Filling in the Doughnut Hole in Medicare

by Tim Foley

categories: Medicare and Medicaid, Obama and Congress

Published June 22, 2009 @ 04:06PM PT

Today an article in the Washington Post proclaimed that a new voluntary agreement with Big Pharma for $80 billion a year in discounts would provide "a bit of cash for President Obama's expensive and ambitious attempt to give health coverage to every American."  That's a bit off the mark - this money mainly goes to bail out the "doughnut hole" in Medicare Part D.  This may not help get comprehensive health care reform passed, but it's a huge help for Medicare patients across the country.

Of all the quirks of Medicare Part D, the "doughnut hole" seems the most arbitrary and the most cruel.  Beneficiaries are fully covered for the first $2,700 of their prescription drugs per year, but then the coverage abruptly cuts out.  Once they get to just north of $6,154, they're considered to be in need of catastrophic coverage, and Medicare kicks back in to cover everything else above that dollar value.  The original theory would be that some cost-sharing would discourage the use of unnecessary drugs, keeping costs down.  Interesting idea.  But what it's mainly done is throw about 25% of Medicare beneficiaries into an awkward coverage gap where they can pay as much as $3,400 out of pocket on necessary prescription drugs per year.  Some can afford that, some can only respond to having to pay for expensive drugs out of pocket by, well, not taking the drugs for the rest of the year, or rationing their pills by cutting their doctor-prescribed dosage into halves, thirds, or quarters.

That's right - the dreaded "r" word is alive and well and provided by the private health insurance plans that make up Medicare Part D.

Although it's been a problem since inception, and far more wide-spread than anticipated, solving it has been a pickle.  The doughnut hole was always a bow to the political realities of getting an expensive entitlement passed with a conservative Congress and putatively conservative President.  They could have forced participating plans to negotiate for the best rates, but the government waived that right.  They could have focused on generics, or the reimportation of drugs from Canada, but Medicare Part D was forbidden from doing that as well.  And spending still more on the program was out of the question.  So the people forces to take the hit were senior citizens.  Even with the change in party in both Congress and the White House, the pharma lobbyists had too much at stake to allow negotiation or reimportation, and there were and are too many political problems with the government spending more money to fill the hole.

Enter today's arrangement - whereby Big Pharma has agreed to offer discounts up to $80 billion total so that those caught in the doughnut hole will only pay half of their prescription drug costs while in it.  This is a big deal to seniors who are stuck in the hole.  It's a big deal for President Obama, who at the announcement pointed out that he and Sen. Chris Dodd - standing behind the rostrum - had similar experiences on the presidential campaign trail of urgent requests from seniors in real need.  It's also a big deal for PhRMA, who gets to burnish its pro-reform credentials at fairly minimal cost - Dean Baker calculates this commitment is about 2% of what the pharmaceutical company makes off of Medicare Part D.

Don't expect this to translate into savings for the larger health care reform effort, or to necessarily mean Big Pharma will go any easier if health care reform bites into their bottom line through negotiated drug prices for a public plan, or more investment in comparative effectiveness research that asks "Why am I paying for drug A at $15 a pill, when drug B is roughly as effective at $0.15 a pill?"  But do expect this to make a very real difference for those who are currently crunched under the arbitrary and unfair whims of our health care system.

(Photo credit:  MaranzaMax on Flickr.)