Question: Your August 2007 Medicare Part D Newsletter stated that the 2008 Medicare Part D premiums will only go up by about $3 per month and that 2007 premiums are running about $23 to $32 per month.  How can this be?  I need a Part D plan with Doughnut Hole coverage and my monthly premiums in 2006 were $76.  Then in late 2006, I was notified that my 2007 monthly premiums would go up to $86 a month, and also my existing plan would now only cover generic medications in the coverage gap.  I found another Part D provider in my state covering all my medications in the gap, and my 2007 monthly premiums are now up to $96 a month - or over 3-4 times higher than the premiums mentioned in the August Part D Newsletter!  Again, how can this be? [Editorial note: Question slightly modified for purposes of anonymity.]

 
Our Online Team Answer:  Unfortunately, the significance of average Medicare Part D premiums as released by the Centers for Medicare and Medicaid Services (CMS) is a bit confusing - and also caused a bit of a stir in 2006  (see Lee, Washington Post, http://www.washingtonpost.com/wp-dyn/content/article/2006/10/12/AR2006101201511.html October 13, 2006).

As background, early in August, CMS announced that the "average" premium paid by a Medicare beneficiary would only increase $3 in 2008 (CMS Press Release, August 13, 2007).  In addition, the average Part D premium currently being paid by a Medicare Part D beneficiary was quoted to be around $22.  However, this average value released by CMS is an average of all the people actually enrolled in the 2007 Part D programs.  So if all these people stay in their exact same Part D plan, they will pay an average of $3 more per month in 2008 or $25.  >Obviously, Part D plans change year to year and it is difficult to guess whether people will stay in their same Part D plan for the next year.

If you compare this to last year, CMS estimated that the 2007 monthly Part D premiums would actually be a little higher.  In a Press Release from September 29, 2006, CMS stated that:  “The monthly premium beneficiaries will pay in 2007 will average $24 if they stay in their current plan -- about the same as in 2006.”

As noted in our August Newsletter, the monthly average released by CMS can be compared to the actual average premium across all Part D plans which is $32 per month (calculated by adding up all the premiums across the country dividing by the total number of Part D plans and you should get $32).

But like the CMS $22 monthly Part D premium - an average monthly premium value may have only limited meaning unless you look at all of the available information on Part D plans.

Why is this?  (Warning: Short Math Tutorial!)  Here is an example showing how averages are only one way to generalize groups of numbers – some might painfully recall this particular exercise from early math classes.

If you have 4 groups of three numbers such as: (0, 5, 10) and (3, 3, 9) and (4, 5, 6) and (5, 5, 5) - you will see that all four groups of numbers have the same average of 5.

But the average number of 5 only describes the four groups and does not mean that all four groups are the same.  Unfortunately, from experience, many people would believe that if all four number groups have the same average, then the number groups must be the same or at least similar.

The same logic from this simple example also applies to the $22 average monthly Part D plan premium released by CMS.  As noted, you spend a lot more for your monthly Part D premiums than this $22 value - and we can be very sure that many people spend less than $22 per month for their Medicare Part D premium.  The average is not wrong - it simply is an easy, but inexact, way to summarize the Part D premiums and perhaps should be accompanied by other information - such as the range of monthly premiums across the country and the dispersion of premiums around the average.

For instance, in 2007, we determined the following for the California Medicare Part D plans:

• The Total number of stand-alone 2007 Medicare Part D plans in California: 54
• The Average monthly Medicare Part D premium in California: approximately $32

• The Lowest monthly Part D premium: $9.70 (WellCare Classic)
• The Second Lowest monthly Part D premium: $9.80 (AARP Medicare Rx Saver Plan)

• The Largest monthly Part D premium: $80.90 (Humana Complete)
• The Second Largest monthly Part D premium: $74.80 (Sierra Rx Plus)

As can be seen from the 2007 California Part D premiums, the monthly Medicare Part D premium values had a wide range ($9.70 to $80.90) and the average Part D premium value ($32) could be considered a rather weak indicator of actual Medicare Part D plan premiums in California.

We list the second largest and second smallest monthly Part D premiums to show that the high and low values were not just unusually high or low exceptions.  Furthermore, the California numbers seem to vary quite a bit when compared to the national 2007 average Part D premium of $22.

So in summary, the average monthly premium stated by CMS may be a good way to quickly describe Medicare Part D premiums across the country, but without more information it may be difficult to draw any concrete conclusions.

NOTE:  A separate but important concern is that there may not be 2008 Medicare Part D plan with complete Doughnut Hole coverage and Medicare beneficiaries who depend on this coverage should prepare now for the financial burden that might come in 2008.  In other words, take advantage of the savings in 2007 and try to budget accordingly for increased prescription costs in 2008.