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July 17 2018

The Wrong Way to Close the Donut Hole

by Hadley Heath

In February of this year Congress passed and President Trump signed the Bipartisan Budget Act, a bill that contained many various provisions, some good and some bad. We should keep the good changes, but address the bad, and quickly.

What did the bill get right? Well, here’s one example: it repealed the Independent Payment Advisory Board, or IPAB, a board authorized by the Affordable Care Act to reduce per-capita spending in Medicare, the program that provides health insurance coverage for millions of American seniors. This repeal stopped the creation of a too-powerful board that could have ultimately rationed care. This was an indication that Congress recognized the potential harm of government control of health care spending. 

On the other hand, another provision In the Bipartisan Budget Act went in exactly the opposite direction: The bill tinkered with an already-planned policy change that would close Medicare’s donut hole, the gap in drug coverage some seniors experience between basic coverage and catastrophic coverage. This tinkering is anything but harmless and represents government bullying at its worst.

The Affordable Care Act put Medicare Part D (that’s the drug coverage part) on a path to closing the donut hole when the health reform law passed in 2010. The ACA plan would have forced drug companies to slash their prices and provide a 50 percent discount in the donut hole, while also forcing insurance companies to pay for 25 percent of the costs (leaving seniors with 25 percent of costs - a great improvement over the previous arrangement where seniors paid the full cost).

But the BBA of 2018 changed this plan and foisted even more costs on drug manufacturers. Instead of forcing a 50 percent discount, the government will now force a 70 percent discount. This is basically a huge gift to the health insurance lobby, whose share of donut hole costs will now be reduced from 25 percent to 5 percent.

You might be asking “Why should I care?” And fair enough so. But this behind-the-scenes change is actually important for everyday Medicare beneficiaries and those who plan to use the program in the future. First, shifting costs away from insurance companies (and the government, who subsidizes the insurance plans) reduces these parties’ incentive to control costs. All of the players in our health system should face appropriate incentives to consider value and hold down costs. 

Second, shifting costs — even MORE costs — onto drug companies may backfire. Drug companies are easy to paint as villains, but like other businesses, they have to maintain a bottom line. Forcing a 70 percent discount on their products reduces their ability to turn a profit and sucks resources away from their important task of innovating and discovering cures for the future.

As the clock moves us closer to 2019 (it’s July already!), it becomes more and more urgent for Congress to address the donut hole in a more sensible and responsible way. The fact is that once the donut hole is closed, many seniors may never know or understand how it happened; they will simply be glad it is closed, eliminating the political incentive to address this problem the right way. But sadly, when needed drugs are less available and health care costs continue to skyrocket, we will have this poor policy choice in the BBA to blame. Policy makers should revisit the donut hole before it’s too late.

Independent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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