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Understanding Types of Part D Plans

In This Article:

• Introduction - Requirements for All Part D Plans
• Standard Part D Plans
• Alternative Part D Plans

Introduction - Requirements for All Part D Plans

Part D plans, whether stand-alone Prescription Drug Plans (PDPs) or Medicare Advantage plans with a Part D benefit (MA-PDs) must all adhere to certain requirements established by the Federal government. 

 

All Part D plans must cover some, if not all, Part D drugs although they may limit their coverage through use of a formulary. Plans are not required to cover all Part D drugs, with certain exceptions, which you can view in the Part D Coverage article.

• All plans must offer members prices the plans have negotiated with pharmaceutical manufacturers on the drugs they cover. 

 There are two types of Part D plans, standard and enhanced. The distinctions are based upon the actuarial structure of Part D plans. The cost-sharing structure of every plan must be calculated based upon whether it is the actuarial equivalent of, or exceeds the value of the defined standard plan.

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Standard Part D Plans

Defined Standard Part D Plans

Defined Standard Part D Plans --The defined standard plan is established by CMS each year and has a set deductible and cost-sharing (these amounts increase each year).

 

This type of plan must have:

• an annual deductible ($295 in 2009)
• 25 percent cost-sharing in the initial coverage period (the period after the member has satisfied the deductible, but before they reach the initial coverage limit and enter the doughnut hole or coverage gap).
• After plan members reach the initial coverage limit threshold ($2,700 in 2009), they pay 100 percent of the plan’s negotiated prices for covered drugs until reaching the out-of-pocket threshold ($4,350 in 2009), when members enter the catastrophic coverage. Members who reach the catastrophic benefit pay minimal coinsurance or co-payments for their plan-covered drugs for the rest of the plan year. 

 

See 2009 Part D defined standard plan cost sharing.

Actuarially Equivalent Standard Plans

Actuarially Equivalent Standard Plans --Actuarially equivalent plans use the standard annual deductible, but have different cost-sharing structures.

 

An actuarially equivalent standard plan must:

• Charge the standard annual deductible ($295 in 2009).

Such plans are allowed to:

• Have a different, albeit equivalent, cost sharing structure in the initial coverage period, and within the catastrophic benefit.
• For example, an actuarially equivalent standard plan can use tiered co-payments instead of co-insurance in the initial coverage period. A common example of tiered co-payments might look like this: $15 for a generic drug, $20 for a preferred brand name drug, and 50 percent of the negotiated price of a specialty or high-priced drug. 

 

• Offer actuarially equivalent coverage within the catastrophic benefit.
• For example, plans may reduce or even eliminate cost sharing for generic drugs, as long as the costs remain the actuarial equivalent of those in the standard defined plan.

 

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Alternative Part D Plans

Requirements for All Alternative Part D Plans

Alternative Part D plans must use the defined standard plan as a “fixed point of comparison” in designing the plan structure. This means the cost-structure of alternative plans must be either actuarially equivalent to, or provide more value than the defined standard plan. The actuarial value of an enhanced plan may never be lower than the actuarial value of a defined standard plan.

 

Alternative plans may never charge an annual deductible in excess of the defined standard plan deductible. Moreover, they must charge a premium at least equal to the premium they charge for defined standard coverage. Note that an alternative MA-PD plan may reduce the premium through use of Medicare Advantage rebates.

Types of Alternative Part D Plans

Basic Alternative Part D Plans-- Basic alternative plans must be actuarially equivalent to defined standard plans, but are allowed to have different deductible and cost-sharing structures.

 

These plans are permitted to:

• Change the cost sharing structure in the initial coverage period.
• For example, these plans may use a tiered co-payment structure.
• They may also implement a first-fill-free structure to create incentives for plan members to switch from brand to generic drugs.
• They may also use reference-based pricing.
• This type of cost sharing applies a supplemental co-payment, based upon the difference in the negotiated price for dispensing a lower cost generic and the higher price of a brand name drug.
• Reduce the annual deductible or to require a brand drug-only deductible, but
• They may not have a deductible that exceeds the defined standard plan deductible.
• Modify the initial coverage limit, as long as the cost remains actuarially equivalent to the defined standard plan.
• For example, basic alternative plans might have a cost-sharing structure in the initial coverage limit under which members pay a lower copayment for generic drugs than for brand name equivalents.

Enhanced Alternative Part D Plans— The actuarial value of these plans must exceed the value of a defined standard plan.

 

There are a number of different ways a Part D plan may achieve added value. Enhanced alternative plans may:

 

• Cover additional drugs that are not Part D drugs;
• Reduce cost sharing in the coverage gap below 100 percent;
• Reduce the annual deductible;
• Reduce cost sharing in the initial coverage period between meeting the deductible and entering the coverage gap below the defined standard plan requirement of 25 percent coinsurance or the actuarial equivalent of 25 percent;
• Increase the initial coverage period and delay the point at which members enter the coverage gap; or
• Offer gap coverage of an entire tier of covered drugs, a subset of a tier or through a capped dollar amount of coverage within the gap

 

Generally, but not always, enhanced alternative plans charge a higher premium than other Part D plans.

 

Medicare Advantage plans are not allowed to offer enhanced alternative Part D plans unless the plan sponsor offers another plan in the same service area that provides defined standard coverage, actuarially equivalent coverage, basic alternative coverage, or enhanced alternative coverage with no additional premium.

 

Full Extra Help pays the complete premium of standard plans only if the premium is at or below the applicable regional low-income benchmark premiums. Extra Help only pays the portion of an enhanced plan premium that is attributable to the defined standard elements of the plan.

 

Some conclusions you can easily reach as you counsel your clients:

 

• If a plan has co-payment tiers rather than 25 percent co-insurance, it is not a defined standard plan.

 

• If a plan has the standard annual deductible, but has co-payment tiers, it is either an alternative standard plan or a basic alternative plan.

 

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