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February 27 2018

Change to Medicare's Donut Hole Looks Good But Only on the Surface

by Hadley Heath

Medicare's Donut Hole is an accident of history, really: It was first put into place in an effort to make the cost projections for Medicare Part D look better for the government. But it has caused continual problems for senior citizens whose drug costs exceed the initial coverage limit but aren't high enough to be covered via Part D's "catastrophic coverage." Those costs fall in the coverage gap, or donut hole, and seniors have to pick up the lion's share of the cost out of pocket. 

The Affordable Care Act -- or ObamaCare -- made changes that would have eventually closed the donut hole and kept seniors' cost-sharing consistent (at 25 percent) even when their costs exceeded the initial coverage limit. This would obviously be beneficial for seniors, but it would require drugmakers and insurance companies to pick up additional costs. The original plan in the ACA was to have drugmakers pay for half of the costs in the donut hole, while insurance companies picked up the other 25 percent (leaving 25 percent for seniors). 

But now, the recently passed Bipartisan Budget Act (BBA) is making yet more changes in an effort to save the government money (and to appease the powerful health insurance lobby). Now the donut hole will be closed by forcing drugmakers to pay for 70 percent of costs, while insurance companies cover only 5 percent (this saves the government money because these insurance costs are heavily subsidized). 

Seniors in Part D -- and other observers -- might think, "What does it matter? The amount seniors pay will stay the same." Fair question. But there is a good answer. Matt Kandrach of the group Consumers for a Strong Economy wrote about this recently in a piece for Morning Consult. Here's what he had to say:

By removing insurers’ liability, the BBA incentivizes insurance companies to accelerate patient spending in the initial coverage stage – approving payments where they otherwise may have objected – so they reach the catastrophic coverage stage more quickly. Under the previous cost-sharing arrangement, all parties had an incentive to minimize costs. By transferring the burden to drug manufacturers, insurers will now have little incentive to negotiate price deals or institute cost saving measures, ultimately driving up the cost of Medicare across the board, further burdening taxpayers.

But the implications of this budget deal are much greater than just the price tag. When government gets into the business of health care, it distorts the market, limits competition and increases costs. And that’s exactly what the BBA has done. As the financial burden on government expands, the easier it becomes for Washington to justify making critical decisions about quality and rationing of care.

Worse yet, the budget deal undermines the risk-based value of plans, meaning some plans may no longer qualify to participate in Part D, further limiting competition and consumer choice. Ultimately, if too few plans qualify, a public option — a government run plan — could be triggered in Part D, moving the nation even closer to a single-payer health care system.

This explanation is the perfect summary: A move that appears neutral or even beneficial to seniors on the surface could ultimately cause them great harm by reducing the insurance and healthcare options available to them. It will skew incentives, burden taxpayers, and limit competition and choice. Health policy -- and especially drug policy -- can be complicated, but it's critical that lawmakers focus on what's best for all stakeholders in both the short and long run. The latest changes to Part D fall short. 


Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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