Medicare Modernization Act

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 — also known simply as the Medicare Modernization Act (MMA) — is a sweeping piece of legislation that created a prescription drug benefit for millions of Medicare beneficiaries.

It also established the modern Medicare Advantage program, which replaced the former Medicare+Choice program created in 1997.

The MMA is generally thought of as the largest benefit expansion in Medicare’s history.

Prior to the enactment of the MMA, Medicare had no outpatient drug benefit. Beneficiaries mainly relied on other programs such as Medicaid, employment-based retiree plans or Veterans Affairs benefits. Others found limited coverage through Medigap policies or private health plans.

An estimated 25% of Medicare beneficiaries had no drug coverage at all prior to the MMA.

The bill was debated and negotiated for nearly six months in Congress before President George W. Bush signed it into law.

The legislation sparked ideological conflict between lawmakers who wanted to expand Original Medicare and those who preferred giving private health insurance companies a greater role in the program’s future.

House leaders had to persuade several Republican representatives to switch their votes at the last moment to save the measure, according to a 2004 report by Johns Hopkins University and University of California researchers.

Many conservatives were reluctant to sign off on the bill’s multi-billion-dollar price tag, while others believed the bill didn’t provide enough incentives for beneficiaries to switch from Original Medicare to private health plans.

The MMA became law in 2003, but the Medicare Part D program wasn’t fully implemented until 2006. To bridge the gap and provide some immediate relief from high drug costs, the law included a provision for Medicare discount drug cards.

Part D is a voluntary program administered through private insurance companies. Plans must adhere to minimum standards and requirements but have considerable flexibility in how benefits are structured, including their formularies, cost-sharing rules and preferred pharmacy lists.

Medicare Advantage is an alternative to Original Medicare. Beneficiaries can elect to receive all their covered services through a private insurance company. In 2022, a majority of all Medicare Advantage plans — 89% — included prescription drug coverage.

The MMA guaranteed that beneficiaries had access to at least two qualifying Medicare Advantage plans in their area. It also made private plans responsible for negotiating prices with drug manufacturers and developing formularies.

The MMA modified Medicare Advantage payments for Part A and Part B services, resulting in rates that substantially exceeded payments under Original Medicare.

Supporters of the MMA believed that by paying private insurers more to administer these plans, insurers could offer extra benefits to draw seniors into private health programs.

The Medicare Modernization Act affected the program and its beneficiaries in significant ways.

Perhaps the greatest impact is a massive enrollment shift from Medicare Supplement plans to Medicare Advantage plans.

In 2022, 48% of all Medicare beneficiaries — 28 million people out of 58.6 million — were enrolled in Medicare Advantage plans, according to the Kaiser Family Foundation.

Private health plans, and the companies that offer them, are now more central to the way Medicare operates than ever before. The Congressional Budget Office has projected that the percentage of beneficiaries enrolled in Medicare Advantage will continue to rise and hit roughly 51% by 2030.

From a federal spending perspective, the MMA ultimately cost the government much more than anticipated.

Lawmakers were told the MMA would cost $395 billion, but the true price tag was closer to $534 billion. Two years later, the federal government released a report stating that the MMA would cost the government about $1.2 trillion within a decade — much higher than initial projections.

The MMA has also influenced Medicare premiums.

The MMA requires the Social Security Administration to conduct outreach to low-income beneficiaries who may be eligible for cost-saving subsidies.

When this provision rolled out in 2007, subsidies were given through the Prescription Drug Discount Card program. Today, these Part D subsidies are known as the Extra Help program. The Social Security Administration still oversees enrollment and eligibility for Extra Help.

The MMA also created income-related Part B premium subsidies for qualifying low-income beneficiaries.
As a result, wealthier beneficiaries whose modified adjusted gross income exceeds a certain threshold are now required to pay higher Part B and Part D premiums. This additional cost is known as the income-related monthly adjustment amount or IRMAA charge. It’s estimated that it affected about 7% of all Medicare beneficiaries in 2021.

The Medicare Modernization Act expanded prescription drug coverage to millions of older and disabled Americans.

After the MMA rolled out, the portion of Medicare beneficiaries without drug coverage has declined. An estimated 91% of Medicare beneficiaries had drug coverage in 2019, according to the Department of Health and Human Services.

However, the landmark legislation isn’t free from reproach.

One of the biggest ongoing criticisms of the MMA is that the legislation explicitly barred the U.S. government from directly negotiating with drug companies to lower prices.

Instead, insurers negotiate with drug manufacturers, spreading the bargaining power of the Medicare program across multiple private plans.

This has caused the federal government to pay more for Medicare drugs than for drugs purchased through other federal programs, such as those from the VA and Department of Defense health systems.

The Congressional Budget Office found that Medicare Part D pays almost twice what Medicaid pays per prescription for costly specialty drugs ($3,600 versus $1,920). Unlike Medicare, Medicaid requires a discount from the manufacturer.

Another unpopular provision prevents the government from establishing a formulary — but does not prevent private insurance companies from doing so.