Medicare Modernization Act

The 2003 Medicare Modernization Act (MMA) is considered one of the biggest overhauls of the Medicare program. It established prescription drug coverage and the modern Medicare Advantage program, among other provisions. It also created premium adjustments for low-income and wealthy beneficiaries.

What Is the Medicare Modernization Act of 2003?

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 often considered the largest benefit expansion in Medicare’s history.

Highlights of the Medicare Modernization Act
  • Established the modern Medicare Advantage program
  • Created the standalone Medicare Part D prescription drug benefit
  • Created subsidies for low-income beneficiaries to help cover Part B and Part D premiums
  • Required wealthier beneficiaries to pay higher Part B and Part D premiums (known as the income-related monthly adjustment amount)
  • Allowed reimbursement for an initial preventive physical exam
  • Provided coverage for cardiovascular disease and diabetes screenings for high-risk beneficiaries
  • Gave an extra $25 billion to rural hospitals
  • Mandated a major overhaul of the Part A and Part B claims processing system, implementing Medicare Administrative Contractors (MACs) in 15 jurisdictions across the country

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 percent 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.

Prescription Drug Coverage

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.

Since 2006, Medicare beneficiaries can choose to receive prescription drug coverage in one of two ways:
  • Standalone Part D plan
  • Medicare Advantage plan with prescription drug coverage.

Part D is a voluntary program administered through HMOs and 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

Medicare Advantage is an alternative to Original Medicare. Beneficiaries can elect to receive all their covered services through an HMO or a PPO. In 2021, a majority of all Medicare Advantage plans — 89 percent — include 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.

What Was the Impact of the Medicare Prescription Drug Improvement and Modernization Act?

The Medicare Modernization Act has impacted the program and its beneficiaries in significant ways.
Perhaps the greatest impact is a massive enrollment shift to Medicare Advantage plans.

In 2020, nearly 40 percent of all Medicare beneficiaries — 24.1 million people out of 62 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 about 51 percent 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 $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.

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The MMA also impacted the price of 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 (IRMAA). It’s estimated to impact about 7 percent of all Medicare beneficiaries in 2021.

Medicare Modernization Act Pros and Cons

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

After the MMA rolled out, the share of beneficiaries without drug coverage declined. By 2016, an estimated 90 percent of Medicare beneficiaries had drug coverage, according to a report in Health Affairs.

But 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.

Last Modified: September 15, 2021

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