What’s the Deal With Ensuring the Uninsured are Insured? Part III: The Donut Hole

Hello All!

Welcome to another edition of “What’s the Deal?” the blog that always accounts for its finances 75 years into the future (a Medicare Trustees’ Report joke).  Sorry for the delay in posting, but a lack of internet access and an irritable computer have left me with pent up policy rants for 4 weeks now (I know you can all relate).

mmmm… prescription drug coverage

In this week’s blog, we continue our 4 part blog series on the implementation of health reform in the U.S. (Here are Parts I & II).  In Part III, we’ll focus on a specific provision of President Obama’s health reform plan: closing the donut hole.  Wait what?  What do donuts have to do with health reform?

Turns out, only a metaphor.  “The donut hole” is the gap between what Medicare benefits cover to pay for prescription drugs and what seniors must pay for themselves.  There is a specific provision within Medicare, called Part D, that was enacted in order to pay for prescription drugs on a tiered threshold, but this has proven to be inadequate coverage, and health reform instituted a program to close “the donut hole.”

There has been recent talk of this action being unnecessary; that closing the donut hole is not the real problem, and that this coverage plan takes Medicare dollars away from beneficiary plans and puts them towards covering costly drugs.  We’ll look into this claim by looking at the beginning of Part D, the cost of drugs, and President Obama’s solution in the healthcare reform act.

Coverage Beyond Basic Care

Visual approximation of the debate over MMA

In 2003, the Medicare Modernization Act (MMA) was passed by Congress (narrowly, after much debate) and signed by President Bush pushing important changes to Medicare spending.  The reason for this legislation in the first place was to expand Medicare coverage to match the rise of prescription drug costs, which health plans were having an increasingly difficult time covering.  Moving beyond the initial Medicare health plans (A & B) that were instituted from the beginning of Medicare in 1965 certainly has made the plan more complicated, but given the wide support from Congress and several powerful lobbys (AARP, etc…) the provision was (and still is) a popular one.

That specific provision of MMA important to the story here is the beginning of Part D, which started in 2006.  Here are the basic outlines of the original plan:

  • Seniors choose from several available private Medicare plans in Part D.
  • Importantly, the law prohibits the federal government from negotiating prices with drug companies.
  • Seniors with drug costs up to $2,400 (annual) pay for about 25% of these costs, within their insurance plan, while their eligibility within Part D cover the rest.
  • Seniors with drug costs above $4,700 (known as catastrophic coverage) pay about 5% of co-pay costs.
  • Seniors with costs between $2,400 and $4,700 are not covered by Part D, and are required to pay 100% of their drug costs.  This group amounts to about 25% of all Medicare beneficiaries.

    google images is too good

So, here we find the technical gap in coverage for seniors, called “the donut hole.”  Barack Obama as a presidential candidate in 2008 campaigned on a promise to close this gap, and the Democratic controlled Congress in 2010 sought to address this as part of overall health reform.  If one wished to argue against covering this gap, consider this: A 2009 Kaiser survey found that 12% of seniors said they chose to forgo prescription medications in the past year due to high costs.

Hmm… based on that survey, even if the number of people affected by this problem is relatively low, it seems like a problem worthy of addressing.

A Plan in Writing to Close the Donut Hole

The Patient Protection and Affordable Care Act signed into law a new provision that helps those seniors with drug costs between $2,400 and $4,700 by covering a significant portion of these costs, starting in 2011.  This extra coverage rises in percentage each year, gradually narrowing the gap between what prescription drugs cost, and what traditional Medicare can cover.  Starting in 2012, seniors (within that funding gap) needed to cover 50% of name brand drugs and 86% of generic brand drugs.  By 2020, seniors will only have to pay 25% of name brand drugs and 25% for generic drugs; not an insignificant reduction in cost.

The Cost of Prescription Drugs

Several factors have contributed to the rise in prescription drug costs over the last few decades.

  • According to the U.S. Census, from 1999 to 2009, the number of prescription drugs purchased  grew by 39% compared to only a 9% jump in the total population.
  • Most of the prescription drugs sold are top brands which command a higher price.  In addition, heavy doses of marketing are done with top brands, tilting their share of the market, which of course leads to price control.
  • The retail price of prescription drugs has increased 3.6 % per year from 2000 – 2009 compared to a rise of 2.5% in inflation.

And here’s a nice graph:

% of overall health spending.  Pictures make Medicare spending blogs easier to swallow

Notice that after a very high disparity between drug costs and other health services, prescription drug costs have declined compared to other costs.

