asked enrollees which of the 

plan’s extra benefits were most important to them, 87 percent said prescription drugs. 

Moreover, one-third of HMO enrollees indicated that the drug benefit was the “single most 

important reason they chose their HMO.” 

Currently, HMO plans limit their drug benefit in various ways. One way is to limit coverage to 

a certain dollar amount. Of the HMO plans that offered an extra drug benefit in 2001, 87 

percent limited the dollar amount of coverage. Plans can also limit the drug benefit by charging 

beneficiaries coinsurance or copayments, by only covering certain types of drugs (i.e., brand 

name or generic drugs), or only covering drugs on a formulary. A formulary, as defined by the 

National Pharmaceutical Council, is “a listing of prescription medications which are preferred 

for use by a health plan and which may be dispensed through participating pharmacies to 

covered persons. This list is subject to periodic review and modification by the health plan.” 

Medicare HMO Prescription Drug Benefits 1 OEI-03-00-00430 
Sources of Information on HMOs’ Drug Benefit 

Beneficiaries can receive information about plans’ drug benefits from a number of sources. 

One tool a beneficiary can use to compare drug benefits is the Summary of Benefits. This 

document describes a plan’s benefits in a standardized format that makes it possible for a 

reader to compare benefits across different plans, and also to compare a plan’s benefits to 

Medicare’s traditional fee-for-service program. The CMS mandates each plan have a 

Summary of Benefits that can be provided to beneficiaries to assist them in making informed 

choices. The CMS currently requires that the Summary of Benefits state clearly whether there 

are limits to the drug coverage, and if so, state the dollar limits and the time period of the limits. 

In addition, plans must state whether unused dollars in one time period cannot be carried 

forward to the next period. Plans must also state the dollar amounts of any copayments, and 

whether the benefits are restricted to a formulary. 

In addition to reading the Summary of Benefits, beneficiaries can phone HMO plans and 

speak to customer service representatives to get information about the drug benefit. 

Beneficiaries with Internet access can also use the Medicare Compare database located on the 

Medicare website (www.medicare.gov). This database contains descriptions of plan benefits 

according to service area. Like the Summary of Benefits, Medicare Compare explains 

benefits in a standardized format that allows beneficiaries to compare benefits across plans. 

Information required of the plans in the Summary of Benefits can also be found in Medicare 

Compare. 

The HMOs are required to submit all the details of their contracted plan benefit packages to 

CMS for review and approval. Beginning in 2000, plans submitted information about their 

benefits to the new CMS database called the Plan Benefit Package database, which is a part of 

CMS’ Health Plan Management System. The Plan Benefit Package database provides a 

standard structure for the description of all plan benefits. The Summary of Benefits is 

automatically generated from this database, and Medicare Compare is updated from this 

database. This database collects more detailed information about plans’ drug benefits than 

HMOs have provided to CMS in the past. 

METHODOLOGY 

Plan Benefit Package Information 

We obtained a copy of CMS’ Plan Benefit Package database for contract year 2001. Using 

this database, we identified 484 managed care plans with a prescription drug benefit. Of these 

484 plans, 410 had a dollar limit on drug coverage. From plans with dollar limits, we selected 

organizations that had a contract with CMS to provide benefits either through HMO plans only 

or through a combination of both HMO and HMO Point of Service (HMOPOS) plans. There 

were a total of 377 plans offered by contracted organizations with either all HMOs or a mix of 

HMO and HMOPOS plans. In this report, we will refer to these 377 plans as HMO plans. 

Medicare HMO Prescription Drug Benefits 2 OEI-03-00-00430 
We analyzed the database information to identify how HMO plans establish the drug benefit’s 

dollar limit. Of the 377 plans with a dollar limit, 3 plans did not answer most database 

questions about the limit. Therefore, much of our analysis is based on 374 plans. The variables 

we analyzed included: (1) dollar amount of the limit; (2) time period of the limit; (3) whether a 

beneficiary’s unused coverage dollars could be carried forward from one time period to the 

next; (4) drug types included in the limit; (5) coverage of formulary and non-formulary drugs; 

(6) the pricing method (i.e., the method used by the HMO to determine the dollar amount 

applied toward the limit for a beneficiary’s drugs); and (7) whether copayments are deducted 

from the drug’s prescription price before that dollar amount is applied toward the beneficiary’s 

limit. 

