V I E W P O I N T

Medicare's doughnut hole: a bitter pill to swallow

When the Medicare Modernization Act of 2003 (MMA) established the Medicare Part D prescription drug benefit, it defined a standard benefit that includes a gap in coverage as a way of limiting federal spending. When beneficiaries fall into this so-called doughnut hole, they are responsible for the full cost of their prescription drugs plus they must continue paying their Part D premiums even though they are not receiving benefits.

Under the standard benefit in the MMA, Medicare Part D beneficiaries are responsible for a $250 yearly deductible and then 25 percent – or $500 – of the next $2,000 in covered drug costs, while their private plans pay 75 percent – or $1500 – of the $2,000. Once a total of $2,250 has been spent on drugs, beneficiaries fall into the doughnut hole; prescription drug coverage stops but monthly Part D premiums must still be paid. Many beneficiaries are shocked at how quickly they reach the coverage gap because they don’t realize the $2,250 spending limit includes both the money they spend out of their own pockets as well as the portion of drug costs paid by their private plan.

Beneficiaries in the doughnut hole are responsible for paying the next $2,850 of drug costs out-of-pocket – bringing total spending to $5,100 – before they are entitled to catastrophic coverage. If they reach the catastrophic threshold, their prescription drug plans pay 95 percent of their covered drug costs until the end of the year. The entire process starts from the beginning each calendar year and receiving the benefit of catastrophic coverage will become increasingly harder as the thresholds rise to reflect continued increases in drug costs. As the attached chart shows, 2006 is the high water mark. The doughnut hole will keep getting larger every year – it is expected to almost double in nine years.

Although private Part D plans can deviate from the standard benefit as long as they provide “actuarially equivalent” coverage, about 85 percent of the plans have a doughnut hole, and those that don’t are very expensive. It is estimated about 6.5 million of the 11.8 million Medicare beneficiaries in plans with a coverage gap will fall into the gap this year, with the average beneficiary in a stand-alone Part D plan reaching the gap on September 22. (Institute for Alternative Futures) Other reports estimate a lower number of Medicare beneficiaries falling into the doughnut hole in 2006. This is in part because people who did not enroll in Part D in January, but waited until closer to the May 15 deadline, might not reach the gap this year but could reach the gap in 2007 and beyond. Dual eligibles and low-income beneficiaries eligible for extra help are protected from falling into the coverage gap.

Why people are confused

The doughnut hole is unique to Medicare. Private health insurance plans do not reduce coverage before catastrophic limits are reached so those who had drug coverage while they were working aren’t expecting the coverage gap in Part D. When choosing among the vast array of drug plans available to them, most seniors focused on the deductibles, premiums, and whether the formularies included the drugs they need, rather than on the coverage gap. The Centers for Medicare and Medicaid Services (CMS) and the private drug plans do not highlight information about the coverage gap in the informational materials they provide to Medicare beneficiaries, and it is difficult for Medicare beneficiaries to get correct information when they call CMS or their plan with questions. For seniors who do know about the doughnut hole, a study published in the August 1 Health Affairs reports that 88 percent consider the doughnut hole coverage gap a “significant drawback” of the Medicare Part D program.

For these reasons, very few seniors even know their plan has a doughnut hole until they fall into it. They typically find out when they are in the pharmacy getting a prescription filled, and they are faced with a bill for the full cost of their drug rather than just paying a copayment. Seniors who have already fallen into the doughnut hole have been quoted as saying it came as a “total surprise…nobody ever explained it to me.” For seniors who are aware of the doughnut hole, many do not understand that both the costs they pay as well as the costs paid by the private plans are counted to reach the $2,250 spending level that puts them in the gap. They also do not understand that once they are in the gap, only spending on drugs on their plans’ formularies and from their in-network pharmacies count toward the $2,850 out-of-pocket requirement to get out of the doughnut hole. For example, spending on drugs from Canada is not covered. Also, many drug companies no longer offer free drugs through their patient assistance programs to seniors with Part D, even when they are in the doughnut hole.

Impact of falling into the doughnut hole, difficulty in getting out

Once a senior falls into the doughnut hole, estimates are that over half never get out because they cannot afford to pay $2,850 for their prescription drugs in addition to paying monthly premiums for a benefit they are not receiving. Those who can’t afford medicines in the doughnut hole might buy from Canada where drug costs are lower, even though this doesn’t count toward the out-of-pocket spending needed to reach catastrophic coverage. Others split pills or go without needed medicines. For many patients, abruptly stopping their medicines, particularly psychiatric drugs, can be worse than not starting at all. Medicare beneficiaries could be forced into hospitals to get their drugs or to recover from the health effects of discontinuing their medicines. This is the most expensive care available and could ultimately cost the government more than liberalizing or eliminating the doughnut hole. In addition, a recent study published in the New England Journal of Medicine shows a 22 percent increase in mortality when comparing insurance plans with and without caps on prescription drug spending.

Increasing prescription drug costs

When the Bush Administration designed Part D they claimed that competition among private drug plans would lower drug prices. Research shows this is not happening. While premiums are likely to remain fairly stable in 2007, prices for the top 20 drugs most frequently used by seniors have gone up since Part D started in January 2006, some as much as four times the rate of inflation, (FamiliesUSA, AARP). Part D drugs are consistently more expensive than those offered through the Veterans Administration or Medicaid – both cases in which the government negotiates for lower prices. Drugs offered through Part D also cost more than the same drugs sold in Canada, the United Kingdom or France. According to a FamiliesUSA study, if Part D plans paid the same prices for prescription drugs that the Veterans Administration pays, enough money would be saved to eliminate the coverage gap. The prohibition on price negotiation has resulted in soaring drug company profits as increased numbers of seniors purchase more drugs at inflated prices. For example, it is estimated that drug companies are receiving a $2 billion windfall in 2006 alone because dual eligibles are no longer receiving drugs through Medicaid, which negotiates for price rebates and discounts, but rather are covered by Medicare Part D.

National Committee Position

Allow seniors to get prescription drugs directly from Medicare while requiring Medicare to negotiate the lowest prices for seniors, as is the case with the Veterans Administration. Providing a prescription drug benefit through the traditional Medicare program would reduce confusion for beneficiaries, providing them with a plan which provides simple, cost-effective coverage and affordable drugs. Requiring the government to negotiate drug prices and eliminating subsidies that are now going to pay private insurance companies’ administration, marketing and profits could eliminate the doughnut hole in the current Medicare Part D prescription drug benefit.

The National Committee also supports interim steps to help Medicare beneficiaries who find themselves in the coverage gap such as:

• Waiving premiums for any month a senior is in the doughnut hole and not receiving Medicare prescription drug coverage;

• Counting all prescription drug expenses incurred in the doughnut hole toward the amount needed to reach catastrophic coverage; and

• Liberalizing the asset test so more people are eligible for extra help and not subject to the coverage gap.

Department of Government Relations and Policy, September 2006