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Critical Condition

NRO’s health-care blog.

Time to Make the Donuts



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One of the dumbest provisions of PPACA is the one that eliminates the Medicare “donut hole.” This feature of the Medicare prescription drug benefit was designed to encourage seniors to be wise about their pharmaceutical spending, while giving them insurance against catastrophic drug bills. It was one of the main reasons that spending on the program came in at 45 percent below government projections in 2009, saving taxpayers over $50 billion. Cost sharing works.

Now, from the Washington Post, comes word that — surprise, surprise — the elimination of the donut hole may result in a “[steep] increase in the price of drugs”:

Some of the most expensive drugs taken by people in the doughnut hole face minimal competition from generics or brand-name alternatives, making them particularly susceptible to price inflation, said Brit Pim, vice president of government programs development at benefits manager Express Scripts. Those include “specialty medications” for complex diseases, he said.

Express Scripts found that in 2009, the average price for specialty medications rose 13.5 percent.

Why? Now that Medicare beneficiaries will have no incentive to care about the cost of the drugs they buy, pharmaceutical companies have every incentive to raise prices. More importantly, seniors will have much less incentive to use cheaper generic drugs instead of more expensive, branded ones. If you wondered why the pharmaceutical industry lobbied for Obamacare, here’s your answer.

The donut hole, a.k.a. the Medicare Part D coverage gap, was incorporated into the Medicare prescription drug benefit when it was enacted in 2003. It required that, in a given year, retirees must pay themselves for drug spending above a certain level ($2,830 in 2010) and below a certain level ($6,440 in 2010). Below those levels, Medicare paid about 65% of the costs; above them, Medicare paid 95%. The thresholds were designed by actuaries who mined actual drug usage statistics to identify the optimal price points.

PPACA, on the other hand, eliminated the donut hole for political reasons: it allowed Democrats to soften the political blow of eliminating $500 billion in Medicare Advantage subsidies. In other words, the most cost-effective aspect of the Medicare drug benefit was eliminated in order to wipe out the most market-oriented aspect of Medicare’s traditional benefit. Awesome.

Avik Roy is an equity research analyst at Monness, Crespi, Hardt & Co., and blogs on health-care policy at The Apothecary.



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