We found inconsistencies within some HMO plans’ responses to certain database questions. In 

order to analyze the data, we re-coded these responses based on other information provided 

by the plan in the database. Also, a majority of plans did not select one of the nine categories 

the database specified for pricing method. Instead these plans chose the response, “Other.” 

For these plans, we used narrative explanations in the note fields to either re-code responses or 

create additional categories for pricing method. We did not contact HMOs to verify the Plan 

Benefit Package data they provided to CMS. 

Customer Service Information 

The 377 plans that we identified for analysis in the Plan Benefit Package database represented 

118 contracts between CMS and HMOs. A single contract can be for one or more health 

plans. We phoned customer service staff at one plan representing each of the 118 contracts. 

When a contract had more than one plan, we selected one plan at random. 

In our phone calls, we presented ourselves as consumers and asked questions about the dollar 

limit. The purpose of these calls was to determine how HMO plans explain the dollar limit to 

those who ask about it on the phone. We also attempted to find out what specific dollar 

amounts would be applied to the limit for four drugs commonly used by elderly Americans. 

Of the 118 plans we attempted to contact, we were able to ask questions of 99 plans. We 

were not able to ask questions of the remaining 19 plans for the following reasons: 6 plans 

would not answer questions because they were not enrolling new members at the time of our 

call; 5 plans would not answer questions without personal information such as name, address, 

phone number, or ZIP code; 4 plans could not be reached with the phone numbers available; 2 

plans said the person who could answer our questions would not be able to call us back 

because it was a long distance call; 1 plan was out of business; and 1 plan did not return our 

calls after multiple attempts to reach them. 

Summary of Benefits Information 

In addition to questions relating to the drug benefit’s dollar limit, we asked each customer 

service representative to send us the plan’s Summary of Benefits. Of the 93 plans whose 

Medicare HMO Prescription Drug Benefits 3 OEI-03-00-00430 
customer service representatives said they would send us a Summary of Benefits, we received 

this document from 58 plans. We reviewed the Summaries of Benefits to determine how 

HMO plans explain the dollar limit to beneficiaries in writing. 

Comparison of Information that HMOs Provided to CMS and Consumers 

In order to determine whether HMO plans provide CMS and beneficiaries the same 

information about the dollar limit, we compared information we collected from the three 

sources: the CMS Plan Benefit Package database, the phone calls to plans’ customer service 

representatives, and the plans’ Summaries of Benefits. When information from the Summary

of Benefits was not available, we compared information plans provided to CMS with 

information plans provided to consumers on the phone. We determined whether information 

regarding five issues matched in the different sources. The five issues included (1) the existence 

of a prescription drug benefit, (2) the existence of a dollar limit on drug coverage, (3) the 

amount of the dollar limit, (4) the time period of the dollar limit, and (5) the pricing method for 

determining the amount applied toward the limit for a beneficiary’s drugs. 

____________ 

This study was conducted in accordance with the Quality Standards for Inspections issued by 

the President’s Council on Integrity and Efficiency. 

Medicare HMO Prescription Drug Benefits 4 OEI-03-00-00430 
FINDINGS 

Comparing the dollar limits on drug benefits can be a daunting 

task 

There are a number of elements that beneficiaries should review when comparing and assessing 

plans’ limits on drug benefits. While the amount of the dollar limit on an HMO plan’s drug benefit 

is an important element when comparing plans, it is not the only factor that Medicare beneficiaries 

should consider when determining the value of a plan. Considering only the dollar amount, a 

beneficiary would assume that a plan with a limit of $1,000 would have double the value of a plan 

with a $500 drug limit. However, this is not necessarily true. Depending on the needs of the 

beneficiary, there are other elements that can significantly affect the value of a plan’s drug benefit. 

These elements include the time period of the dollar limit, whether the plan allows beneficiaries to 

carry forward unused dollars, the types of drugs covered under the limit, the pricing method the 

HMO uses to determine the dollar amount applied to the limit for each prescription, and whether 

the HMO deducts copayments before applying the prescription’s dollar amount to the limit. 

