The One Medicare Program that Actually Works

This is Avik Roy, writing in National Affairs:

The most successful cost-control experiment in Medicare — the relatively new prescription-drug component called Part D … is a so-called “premium support” program. Seniors are given a set amount of money to apply toward their choice of plan, selected from a menu of private prescription-drug coverage options. If they prefer a more expensive plan, they can make up the difference themselves….

The program also contains a further cost-control mechanism that has come to be known as the “donut hole,” by which recipients are required to pay for all drug costs above a certain minimum level and below a ceiling — a design intended to simultaneously make seniors sensitive to prices yet shield them from catastrophic costs. In 2009, the donut hole required retirees to pay 100% of prescription-drug costs above $2,700 and below $6,154, in order to discourage unnecessary spending….

These two market-based elements have indeed kept costs down for this component of Medicare. While Medicare Part D has provided drug coverage to most Medicare recipients and is very popular with seniors, it has so far come in more than 30% below the original cost expectations of the Congressional Budget Office. In a recent report, the actuary of Medicare projects that Part D’s cost over its first decade will likely be more than 40% below those original estimates.

Comments (3)

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  1. Devon Herrick says:

    The Affordable Care Act closes the so-called donut hole by 2019. As Avik Roy alluded to, the donut hole serves an important purpose. These plans typically pay 75% of the cost of drugs above the deductible (about $295) until seniors reach the donut hole ($2700 in total drug spending). That means that a senior whose total drug bill in a given year reaches $1000 will only have spent $475 out of pocket. A senior whose total drug bill reaches $2700 in a given year will only have spent about $900 out of pocket.
    Thus, most seniors can see a benefit to having Medicare Part D plans – even those with modest annual drug bills. Once through the donut hole, Part D plans pay about 95% of the cost for drugs.

    Having a donut hole makes the plans affordable enough that seniors with few drug needs. Without these relatively healthy seniors, Medicare Part D drug plans would suffer adverse selection and premiums would skyrocket.

    Yet, at the same time, seniors with high drug needs have access to coverage that protects them against catastrophic bills.

    Only a few million seniors fall into the donut hole in a given year. But removing it means that far more seniors will reach that level of spending because they have little reason to avoid it.

  2. Joe Barnett says:

    Part D was still a bad idea. Due to the government entering the market, many seniors lost the private drug coverage they previously had.

    The fact that it cost 30 percent less than CBO projected is because CBO projections never consider changes in behavior as a result of government programs. I’m sure this program can be made just as inefficient as the rest of Medicare.

  3. Virginia says:

    This is probably the first time I have ever heard of a government program coming in under budget. It’s a little like catching a public policy unicorn.