On July 12, 2001, President Bush announced a Medicare-endorsed prescription drug discount card program tohelp Medicare beneficiaries reduce theirout-of-pocket drug costs. The President stated that the discount card program was an interim measure that wouldprecede broader Medicare reform measures,including a prescription drug benefit for seniors. Medicare does not cover most outpatient prescription drugs. Mostseniors have some form of supplementaryhealth insurance to cover expenses not met by Medicare; however, many of these plans do not offer drug coverageor offer limited protection for drug expenses. (1) The President's card program is controversial and immediately prompted criticism from the retail pharmacy industry, from some Members of Congress, and fromsome consumer groups. Critics of the plan have argued that the plan would not bring additional benefits for seniorsand that retail pharmacies would bear theburden of prescription drug cost reductions for seniors. Shortly after the card initiative was announced in 2001,pharmacy groups successfully filed a lawsuitagainst CMS, asking a federal court to issue an injunction that would halt the card program on the grounds that theAdministration had no statutory authority toestablish the program. The Administration proceeded with plans to modify the program and used a formalrulemaking process for a new proposal. On March 6,2002, CMS issued a proposed rule for the card program with a 60-day comment period. On August 30, 2002, CMSissued the final rule. Although pharmaciescontinued to assert that the Administration lacked the authority to implement the initiative, CMS proceeded withthe program. On January 8, 2003, CMS formallysolicited applications from parties interested in offering Medicare prescription drug discount cards. Applicationswere due on March 7, 2003. On January 29, 2003, a federal district court judge ruled against the Medicare discount card initiative, stating that the Administration did not have the statutoryauthority to implement the program. CMS withdrew its solicitation for applications and issued a statement sayingthat CMS is evaluating the court decision andthe various options CMS has, including a likely appeal. (2) The BushAdministration has stated that it would include prescription drug coverage in its plan to reviseMedicare, but it is unclear whether the prescription drug discount card would be included in the Administration'sproposal. In the 108th Congress, legislation hasbeen introduced ( H.R. 513 ) to authorize the Secretary of Health and Human Services to endorse prescriptiondrug discount cards for use by Medicarebeneficiaries. Currently, many private companies and membership organizations offer prescription discount cards for seniors. The Medicare discount card program would allowprivate companies to develop discount card plans for beneficiaries and apply for Medicare endorsement of theirplans. The President's proposed program would,in most respects, be similar to these other plans. The major difference is that the discount cards offered under thePresident's plan would be Medicare-endorsedand would provide consumers with comparative information on the formularies and prices offered within the cardprogram. Another key difference is thatbeneficiaries could have only one Medicare-endorsed card plan. This report will discuss prescription drug coverage gaps for seniors, private sector discount card programs, the discount card program the President originallyproposed in July, and the key differences in the final regulation issued in August 2002. Implementation issues ofthe program, as well as asserted benefits andlimitations, will also be explored. This report will be updated as events warrant. In 1998, an estimated 10 million elderly people, or 27% of Medicare beneficiaries, did not have any form ofprescription drug coverage. The remaining 28 millionMedicare beneficiaries had some form of drug coverage for at least part of the year. However, coverage is notalways stable and access to drug benefits for seniorsis declining. (3) Medicare beneficiaries are among the highest users ofprescription drugs. They represent 14% of the total U.S. population, and account for 43% ofthe nation's total drug expenditures. (4) With national spending on prescriptiondrugs rising, Medicare beneficiaries face increasing challenges in being able to payfor their prescription drug needs. Although most Medicare beneficiaries have some form of prescription drug coverage, they still pay a portion of their total drug expenses out of pocket. In 1998,beneficiaries with coverage paid approximately 33% of their total drug expenses out of pocket. Averageout-of-pocket drug expenditures for beneficiaries withcoverage was $325 in 1998, while expenditures for those without coverage was $546. For those in poor health, theout-of-pocket expenditures for uncoveredbeneficiaries averaged $820. According to the 1998 Medicare Current Beneficiary Survey (MCBS), coveredbeneficiaries paid a larger percentage of their totaldrug costs out of pocket in 1998 than in 1997. Between 1997 and 1998, out-of-pocket expenditures for coveredbeneficiaries increased by almost 18 percent,while beneficiaries with no coverage had no change in expenses. (5) Prescription drug discount cards are widely available