The Donut Hole
Most non-seniors have never seen a “donut hole” in their health insurance coverage. That’s because when politics doesn’t interfere there are much more rational ways of structuring an insurance benefit. Under Medicare Part D, however, Avik Roy describes the coverage this way:
Seniors were required to pay for 25 percent of drug spending below a certain level ($2,830 in 2010) and 100 percent of drug spending in a middle level (between $2,830 and $6,440). After spending through the middle level, seniors would only pay 5 percent of any additional costs. It’s that middle level, where seniors pay 100 percent of the costs, that came to be derisively known as the “donut hole.”
To hear the Obama administration talk about it, you would think the donut hole is a huge burden for seniors. But as Avik Roy explains:
- Two-fifths of seniors have private drug coverage.
- Of those who do enroll in the Medicare drug program, nearly half qualify for the program’s low-income subsidy, which fills in the donut hole.
- Of the 31 percent of retirees in 2009 who enrolled in Part D and did not qualify for the low-income subsidies, the vast majority — 81 percent —never reached the donut hole.
- Most of those who do hit the donut hole only end up being liable for a small amount of money at the end of the year.
- All told, only 6 percent of seniors spend enough on drugs to reach the donut hole threshold and only 1 percent of seniors spend all the way through it to reach the program’s catastrophic coverage.
- There’s more: For around $32 extra a month, retirees can pay for drug-benefit plans under Medicare that entirely fill in the donut hole.
I like Roy’s coverage of this subject, but disagree with his conclusion that the “donut hole was a far-sighted, efficient cost-sharing measure.” More on that in a future post.
John, I agree with you. The donut hole is idiotic.
For that matter, most seniors have never seen a “donut hole” in their health insurance coverage. Only something like 10% of seniors (about 4 million) pass the threshold into the donut hole in any given year.
I don’t like the idea of government designing drug benefit plans. I’d rather the private PBMs that administer Medicare drug plans have the flexibility to design plans that could compete for seniors business.
That said, I don’t have a problem with the donut hole. Its presence is designed to make premiums low enough that seniors in relatively good health will still be attracted to the plans. The fact that healthy seniors are willing to sign up for Medicare Part D plans makes them affordable to virtually all seniors regardless of health status. Closing the donut hole will increase taxpayers’ costs; it will blunt any incentive seniors have to choose generic drugs; and costs will rise causing premiums to rise, scaring off healthy seniors in the process.
I was wrong to characterize it that way — I agree with the point that the initial subsidy was not optimal.
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