Dollar Limit and Time Period 

In 2001, 374 Medicare HMO plans reported dollar limit amounts in the CMS’ Plan Benefit 

Package database. Beneficiaries enrolled in these plans would receive drug coverage ranging 

from $200 to $12,000 in the year 2001. Most of the plans (67 percent, 249 of 374) had limits 

that would result in $1,000 or less in drug coverage for 2001. Only 10 plans provided coverage 

totaling $3,000 or more for the entire year. 

Table 1 shows the range of dollar limits and associated time periods for the 374 plans with dollar 

limits. Higher dollar limits are not always associated with longer time periods. For example, 

there are plans with dollar limits of $200 per year, and plans with limits of $1,000 per month. 

The drug benefit’s value, therefore, depends on the time period as well as the amount of the 

dollar limit. 

Table 1. Variation in the Time Period and Dollar Limit of Drug Benefit 

Time 

Period 

Number of 

Plans 

Percentage of 

Plans 

Range of 

Dollar Limits 

Median 

Limit 

Annual 189 51% $200-$3,500 $1,000 

Semi-annual 24 6% $250 - $1,500 $500 

Quarterly 139 37% $62 - $1,000 $175 

Monthly 22 6% $45 - $1,000 $50 

Source: 2001 Plan Benefit Package database in CMS’ Health Plan Management System 

Medicare HMO Prescription Drug Benefits 5 OEI-03-00-00430
The drug benefit’s value is also affected by whether the plan allows unused dollars to be carried 

from one time period to the next. In 2001, only 12 percent of plans (46 of 377) allowed 

beneficiaries to carry forward unused dollars. This is a component of the dollar limit that 

beneficiaries should consider when comparing plans. If a beneficiary were in a plan that limited 

coverage to $250 per quarter and the beneficiary used only $50 in one quarter, the remaining 

$200 would be lost. Beneficiaries who use little or none of their drug benefit in one time period 

but have extensive prescription drug needs in another time period might find themselves without 

enough coverage if their plan does not allow unused dollars to be carried forward. 

Type of Drugs Included in Limit 

Not all HMO plans cover all types of drugs under the drug benefit. For the plans reviewed, 90 

percent (336 of 374) reported using some type of drug formulary. However, approximately half 

of these plans (58 percent, 195 of 336) also allowed beneficiaries to obtain non-formulary drugs. 

While some plans include all covered drugs under the dollar limit, some plans only include specific 

drug types. The types of drugs included in the dollar limit play a significant role in determining the 

value of the drug benefit to an individual beneficiary. One-third of the plans reviewed (33 

percent, 122 of 374) included only brand drugs in their dollar limit. The remaining two-thirds of 

plans (252 of 374) included generic drugs or a combination of generic and brand drugs in their 

dollar limit. 

When comparing HMO plans, beneficiaries need to consider the types of drugs they use and 

whether the plans they are considering include these drugs in the dollar limit. For example, a 

beneficiary who uses only generic drugs may compare two plans — both with annual limits of 

$1,000 — and believe the two plans offer the same value. However, if one plan includes only 

brand-name drugs in the annual limit, and the other plan limits both brand and generic drugs, the 

value to the beneficiary is considerably different. For a beneficiary who uses only generic drugs, 

the plan that does not include generic drugs in the annual limit would provide better value since 

the cost of those drugs would not be deducted from the limit. If this beneficiary chose the other 

plan, each prescription would be deducted until the annual limit was reached. Upon reaching the 

limit, the beneficiary would be faced with out-of-pocket costs. 

Pricing Method Applied to Limit 

The pricing method determines the amount that will be deducted from the beneficiary’s dollar limit 

each time a prescription is filled. The amount applied to the limit for the same exact drug can 

differ substantially among HMO plans that use different pricing methods. According to the Plan 

Benefit Package database, plans used at least 15 different pricing methods in 2001. Most plans 

(81 percent) used one of six different methods. As shown in Table 2, the most frequently used 

pricing method was discounted average wholesale price (AWP), either with or without a 

dispensing fee. Information on all the pricing methods is available in Appendix A. 

