Health Care

The Medicare ‘Savings’ in the New Budget Deal

Medicare Part D has been a success story so far, but a new provision could derail that achievement.

Congress just passed a new budget deal to fund the federal government for another two years. Tucked away in the 652-page bill was a provision that proponents claim is a huge win for enrollees in Medicare Part D, the federal prescription-drug benefit program for seniors.

This provision is aimed at the “doughnut hole,” a coverage gap that forces Part D enrollees to bear high out-of-pocket medical costs once their prescription costs hit a spending limit. The hole was already scheduled to be eliminated by 2020, but the budget deal speeds up the timeline, closing it next year.

On the surface, this is a huge win for patients. But the way that the deal closes the coverage gap is problematic. Part D is a rare public-policy success story celebrated by Republicans and Democrats alike. It has a unique structure in which the government, instead of providing health coverage directly, manages a market of private options. Patients have the freedom to choose among dozens of competing plans.

This market structure has worked precisely as intended. Insurers have to compete for enrollee dollars, steadily reducing their prices and improving benefits. Today, overall Part D costs are $350 billion less than estimated when the program was created in 2003. And it’s wildly popular among enrollees: Nine out of ten report being satisfied or more than satisfied with their coverage.

With the standard benefit, Part D enrollees have to pay the first $405 in drug costs out of pocket. Then proper coverage kicks in, covering about 75 percent of their expenses. However, once enrollees spend $3,750 on medicines, that normal coverage falls away and their out-of-pocket costs spike significantly. Suddenly, they’re responsible for 35 percent of brand-name-drug costs and 44 percent of generic ones.

Part D patients keep facing those higher expenses until their annual drug spending hits $5,000, at which point the program’s catastrophic coverage kicks in and their portion drops way down, to just 5 percent.

This is the doughnut hole, a strange quirk in Part D’s structure. It chiefly affects those who rely on several prescription drugs, such as seniors battling multiple chronic diseases. The high out-of-pocket costs seniors in the gap experience force many to forgo needed drugs because they can’t afford them.

Fortunately, the Affordable Care Act (ACA), President Barack Obama’s 2010 health-care law, does actually fix the problem. It bulked up doughnut-hole coverage by immediately requiring drug companies to cover 50 percent of the costs of brand-name drugs purchased by patients stuck in the gap, with the rest of the costs borne by patients and their insurers.

The ACA has the federal government gradually cover a bigger and bigger share of the cost of doughnut-hole drugs until, starting in 2020, the gap is completely filled in. At that point, Part D patients will  have to pay only their normal 25 percent share until catastrophic coverage kicks in.

The new budget deal expedites that timeline by simply ordering drug companies to pick up 70 percent of the cost of doughnut-hole drugs next year. The doughnut-hole cost-sharing for insurers drops dramatically, down to 5 percent.

Previously, insurers had some incentive to drive drug costs down and keep patients out of the doughnut hole: The insurer still had to pick up a big chunk of the drug costs once the patient fell into the gap.

That’s a big reason why Part D insurers have aggressively encouraged the use of generic drugs, which typically cost a small fraction of the brand names on which they’re based. They want to keep patient costs down. That’s why, under the current incentive structure, only one in four Part D patients hits the doughnut hole.

This new budget provision eliminates that incentive. Insurers will now bear just a tiny fraction of the doughnut-hole expenses — so they’ll have little reason to keep costs under control. In fact, they may even have a reason to drive costs up: The sooner patients hit that catastrophic-care threshold, the sooner the government steps in and takes over virtually the entire bill.

More than 40 million seniors depend on Part D. Congress shouldn’t mess with what has so far been a big achievement. This budget deal could undermine a rare success story.

Kenneth E. Thorpe is a professor of health policy at Emory University and chairman of the Partnership to Fight Chronic Disease.

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