The Medicare Part D prescription drug benefit is offered through hundreds of different plans in 34 geographic regions. The rates insurance companies can charge are adjusted each year by the characteristics of beneficiaries who have enrolled in the plans, with adjustments for gender, the number of low-income people, and the number of disabled people.
Plans each have a formulary, which is a list of drugs made available to beneficiaries. The drugs are grouped in four tiers, with different levels of payments within the plan, depending on the drugs prescribed.
According to MedPAC.gov, “Overall, Medicare subsidizes premiums by about 75 percent and provides additional subsidies for beneficiaries who have low levels of income and assets. Medicare’s payments to plans are determined through a competitive bidding process, and enrollee premiums are tied to plan bids.”
In the different regions, plans have a variety of ways to compete for customers, including annual premium changes, the depth of the formulary, and the networks of pharmacies participating in the plan.
Profits and losses have limits under this system. There are risk corridors imposed, including limits on the profitability of the plans to make money as well as protection against their capacity to lose money. Medicare will pay for “some of the higher-than expected costs” and recapture “excessive profits.” The risk “corridors are scheduled to widen, meaning that plans should bear more insurance risk over time.”