Medicare HMO Prescription Drug Benefits 6 OEI-03-00-00430 
 Table 2. Top Six Pricing Methods Used by HMO Plans with Dollar Limits on Drug Benefit 

Pricing Method # of Plans % of Plans 

Discount % of Published AWP 72 19% 

Discount % Published AWP Plus Dispensing Fee 70 19% 

Medicare+Choice Organization Acquisition Cost Plus ($__) 56 15% 

Published National AWP 40 11% 

Medicare+Choice Organization Acquisition Cost Plus Dispensing Fee 36 10% 

Published AWP Plus Dispensing Fee 28 7% 

TOTAL 302 81% 

Source: 2001 Plan Benefit Package database in CMS’ Health Plan Management System 

Even within one specific pricing method there can be a number of variations. Plans that used a 

discount percentage of AWP reported discounts ranging from 10 to 85 percent. Most of the 

discounts, however, were between 10 and 20 percent. For plans that included dispensing fees in 

their pricing method, the reported dispensing fees ranged from $1.00 to $7.50. 

The variation in pricing methods among HMO plans can have a major impact on how quickly a 

beneficiary reaches the drug benefit limit. Studies of prescription drug reimbursements indicate 

that the use of some pricing methods result in better prices. For example, prices based on the 

acquisition costs of managed care organizations are generally lower than prices based on AWP. 

Furthermore, prices based on a discounted AWP will be lower than prices based on a nondiscounted AWP. Therefore, it is important that a beneficiary have information about plans’ 

pricing methods when choosing between plans. The beneficiary can then differentiate if one of the 

pricing methods is likely to result in fewer dollars being deducted from the limit. The plans with 

pricing methods that result in lower prices would provide a better value to the beneficiary, since it 

is likely that more prescriptions could be filled before reaching the dollar limit. 

Copayment Deducted from Drug Amount 

The value of the drug benefit is also affected by whether the HMO plan deducts the copayment 

from the dollar amount applied to the limit for each prescription. Eighty-five percent of plans that 

reported requiring copayments for drugs (307 of 360) also reported that the copayment was 

deducted from the drug amount applied to the limit. The remaining 15 percent of plans (53 of 

360) reported that the copayment was not deducted from the drug amount. 

All other things being equal, a plan that deducts the copayment from the drug amount offers a 

more valuable pharmacy benefit than a plan that does not deduct the copayment. To 

Medicare HMO Prescription Drug Benefits 7 OEI-03-00-00430 
illustrate, Plans A and B both charge a $10 copayment for a drug that costs $50. However, Plan 

A deducts the copayment for the amount applied toward the limit and Plan B does not. In this 

example, Plan A would apply $40 toward the limit ($50 - $10 = $40), while Plan B would apply 

$50 toward the limit. Consequently, after this prescription, a beneficiary at Plan A would have 

more dollars left in coverage than the beneficiary in 

Plan B. 

The information that HMOs provide to beneficiaries about 

certain elements of the drug benefit is inconsistent, 

incomplete, and confusing 

Inconsistent, incomplete, and confusing information about a drug benefit’s dollar limit makes it 

difficult for beneficiaries to know exactly what the HMO plan’s drug benefit includes. It also may 

make it difficult to compare drug benefits provided by different plans, thereby preventing a 

beneficiary from making an informed choice. Having information about the dollar limit can help a 

beneficiary see more clearly how the value of the benefit differs among plans. 

We reviewed several sources that may be used by beneficiaries to acquire information about a 

plan’s drug benefit. We reviewed two sources provided directly from the HMO plan to the 

beneficiary: the Summary of Benefits, and information collected by phone from the plan’s 

customer service representative. We also reviewed the information that HMO plans provided to 

CMS’ Plan Benefit Package database. Some of this data is used to update plan information that 

beneficiaries can view on the Medicare Compare website. 

Many HMOs did not provide beneficiaries with specific pricing methods, and when 

they did, the information in one source was not consistent with what they reported 

in another source 

The majority of Summaries of Benefits (32 of 58) instructed the beneficiary to call the plan to 

find out how a drug’s dollar amount is determined before it is applied to the dollar limit. 

However, when we phoned HMO plans and asked how the plan determined the amount applied 

to the dollar limit, less than half the plans (40 of 91) mentioned a specific pricing method. Most of 

the other plans said, “the price of the drug” or “the cost of the drug” is what is applied toward the 

limit. Such vague explanations do not provide beneficiaries with actual pricing methods that can 

be used to compare the value of plans. In addition, when we asked plan representatives to 

provide the specific dollar amounts that would be applied to the limit for four drugs, 90 percent 

said they could not or would not provide this information for any of the drugs. Therefore, 

beneficiaries are left to make decisions about the value of a plan’s drug benefit based only on 

vague and undefined pricing method information. 

