Why Obamacare’s Closing the Donut-Hole Isn’t All It’s Cracked Up to Be

by Noah Glyn

The White House is pushing a recently published CMS report that purports to show a new benefit of Obamacare — it’s closing the dreaded Medicare “donut hole.” A senior administration official quoted in Politico’s Playbook says that Obamacare “has helped more than 7.3 million seniors and people with disabilities who reached the donut hole in their Medicare Part D plans save $8.9 billion on their prescription drug costs nationwide — or an average of $1,209 in savings per person.” There’s some truth to this boast, but as usual, there’s more to it than meets the eye. 

Over time, Obamacare closes the coverage gap, informally referred to as the donut hole, in Medicare’s prescription-drug program (Part D). As originally designed, once Part D beneficiaries reached their (relatively low) deductible, they had to pay 25 percent of their drug costs up to a certain dollar amount; once beneficiaries’ drug costs reached that limit, they then had to pay all of their drug costs. Then, if their total out-of-pocket costs reached an even higher level (called the catastrophic coverage limit, which is currently set at $4,750), then they only had to pay 5 percent of drug costs above that limit.

By the year 2020, though, there will no longer be a donut hole. From the moment beneficiaries’ drug costs reach their deductibles until they reach the catastrophic coverage limit, they will only pay 25 percent of their total drug costs.

While it does appear to be true that Part D beneficiaries who are in the coverage gap will start saving money thanks to Obamacare, there are several caveats to this analysis.

First, under Obamacare, higher-income taxpayers pay higher Medicare taxes and higher premiums on Part B and Part D coverage. Medicare Part D was the first federal entitlement to be specifically means-tested. At the time, many Democrats objected to this aspect of the law, since broad-based support for entitlements relies on the universality of their costs and benefits. Democrats are now, ironically, making Part D even more progressive, but these changes will cancel out some of the savings their law provides in Part D. Meanwhile, Medicare beneficiaries with lower incomes (up to 150 percent of the federal poverty line) have already been eligible for subsidies on their out-of-pocket drug costs.

Second, Obamacare will raise the costs for Part D providers, who will likely pass the costs onto beneficiaries in the form of higher premiums. The coverage gap encouraged beneficiaries to keep their drug costs low, since they would be ultimately responsible for a lot of excess costs. There is much evidence to suggest that the increase in health-care cost-sharing is responsible for slowdown in health-care inflation over the past few years. Part D premiums especially have remained lower than projections, and though there are debates as to why that’s been the case, at least part of the reason has to do with the program’s cost-sharing measures, namely the “donut hole.” Now that Obamacare has gotten rid of these measures, the likely result is that Part D premiums will increase. 

The Obama administration is happy to tout the drop in customers’ costs in the short run, but typically, they are ignoring the unintended consequences and hidden costs of their preferred policies.