Approximately 49 million elderly and disabled individuals were enrolled in Medicare in 2011, of which about 29 million were enrolled in Part D. Medicare beneficiaries obtain Part D coverage by choosing from multiple, competing plans offered by plan sponsors—often private insurers—that contract with CMS to offer the prescription drug benefit. About 63 percent of the approximately 29 million Part D beneficiaries were enrolled in stand-alone prescription drug plans (PDP), which add drug coverage to original fee-for-service Medicare and certain Medicare plans, and approximately 37 percent were enrolled in Medicare Advantage prescription drug plans (MA-PDP), which provide Medicare benefits and prescription drug coverage through a single privately managed plan (see table 1 for the number of beneficiaries enrolled by plan type). Of the approximately 29 million beneficiaries enrolled in Medicare Part D, about 36 percent were LIS beneficiaries and approximately 64 percent were non-LIS beneficiaries (see table 1 for the number of beneficiaries enrolled in PDPs and MA-PDPs who were LIS and non-LIS). In 2011, federal spending on Part D totaled approximately $67 billion, accounting for about 12 percent of total Medicare expenditures. Medicare Part D spending depends on several factors, including the number of beneficiaries, their health status and extent of drug utilization, and the cost of drugs covered by Part D. In its 2012 report to Congress, the Medicare Payment Advisory Commission (MedPAC) reported that prices for individual Part D drugs (brand-name and generics) rose by an average of 18 percent cumulatively between January 2006 and December 2009. To help keep Part D spending down, CMS relies on competing plan sponsors to negotiate drug prices for the beneficiaries in their plans. Medicare Part D plan sponsors may contract with PBMs to negotiate price discounts with retail pharmacies and rebates with drug manufacturers for the drugs a plan covers, or plan sponsors may independently negotiate directly with pharmacies and manufacturers. The price discounts that plan sponsors negotiate with pharmacies are based on drug prices that manufacturers establish and generally result in a lower price that a beneficiary pays at the point-of-sale. In comparison, the rebates that plan sponsors negotiate with drug manufacturers are passed on to plan sponsors who may use them to lower beneficiary costs including premiums. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), which established Medicare Part D, required that all Part D plan sponsors offer a minimum set of benefits to beneficiaries, defined as the standard Part D benefit. For non-LIS beneficiaries, this benefit features a deductible (a fixed dollar amount that beneficiaries must pay before coverage takes effect) and an initial coverage period during which the beneficiary pays a coinsurance (or percentage share of the drug’s actual costs) for prescription drugs until the beneficiary reaches the initial coverage limit. After the initial coverage period, the beneficiary enters the coverage gap, which is followed by the catastrophic coverage period in which he or she pays a small amount of the total drug costs. Beneficiaries must also pay a monthly premium to be enrolled in a Part D plan. LIS beneficiaries do not pay the same out-of-pocket costs as non- LIS beneficiaries since they receive subsidies to assist them with their out-of-pocket drug costs. In 2011, out-of-pocket costs for non-LIS beneficiaries in defined standard benefit plans in the initial coverage period included a $310 deductible and 25 percent coinsurance (with the plan paying the remaining 75 percent) until the total combined drug costs paid by the beneficiary and the Part D Plan reached the initial coverage limit of $2,840. The beneficiary then entered the coverage gap until total drug costs reached the 2011 catastrophic coverage threshold of $6,447.50. Once this threshold was reached, the beneficiary paid the greater of either a $2.50 to $6.30 copayment or 5 percent coinsurance per prescription during the catastrophic period. Prior to 2011, non-LIS beneficiaries in the defined standard benefit plan were responsible for 100 percent of their drug costs while in the coverage gap. In 2011, over 90 percent of beneficiaries in PDPs and MA-PDPs were enrolled in actuarially equivalent or enhanced plans. Most of these beneficiaries, however, do not have coverage for brand-name drugs in the coverage gap. See Medicare Payment Advisory Commission, March 2012 Report to the Congress: Medicare Payment Policy. drug. Plan sponsors may require beneficiaries to pay a higher coinsurance or co-pay amount, for example, for certain high-cost drugs, such as specialty-tier eligible drugs that treat conditions such as cancer, multiple sclerosis, and rheumatoid arthritis. Plan sponsors also select whether any utilization management practices apply for each listed drug, such as limits on the amount of drug that can be provided. The Discount Program began in January 2011 after being established in 2010 by PPACA to reduce beneficiaries’ out-of-pocket drug costs when they reach the coverage gap. Non-LIS beneficiaries are