Medicare HMO Prescription Drug Benefits 8 OEI-03-00-00430 
Even when HMO plans furnished some type of information about how they determine the drug 

dollar amount applied to the dollar limit, the details provided were not always consistent across 

information sources. Nearly 90 percent of plans (79 of 91) provided different information about 

pricing methods among the sources reviewed. There were even cases wherein the information 

provided by a plan to all three sources (Plan Benefit Package database, Summary of Benefits, 

consumers calling plan’s customer service number) differed. 

Figure 1 illustrates differences in the information about pricing methods among the sources we 

reviewed. As the example shows, the data reported to CMS provides specific details about what 

pricing method this plan uses to determine the drug amount applied to the limit. The Summary of 

Benefits tells the beneficiary to call the plan and ask how drug costs are determined. However, 

when a beneficiary calls the plan, the customer service representative uses a non-specific term 

like “cost of drug” that provides no real pricing method detail. Furthermore, information provided 

on the phone and the Summary of Benefits makes it clear that copayment amounts paid by the 

beneficiary are not applied to the limit, but the information reported in the Plan Benefit Package 

says that copayment amounts are applied to the limit. In addition, the customer service 

representative talks about both brand and generic drugs when discussing the limit. However, the 

Summary of Benefits refers only to brand name drugs. 

Figure 1: Example of One Plan's Inconsistent and Confusing Information About the Drug 

Amount Applied to the Limit 

WHAT THE PLAN PROVIDED TO CMS ’ PLAN BENEFIT PACKAGE DATABASE: 

AWP minus 14% including copayment amount 

WHAT THE PLAN WROTE IN THE SUMMARY OF BENEFITS: 

“Limits are calculated as the sum total of all of your brand name 

prescription drug purchases minus any applicable copayment costs.” 

“Please ask [the plan] about how we determine drug costs that count 

toward these limits.” 

WHAT THE PLAN’S CUSTOMER SERVICE REPRESENTATIVE SAID ON THE PHONE: 

“The cost of the drug minus the copayment. For example, if the drug cost $50, 

[you] would only pay $15 for brand drugs or $10 for generic drugs. The 

amount deducted from cap would be $35 if it was a brand, or $40 if it was a 

generic.” 

Sources: 2001 Plan Benefit Package database in CMS’ Health Plan Management System; Phone call to 

plan’s customer service representative (January/February 2001); and 2001 Summary of Benefits 

Medicare HMO Prescription Drug Benefits 9 OEI-03-00-00430 
In addition, dollar amounts and time periods reported by some HMO plans were not 

always consistent across sources 

Overall, 16 percent of reviewed HMO plans (15 of 93) provided inconsistent data on the dollar 

amount or time period of their limit across information sources. More than half of these (8 of 15) 

reported contradictory information for both dollar amount and time limit. For example, one plan 

told a consumer on the phone the dollar limit was $1,000 per year but reported to CMS and in 

the Summary of Benefits that the dollar limit was $125 every 3 months. 

Few HMOs provided information to beneficiaries about whether copayments are 

deducted from the amount applied to the dollar limit 

The CMS does not currently require HMO plans to provide information, in the Summary of 

Benefits, about whether they deduct copayments from the prescription price before applying this 

amount to the dollar limit. Only 12 percent of plans (7 of 58) provided this additional piece of 

information to beneficiaries in the Summary of Benefits. 

Medicare HMO Prescription Drug Benefits 10 OEI-03-00-00430 
RECOMMENDATIONS 

Our prior studies have shown that prescription drug coverage is one of the main factors that 

attracts beneficiaries to enroll in a managed care option under Medicare. Thus, every practical 

effort should be made to help beneficiaries compare drug benefits among various plans. In order 

for beneficiaries to make informed choices regarding the value of a plan’s prescription drug limit, 

they need accurate, comprehensive, and comparable information about the plan’s drug benefit. 