through some private companies and membershiporganizations, such as AARP (formerly the AmericanAssociation of Retired Persons). These companies have set up buying clubs that offer savings on prescription drugsand other medical services to attractconsumers looking for a better price on these items. The companies vary from Internet mail order service companiesto pharmacy benefit managers (PBMs) thatoffer discount card services, such as Merck-Medco and the AARP Member Choice Program (provided through theUnited Health Group Incorporated, with mailorder prescriptions filled by Express Scripts). Card plans usually require an annual membership fee that can rangefrom $15 to $50 per year and offer discountcards that are accepted by a network of drugstores and/or doctors. (6) The plansoffer a discount to card holders on their prescription drug purchases at retailpharmacies. Since the announcement of President Bush's proposal, several pharmaceutical companies formed theirown senior discount card plans in early 2002. (Some of these plans are described in the section below titled Senior Discount Card Plans). Card sponsors arrange a network of retail pharmacies that will participate in the program and offer discounts to card holders. The retail pharmacies in the networkagree to accept the card sponsor's reimbursement rate. This reimbursement rate is often lower than what retailpharmacies charge cash-paying customers whohave no healthcare coverage. Pharmacies generally accept the lower price agreed to in the program becausebelonging to the program network results in a largervolume of business. However, the lower prices accepted by the pharmacies may result in lower prescription drugrevenues for the store. The operators of card programs typically control the costs of a prescription drug benefit by developing formularies. (7) A formulary is a list of drugs that the cardsponsor generates to provide the higher benefits to participating members at a reduced cost. In deciding which drugsto include in the formulary, the card sponsordetermines which drugs are most cost-effective to include in the list. Discount card programs generally userestricted formularies. Patients may obtain discountsonly on the drugs included in the formulary offered by the card program and must pay full price for the drugs notincluded in the card's formulary. Private discount card programs are similar to other drug benefit programs, such as those offered by private health insurance plans, in that they generally developformularies by consulting with an independent pharmacy and therapeutics (P&T) committee. A number ofdrugs may be used to treat a certain condition ordisease. Such drugs are said to be therapeutically equivalent or belonging to the same therapeutic category. Aformulary does not always include every drug in agiven therapeutic category, but usually includes at least one brand-name drug per category. The P&Tcommittee evaluates the safety, efficacy, substitutability andcost of therapeutically equivalent drugs. The members of the committees and the decision-making process vary byhealthcare plan, but most often includephysicians, pharmacists, medical directors, and/or health plan staff members. Some larger drug benefit sponsors,however, do not allow their staff to participate inP&T committees because of potential conflict of interest. Some health plans say that they emphasize outcomesin choosing formulary drugs, while others lookmore at clinical comparability, bioequivalency and cost. (8) Formularies allow card providers to contain the cost of prescription drugs primarily through manufacturer rebates and retail pharmacy discounts. Drugmanufacturers give rebates to the card providers to increase market share and/or utilization. If a manufacturer'sproducts are included in the formulary, themanufacturer expects the use of its drugs to increase. The amount of the rebate offered by a manufacturer to asponsor varies by plan. These rebates varysignificantly across the industry, and there is no reliable data to suggest the size of such rebates. The rebateseffectively lower the net prices that the benefitsponsor must pay for the prescription drugs its members use. Retail pharmacies provide discounts in order to gainaccess to card plan members. In addition to retail pharmacy discounts, many card programs offer mail order services to their members. Mail order pharmacies operate at lower costs thantraditional retail pharmacies and tend to be less expensive for the card sponsor. Some card sponsors encourage theirmembers to use the mail order pharmacy byoffering lower prices through the mail order service than are available at retail pharmacies. Some card sponsors perform drug utilization review (DUR) to evaluate whether a patient was prescribed the proper dosage, whether the patient is getting theappropriate dosage, or if prescriptions are being refilled too frequently. DUR also screens prescriptions for drugsthat may be inappropriate for the patient, fordangerous drug interactions, for duplicate prescriptions, for the overuse of controlled substances, and for fraud andabuse. Actions resulting from incidentsuncovered through DUR may result in the card sponsor sending educational material to the physician or pharmacist,or in dropping coverage for the patient.