The Policy Debate

So what is the problem with the government picking up the tab for the donut hole?  There are many arguments here, mostly that revert to the size and role of government in private business (like drug costs), but the most common criticism of the effort to close the donut hole is that competition and private health plans will lower the costs of prescription drugs more efficiently and without the “excessive burden” of government.  This notion is the central theme of present conservative views on Medicare, exemplified by the Ryan Budget: the House passed Federal budget plan written by House Budget Chair Paul Ryan.  Recent  lower spending in Part D are used as evidence for this plan, citing the efficiencies of competition.

There are some problems with this argument, however.

Another picture!

Original projections of Part D spending by the Congressional Budget Office (CBO) were significantly higher than they turned out to be.  But why?  The two primary factors for lower costs for Part D were lower than expected enrollment in Part D and a sharp decline in spending growth of prescription drugs.

CBO had projected enrollment in Part D for its first 5 years to be 42.1 Million and the actual enrollment was 31.5 Million, a difference of about 25%.  This accounts for about half of the actual lower costs for Part D.  The decline of prescription drug costs per beneficiary was also not counted on by the CBO as part of overall lower drug costs over the same period (from the larger graph above).

For having a bunch of economic nerds, the CBO logo could be a lot better; maybe something with a bar graph in it

The claim that competition between private Part D plans were the cause of the decline in overall drug costs and per beneficiary cost falls short against the evidence.   The lower overall cost of drugs is attributed mainly to fewer new blockbuster drugs that have been approved, and the move of brand name drugs to generic drugs; not the result of competition (private companies have actually not done as good a job as expected of negotiating discounts from drug companies).


So, shall we go back and examine the initial questions into Part D?

First, is the donut hole worth closing?

  • Some politicians like to think of President Obama’s initiative to help seniors pay for costly drugs as a political tool over an issue that is not the biggest federal expense and doesn’t affect the largest portion of Americans.  Even if that assessment is true, the donut hole is a serious problem for those seniors who fall into the gap; many, as aforementioned, decide to forgo drug coverage instead of going into debt over paying for drugs.
  • Further, Medicare does not cover all health costs that seniors may incur; As articulated by this article in the Baltimore Sun, seniors would have to pay out of pocket for hearing aids, dental care, and extended stays in nursing homes.  If a senior had to pay out of pocket for prescription drugs in addition to these costs, it could lead to a large amount of debt for many.

Second, is money for closing the donut hole taking away from traditional Medicare coverage?

  • As we saw in the large graph, prescription drug costs have risen significantly in the past 2 decades (though recently declined) as a part of overall health spending.  Therefore, shouldn’t more of the health plan coverage go towards covering the most costly expense?  Makes sense to me.

Finally, the third question about Part D:  Since privatization of Part D plans and competition lowered overall Part D spending, shouldn’t seniors be deciding between “premium support coverage”, between private Medicare plans and regular Medicare?

  • As we discussed in the article here, competition between private Part D plans to cover prescription drugs was not a major factor in the lower than expected 5 year spending for Part D.  The actual cause was lower enrollment in the program and a reduction in the overall cost of prescription drugs.
  • This supposed “evidence” should not be used to push a plan such as Rep. Paul Ryan’s which would change Medicare to a premium support plan.  There is little evidence to suggest private plans would lower overall spending and as research has suggested, private plans often do a poorer job of negotiating lower costs with drug companies for their plans.
  • The policy argument here is the same as we’ve been seeing throughout American history, on the size and roll of government into private enterprise.

There is much, much, much more to this story, but I think we can now safely describe what exactly the “donut hole” is.  This issue is on track to be covered by the Affordable Care Act as part of an overhaul of the health system.  It still is an important issue though; politically, it is very popular.  Though a seemingly small issue, the essential argument again boils down to American ideological differences.

Well, its good to be back on the horse!  I think this blog could have used a dose or two more of historical explanation, but since its my first blog back, I’ll cut myself some slack.  Until next time,

Your Faithful Historian,

Eric G. Prileson

Sources and Further Reads:

Medicare Part D Spending Trends:Understanding Key Drivers and the Role of Competition, Jack Hoadley, PhD. Georgetown University. May 2012.








About eprileson

I am a historian and writer who wants to bring to light current events through a historical perspective. It is difficult to understand today's current events without having a grasp of what has occurred before. This is a running thread to help keep people informed about the present and remind everyone to not forget their past. Enjoy and please comment!
This entry was posted in Health, Politics, Social Issues, U.S., Uncategorized and tagged , , , , , , , . Bookmark the permalink.

One Response to What’s the Deal With Ensuring the Uninsured are Insured? Part III: The Donut Hole

  1. jabisamra says:

    I don’t know which is better, the pictures or the analysis.

    Makes sense Obama would want to cater to the elderly. They vote.

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