Mastering the Medicare Machine
Uncle Sam's prescription benefit plan is a masterpiece of confusion. But it just might save you--or someone you love--a bundle on health-care costs.
By Michelle Andrews

(MONEY Magazine) – If you are age 65 or older, brace yourself for a lot of mail. From your former employers. And insurers. From Uncle Sam. And still more insurers. They will be showering you with information about changes in your existing insurance. They'll be flooding you with marketing materials about new coverage options. And as if the postal deluge weren't enough, you're likely to be bombarded with information and pitches on television, on the radio and in print over the next few months too.

What's behind the communication explosion is nothing short of the most comprehensive changes to the Medicare system in its 40-year history. Uncle Sam is cranking up the machinery to deliver coverage for prescription drugs for the first time ever, through either stand-alone drug policies or an expanded network of managed-care plans. The details will be complicated. The number of options will be staggering. So will the possibilities for confusion.

But the potential for savings is also great for the nearly 42 million elderly and disabled Americans who have most of their health-care bills paid by Medicare. The average participant is expected to save 37% on out-of-pocket drug costs, with low-income seniors, people who currently don't have drug coverage and those with catastrophic medical costs emerging as the biggest winners.

In short, if you're a Medicare beneficiary--or you love someone who is--you've got some serious choices to make in the months ahead. "A lot is being asked of this population, many of whom may be coping with chronic illnesses, juggling multiple prescriptions and who probably haven't shopped for health benefits in years," says Stuart Guterman, the Medicare program director at the Commonwealth Fund.

Turn the page for answers to your most pressing questions about the new Medicare.

Q How does the new drug benefit work?

The new benefit, formally known as Medicare Part D, will offer coverage for the cost of medicine through stand-alone prescription drug plans (PDPs) sold by insurers and subsidized and regulated by Medicare. You can also get prescription drug coverage through one of the many managed-care alternatives to traditional Medicare, mostly known as Medicare Advantage plans. The PDP providers will range from nationally known insurers like Aetna and Humana to regional companies, and the plans will differ considerably in details, including the premiums they charge, the drugs they cover and the pharmacies they allow you to use. Every area of the country will have between 11 and 23 choices of insurers, and some of those providers may offer more than one type of policy.

Fortunately, you've got time to decide. While coverage can begin as early as Jan. 1, you can sign up for a drug plan anytime between Nov. 15, 2005 and May 15, 2006 without penalty.

Q How much will I have to pay?

Although the government is picking up the lion's share of the tab, you'll still end up shelling out a fair amount for drug coverage. Medicare projects that the average premium will run around $32 a month. But in most areas there will be bare-bones plans available for less than $20 (and, in many cases, less than $5), as well as Cadillac versions with lower deductibles and additional coverage that may cost as much as $100.

In addition, under the standard plan, you'll pay a $250 deductible and work your way through a complicated co-payment structure (see "What You'll Pay" on page 162). Here's how it works: You pay 25% of the first $2,250 in drug bills you incur. At that point, you'll hit a coverage gap commonly referred to as the doughnut hole, in which you're responsible for all of your drug costs until you've spent a total of $3,600. (If you have no other coverage, you'll reach that level when your total bill hits $5,100). Above that threshold, benefits kick in again, with Medicare paying 95% of your drug costs for the rest of the year. "The benefit may not be as generous as some would want," says Tricia Neuman, director of the Kaiser Family Foundation's Medicare Policy Project. "But what's most important is having insurance coverage that will help you pay for medicine if you become ill and run up huge drug bills."

You don't need a catastrophic illness to save money, although some people will end up saving much more than others. The biggest beneficiaries will be low-income seniors, who are expected to see their costs drop by 83% vs. an average 28% dip for all other participants. People who spend more than $3,600 out of pocket could see a 37% decline.

Not everyone will be a winner: One in four participants are projected to see costs rise, on average, by nearly $500 a year, including people with low drug costs who currently pay no deductible on their insurance and people who may lose access to more generous employer-sponsored retiree coverage as a result.

Q How do I know if the benefit is right for me?

