The Donut Hole in Medicare Part D (the prescription drug benefit) is slowly going away. Medicare Part D has four tiers of coverage.
- Deductible phase where Medicare pays 0% (2013 $325)
- Basic coverage where Medicare pays 75% ($325.01 to $2,970)
- Donut hole where Medicare pays 2.5% ( $2,970.01 to $4,700) (Medicare has negotiated large discounts with providers)
- Catastrophic coverage where Medicare pays 95% of costs ($4700.01 to infinity and beyond)
There is a reasonable non-spite rationale for this benefit design. I don’t think the rationale works well as it was implemented as the donut hole was too high to discourage drug use that could be safely discouraged.
The idea behind the donut hole in the benefit design was to discourage “over-use” of drugs by the medium to high intensity users while still providing help to people who are truly screwed. This is fairly common benefit design in most health insurance plans.
However the problem is that the donut hole applies to people who most likely suffer from chronic conditions. The idea of a 97.5% coinsurance amount is that it will discourage people from buying unnecessary pills. The problem is that people who are hitting that level of payments need those pills. Discouraging people with chronic conditions from buying the drugs that they need leads to higher long run costs as manageable conditions become unmanaged acute crisis situations.
This is a significant problem with most deductible/co-pay/co-insurance plans.
The deductible/low co-insurance incentive structure makes sense for people like me and my family who are reasonably healthy and have no long term chronic conditions. We have the ability to absorb a one-off hit and we can anticipate that any hit is a one off, isolated event at this time in our lives.
It does not make sense for a college friend of mine. She was/is manic-depressive and her manic-depression was smoothed out when she was taking her prescribed regimen. She was, as most college students are, severely cash constrained. Her insurance had a combined $100 a month co-pay for her medications. Her solution to being flat broke was to stretch out her medication by either splitting pills in half (the more ‘successful’ system) or initially taking a full dose every other day. These systems led to one involuntary mental health commitment and two voluntary mental health commitments.
After her second voluntary commitment, her case manager figured out that the government could have saved several thousand dollars a night if she was able to get her meds for free. And amazingly, the case manager was right and fought like a tiger to get a modified care plan that got my friend her psych drugs at no cost share. The last I heard, my former friend was in a pretty good place at the total cost of $1,200 per year instead of $2,500 a night.
Benefit designs that are good (enough) for most people fail miserably when insurance moves from covering unexpected events to managing chronic conditions. People have relatively narrow time horizons and irrationally high discounts on the future in all cases. People in situations of scarcity are not optimizing complex multi-variate problems of life. They are managing single satisficing solutions with minimal regard to interaction impacts. Putting people who, systemically are costly, at the position to choose rent over needed medication is a good way to save money in year one but spend way more in year two.