Yesterday we briefly talked about Medicare Part A and Part B. Part A covers in-patient/overnight stays at the hospital while Part B covers most other services that involve interacting with other people. When Medicare started, prescription drugs weren’t a big cost driver. Basic drugs were available, they treated most common cases to some degree of effectiveness and unsusual cases were out of luck. And then drugs got expensive as they got more complex and the US patent regime encouraged non-market pricing of drugs. Additionally, the US Congress also discouraged non-market pricing of drugs as the federal Medicare program is not allowed to use the simple fact that it is the biggest buyer of medical supplies in the world to get a good price. Drug costs for old people became a massive political issue.
And thus an opportunity for Republicans in 2003 to do two things. The first was to offer a solution that emphasized “compassionate conservatism” for old people to help them get their drugs. Secondly, it was an opportunity to shovel a massive amount of money at drug companies without asking for a whole lot in terms of policy concessions. Thus Medicare Part D was born.
The initial design of Medicare Part D was a kludge of managed market competition. Private insurers offer plans that cover a variety of different drugs according to a basic benefit design. Companies could offer limited lists of covered drugs (formularies) or expansive (and expensive) lists of covered drugs. They could create two tiers (generic and brand) or seventee tiers of coverage with different co-pays and cost sharing. They could decide to require that all beneficiaries try Drug X before they would authorize Drug Y. The rules and plan requirements for Mayhew Insurance would be diametrically opposed to the rules for Big Blue Drug Value Super Duper Plus.
There are common benefit design elements for the individual beneficiary responsibility of costs. The individual would be responsible for a medium sized deductible of roughly $250. After that, the insurer would pay 75% of the contracted costs until the donut hole started at $2,250. From $2,250 to $3,600, the individual was responsible for all of the cost. After $3,600 in total drug costs, the insurer would pay roughly 97% of the remaining drug costs.
Compared to the previous Medicare drug benefit of almost nothing, Medicare Part D as originally designed was significantly better than nothing. It does provide some significant benefits to seniors while being confusing, complex and a massive give-away to drug makers as Medicare was expressly forbidden from getting good deals.
The Affordable Care Act made several signifcant technical changes to Medicare Part D. It still maintains the managed competition design but changes the payment structure. Over the long run, the goal is to get rid of the donut hole completely while in the short run, the goal is to minimize the out of pocket expenses for seniors who are still stuck in the donut hole.
The Center for Medicare Advocacy has a good chart that describes how the benefit design is changing over the course of time.
For 2015, there is a $320 deductible. After that there is a 25% co-insurance until a total of $2,960 is spent (including deductible). The donut hole is for the next $3,720 in contracted rate spending. In reality, the ACA applies a roughly 50% discount to that $3720, so the individual will spend about $1,900 in the donut hole. After that catastrophic coverage kicks in and the insurer pays 95% of the costs.
There is no out of pocket limit. A retired hemophiliac with a million dollar a year drug claim will still be on the hook for $50,000 in drug costs under a Medicare Part D plan. That is an extreme outlier but it is a real case. A more realistic scenario would be someone on an anti-inflamatory drug plus an arthritis medication plus one of the new cholestral pills could easily see out of pocket costs of $4,000 to $6,000 per year even with their Medicare Part D policy.
Over the long run, the donut hole will disappear in 2020 due to PPACA, so out of pocket expenses for all seniors will stay the same or decrease but the drug coverage is not great for people who have very high cost prescriptions due to the lack of out of pocket maximums. A PPACA Exchange plan caps out of pocket expenses at a combined medical/pharmacy/surgery maximum of $6,500 per year. Medicare does not provide that type of protection.