To this end, CMS has taken numerous steps to ensure that beneficiaries receive information 

about drug plans in both the Summary of Benefits and the Medicare Compare database 

available on the Internet. We recommend that CMS also consider the following: 

< Enhance and validate the drug limit information that is collected from plans for the Plan 

Benefit Package database. 

< Enhance current educational efforts to ensure the plans’ drug benefits are clearly 

explained. 

AGENCY COMMENTS 

The CMS reviewed our draft report. They agreed with our draft recommendations: (1) to 

enhance and validate the drug limit information currently collected in the Plan Benefit Package 

database, and (2) to provide beneficiaries with education regarding drug benefits. However, they 

felt our suggestions for how to provide such education were inappropriate. They also commented 

that we did not adequately acknowledge the drug benefit information that is already being 

provided to beneficiaries. 

We acknowledge CMS’ concerns, and have substantially revised our recommendations to 

respond to their comments. We have also modified our introduction and finding sections to reflect 

CMS’ comments concerning the types of drug benefit information already being provided to 

beneficiaries and the inherent complexity of this information. 

However, we continue to believe that pricing information is a key element when comparing plans’ 

drug benefits. We understand that “drug benefit offerings in the pharmaceutical industry are 

complex and it is difficult for anyone (i.e., not only Medicare beneficiaries) to understand . . . .” It 

is precisely for that reason that we continue to believe that beneficiaries need to understand and 

know pricing information to make an informed decision. The CMS suggested that beneficiaries 

would better understand a drug benefit and be able to compare it across plans if they could see 

what it would cost to obtain a prescription for one or two popular drugs. We agree that 

providing plans’ actual prices for 

Medicare HMO Prescription Drug Benefits 11 OEI-03-00-00430 
drugs would assist beneficiaries in making informed choices about the value of a plan to them. 

We encourage CMS to work toward making actual prices available to Medicare beneficiaries. 

Medicare HMO Prescription Drug Benefits 12 OEI-03-00-00430 
APPENDIX A 

Pricing Methods Used by HMO Plans with Dollar Limits in 2001

Pricing Method 

Number of 

Plans 

Percentage 

of Plans 

Discount % of Published AWP 72 19.25% 

Discount % of Published AWP Plus Dispensing Fee 70 18.72% 

Medicare+Choice Organization Acquisition Cost Plus ($__) 56 14.97% 

Published National AWP 40 10.70% 

Medicare+Choice Organization Acquisition Cost Plus Dispensing Fee 36 9.63% 

Published AWP Plus Dispensing Fee 28 7.49% 

Brand - Discount % of Published AWP Plus Dispensing Fee and Generic -

Maximum Allowable Cost Plus Dispensing Fee 

13 3.48% 

Published Wholesale Price 11 2.94% 

Brand - Discount % of Published AWP Plus Dispensing Fee and Generic -

Discount of Published AWP or Maximum Allowable Cost Plus Dispensing 

Fee 

11 2.94% 

Brand - Discount % of Published AWP Plus Dispensing Fee and Generic -

Maximum Allowable Cost or Federal Upper Limit Plus 

Dispensing Fee 

9 2.41% 

Published Medicare+Choice Organization Fee/Charge Schedule 6 1.60% 

Actual Acquisition Cost x 1.25 6 1.60% 

Published Retail Price 5 1.34% 

Medicare Fee Schedule 1 0.27% 

Lesser of Usual & Customary, or, Brand - Discount % of Published AWP Plus 

Dispensing Fee and Generic - Medicare+Choice Organization Acquisition 

Cost Plus Dispensing Fee 

1 0.27% 

Other (not specified) 9 2.41% 

TOTAL 374 100% 

Source: 2001 Plan Benefit Package database in CMS’ Health Plan Management System 

Medicare HMO Prescription Drug Benefits 13 OEI-03-00-00430 



ACKNOWLEDGMENTS 

This report was prepared under the direction of Robert A.Vito, Regional Inspector General for 

Evaluation and Inspections in Philadelphia. Other principal Office of Evaluation and Inspections staff who 

contributed include: 

Isabelle Buonocore, Project Leader Linda Frisch, Program Specialist

Lauren McNulty, Program Analyst

Stacey R.Uhl, Program Analyst

Nancy J. Molyneaux, Program Analyst

Cynthia R. Hansford, Program Assistant

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