If you don't have any prescription drug coverage now, the decision is relatively easy. Sign up with Medicare. Although the magnitude of the projected savings for the uninsured varies, almost everyone agrees you're likely to come out ahead. In addition, you get that financial protection against big drug bills you may incur in the future. "Unless you have a crystal ball that guarantees you'll be healthy for the next year, you're better off signing up if you can afford it," says Robert Hayes, president of the Medicare Rights Center.

If you already have drug coverage from a former employer, on the other hand, you're probably better off sticking with what you've got. Retiree health plans usually offer drug benefits that are at least as good as those Medicare will provide and are often far better, particularly because there's no doughnut hole to worry about. As long as your retiree plan provides what's known as creditable coverage (that is, you receive a notice that your coverage is at least as good as the basic Medicare plan), you'll still be able to switch to the government program without penalty at a later date if you need to.

If instead you are currently paying for a supplementary Medigap policy with a drug benefit, you will probably want to switch to a Medicare plan now. Most Medigap policies have less generous drug benefits than the PDPs will offer and will not be considered creditable coverage. (For more on what to do about your Medigap policy, see page 164.)

Q This is too confusing. Can I just sign up later?

Sure. But the cost of acting later rather than sooner is steep. If you don't have other coverage deemed creditable and you wait until after May 15 to sign up, Medicare will add at least 1% to your premium for every month you delay. So if you wait a year, your premium will be 12% higher than if you had signed up on time.

Worse, the penalty is permanent. "If you're on the fence about signing up, consider one of the cheaper plans," advises Dee Mahan, deputy director for health policy for Families USA, a consumer advocacy group. "It might not be a great plan, and you'll probably be stuck with it until the next open enrollment at the end of next year, but at least you won't get hit with the late penalty."

Q With so many different options, how do I choose the right plan?

All of the new Medicare drug plans have some basic elements in common. For example, every plan must cover at least two drugs in each drug class, plus a majority of drugs in categories like antidepressants and anticancer drugs. The plans can change their lists of covered drugs at will, but they must give members 60 days' notice. But the plans differ in the particular drugs they cover and in their cost structures as well. Some plans, for instance, may break drugs into high-, middle- and low-cost tiers, while others will charge different amounts for, say, brand names and generics. For people willing to pay a higher premium, some plans may also cover a portion of drug costs in the so-called doughnut hole.

You'll find the particulars about the drug plans available in your area on the Medicare website ( and in a handbook called Medicare & You 2006 that's currently being mailed to seniors. To figure out which one best suits your needs, make a list of the drugs you take and how much you pay for them as well as the pharmacy you prefer. Then compare what's covered on the plan with your needs. If a plan looks great in most particulars but doesn't cover one of your drugs, you may want to ask your doctor if you can switch to a similar drug that is on that plan's list of covered medicines.

Q What happens if my situation changes?

If your former employer drops your retiree drug benefit, if you move out of your drug plan's service area or if you lose your drug coverage for any other reason that's not your fault, you'll be able to sign up for a new Medicare drug plan during a special enrollment period. But if you've delayed enrolling in Medicare Part D because you just couldn't make up your mind about what to do or you simply want to switch to a different drug plan, you generally can do so only once a year, between Nov. 15 and Dec. 31.

Your own situation isn't the only factor that may change. The new drug benefit will likely change as well. Premiums could rise based on the number of drug claims filed. Deductibles, out-of-pocket maximums and co-payments could increase as drug costs generally rise. And the list of drugs that each plan covers will undoubtedly change too. "There's no way to know exactly what will happen in the future when you sign up," says Hayes of the Medicare Rights Center.

Just because you don't know what changes may lie ahead, though, doesn't mean you should hold off signing up for drug coverage now. Chances are your medication needs will rise as you age, and even an imperfect benefit is better than no benefit at all, most experts agree. "It's sort of like homeowners insurance," says Neuman of the Kaiser Foundation. "You buy it before your house burns down, not after the catastrophe."


The new Medicare drug benefit splits the cost of prescriptions between Uncle Sam and seniors. Here's how the basic cost sharing works.

NOTE: Assumes no other drug coverage.