I. Overview

As initially enacted, standard prescription drug coverage under Medicare Part D contains a “gap” in coverage during which a Part D enrollee is fully liable for their prescription drug costs. Social Security Act § 1860D-2(b)(3)(A), 42 U.S.C. § 1395w-102(b)(3)(A). In plan year 2010, once a beneficiary incurs $2,830 in Part D spending (split between the enrollee and the plan), Part D coverage will cease until the beneficiary incurs true out-of-pocket spending of $4,550.1 At this point, Part D catastrophic coverage begins. 2

The Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA) (collectively referred to in this memorandum as the Health Care Reform Legislation) reduces the coverage gap by 50% beginning in 2011, and phases it down to 25% by 2021. 3 Under the new law, pharmaceutical manufacturers that wish to have their drugs covered under Part D must agree to provide a discount of 50% of the negotiated price of the drug to Part D enrollees at the point of sale. Social Security Act § 1860D-14A(b)(1)(B). The 50% discount is treated as true out-of-pocket spending for purposes of determining the level of the beneficiary’s incurred costs.4 Id. at § 1860D-2(b)(4)(E). On April 30, 2010, CMS issued a guidance document explaining how it would implement the new provisions. This memorandum analyzes that guidance document.