eligible for the discount if they are enrolled in a PDP or MA-PDP, are not enrolled in a qualified retiree prescription drug plan, and have reached or exceeded Beneficiaries that are enrolled the initial coverage limit during the year.in enhanced plans providing some coverage for brand-name drugs when they reach the coverage gap may also receive the discount after supplemental benefits are applied. PPACA required that manufacturers wishing to have their brand-name drugs covered under the Medicare Part D program participate in the Discount Program. To participate in the Discount Program, manufacturers must sign an agreement with CMS to provide non-LIS beneficiaries a 50 percent discount on the plan- negotiated price for brand-name drugs at the point-of-sale when non-LIS beneficiaries reach the coverage gap. In addition, PPACA stipulated that both the portion of drug costs for brand-name drugs paid by the beneficiary and the portion paid by the manufacturer count toward reaching the beneficiary’s annual catastrophic coverage threshold. As a result, beneficiaries’ out-of-pocket costs will be significantly reduced. (See app. III for information about how the Discount Program works for beneficiaries at the point-of-sale for brand-name drugs.) Separately, PPACA also included provisions that phase out the coverage gap gradually through 2020 by providing Medicare subsidies to help pay for the cost of brand and generic prescription drugs in the gap for non-LIS beneficiaries. Specifically, beginning in 2013, Medicare will pay 2.5 percent of the plan-negotiated price for brand-name drugs. Medicare will increase its subsidy to 25 percent for brand-name drugs by 2020, while manufacturers will continue to pay the 50 percent discount through 2020 and in subsequent years for a combined 75 percent payment towards brand-name drugs for beneficiaries. Additionally, beginning in January 2011, Medicare paid 7 percent of the plan-negotiated price for generic drugs while the beneficiary paid 93 percent of the cost when they reached the coverage gap. Medicare will increase its subsidy to 75 percent for generic drugs by 2020. CMS encourages beneficiaries to use generic drugs to reduce their out-of-pocket spending for drugs, which also helps keep Medicare Part D spending down. In 2010, about 75 percent of drugs dispensed in Medicare Part D were generic, according to CMS. The coverage gap will be eliminated by 2020 as the beneficiary’s coinsurance for brand-name and generic drugs will be reduced to 25 percent—the same coinsurance amount as required during the initial coverage period. See table 2 for beneficiary coinsurance and Medicare subsidy amounts for brand-name and generic drugs through 2020. Figure 1 shows a comparison of a non-LIS beneficiary’s out-of-pocket spending for prescription drugs when the beneficiary reaches the coverage gap under the standard benefit plan without and with implementation of the Discount Program in 2011. If the Discount Program was not in place, non-LIS beneficiaries in the standard benefit would have been responsible for $3,607.50 in drug costs during the coverage gap in 2011 ($6,447.50 annual catastrophic threshold - $2,840 initial coverage limit = $3,607.50). With the Discount Program, non-LIS beneficiaries would pay $1,803.75 in drug costs when using only brand-name drugs during the coverage gap. Plan sponsors, drug manufacturers, and CMS each have responsibilities for carrying out the Discount Program. Plan sponsors are responsible for making payments at the point-of-sale for the 50 percent discount for brand-name drugs on behalf of manufacturers, providing information to pharmacies about beneficiaries and the drugs subject to the discount, and reporting discount amounts to CMS. In order for the discount to be provided at the point-of-sale to beneficiaries, plan sponsors determine: (1) that the drug is an applicable drug; (2) that the beneficiary is eligible for the discount; (3) that the pharmacy claim for the drug is wholly or partially in the coverage gap; and (4) the amount of the discount. After the beneficiary receives the discount at the point-of-sale, plan sponsors are responsible for recording the amount of the discount that was paid for the drug, along with information such as the associated sales tax and dispensing fee. The plan sponsors include this information on the PDE record, a summary record for each prescription that a beneficiary fills. Plan sponsors must submit PDE records to CMS. Drug manufacturers are responsible for making payments to plan sponsors for the discounts sponsors provide on applicable drugs and maintaining up-to-date listings of drugs that are subject to the discount, as stated in the Discount Program Agreement. Manufacturers are required to reimburse plan sponsors for the discounts for applicable drugs that plan sponsors paid on their behalf at the point-of-sale. Manufacturers are also responsible for electronically listing and maintaining an up-to-date electronic Food and Drug Administration (FDA) registration and listing of all national drug codes (NDC) so that CMS and plan sponsors can accurately identify applicable drugs in the Discount Program.