September 30, 2014
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Oh where has my donut hole (going, going) gone?
John Grow

Even before new health care coverage provided by the Affordable Care Act (ACA) officially kicks off on Jan. 1, or has all its major benefits in effect in 2016, a lot of seniors on Medicare have already noticed a drop in their prescription drug charges. 

In fact, a few months ago Health and Human Services Secretary Kathleen Sebelius said 6.3 million Americans in the Medicare program saved a combined total of more than $6.1 billion on prescription drugs since the ACA, better known as ObamaCare, began phasing in reforms in 2010.

These savings are real. And if projections hold, things will get much, much better for seniors for a few reasons. But they started in a very bad spot.

Ten years ago, when Congress created Medicare Part D, the prescription drug benefit with its infamous “donut hole,” which was designed to confront a growing specter menacing the lives of many Americans – the impact of skyrocketing drug prices on seniors.

The prices pharmaceutical companies charged for prescription drugs in the United States were rising fast, outpacing the ability of many on Medicare to pay for them. And there was no end in sight.

Even though these companies were racking up enormous profits; even though they were selling many of these same drugs overseas for a fraction of the prices they charged here; and even charged the Veterans Administration lower, negotiated drug prices for its health care program, “Big Pharma,” as it’s known, wouldn’t budge for Medicare. Their pricing structure was necessary, they said, to fund research and development for future medical miracles.

To cope with these costs, seniors on fixed incomes were stretching their prescriptions to the limit and beyond – they cut doses in half, then half again. Sometimes they just stopped taking their expensive medications altogether. It was truly becoming a matter of life or death for many on Medicare.

Enter the United States Government. But instead of using the sheer buying power that the huge combined volume of drugs used by all the health care programs administered by the government to get a deal, Congress decided to go another way.

Part D was created, and used federal money – tax dollars – to pay a portion of the higher cost of prescriptions to the drug companies for Medicare recipients.

It was a big move. And Washington was nervous. If people knew that the government was going to pay part of the tab, what would stop them from abusing the system; getting prescriptions for drugs they didn’t really need or using costlier brand name drugs rather than the cheaper generics? And Big Pharma would just go on charging whatever they wanted, because Medicare would pay no matter what. 

That’s why the “donut hole” was incorporated into Part D. It was meant to slow down spending, and promote the use of generic drugs. To be a “cost saving” feature. It worked like this:

* The government would pay 75 percent of the cost for covered prescription drugs up until your bills added up to a certain amount. That amount was $2,830 in 2010;

* After that, the government paid nothing, $0, and you paid 100 percent of the drug costs until they added up to another amount. That threshold was $6,440 in 2010;

* The difference between the two amounts – the period in which you pay 100 percent of the bill – that gap is the “donut hole,” which would have meant you’d pay $4,060 out of your pocket in 2010;

* Once past the “donut hole,” you entered the “catastrophic coverage” phase, when the government resumed coverage and paid 95 percent of your drug costs.

The prescription drug benefit did provide some welcome relief to many seniors, helping them pay for basic coverage for high blood pressure or heart disease medication, for example. It did provide incentives to use generics, which are about 80 percent of all U.S. prescriptions. And catastrophic coverage is a real safety net for critical and costly conditions.

But even with the “donut hole” to curb excessive spending, Medicare Part D has, according to a recent report by Forbes Magazine, added $16 trillion to U.S. unfunded liabilities. When it passed, it seems nobody figured out how to pay for it – to offset the projected costs.

It did create a new insurance – “gap insurance.” People paid another monthly premium to protect them from getting lost in the hole. 

“The donut hole never made sense as a matter of health insurance,” Ron Pollack, founding executive director of Families USA, wrote in a recent report on Medicaid.

“Why would you stop coverage when you need it the most ... nearly 4 million beneficiaries with significant prescription drug costs – the people who need help the most – had to pay the full costs for their medications for months at a time. Many had to choose between buying their medications or buying groceries,” wrote Pollack.

Nothing was done to fix the problems until the ObamaCare became law in 2010. That first year checks for $250 were sent to people with Part D when they entered the “donut hole.”

Then discounts for prescription drug coverage during the “donut hole” were put in place. In 2013 and 2014, that discount is 52.5 percent of the cost for brand name drugs and 21 percent of generics.

The “donut hole” itself began shrinking from both the top and bottom thresholds. This year, the 75 percent coverage phase goes from $0 to $2,970. From there to $4,750, you are in the new, discounted “donut hole.” That’s a difference of just $1,780 – and you don’t have to pay even that!

You pay 47.5 percent of brand name drug costs while you’re in there, and the government pays the other 52.5 percent, but 100 percent of those prescriptions are credited against the magic number of $4,750, which gets you out of the “donut hole.” You then exit into 95 percent catastrophic coverage for the rest of the year.

The gap between the top and bottom thresholds will keep shrinking until they meet and the “donut hole” winks out of existence, finally, in 2020 – when, incidentally, without ObamaCare, it would have become $6,000.

ObamaCare is responsible for much of the prescription drug savings people are recording now, but not all. Some of the biggest and most popular drugs in history – like Lipitor, Plavix and Viagra – lost patent protection in 2011 and 2012, according to pharmaceutical industry information.

Once these patents expire, name brand drugs face potential competition from their lower-priced, generic selves. That’s called going over the “patent cliff,” and some other very big names are set to take the plunge this year.

Generic versions of Oxycontin for pain, and Zometa and Xeloda, cancer treating drugs, should become available.

Over the next two years, blockbuster drugs – Nexium, Cymbatta, Lunestra, Abilify and Crestor run out of their patent periods.

Evista and Actonel, drugs used to treat and prevent osteoporosis; Celebrex, which is widely prescribed for osteoarthritis and rheumatoid arthritis can be made available in a lower-priced version.

Combivent and Symbicort, both widely used treatment for COPD, asthma and other breathing problems, and Nanenda, which has proved very successful in cases of moderate to sever Alzheimer’s, will all be eligible for generic competition.

And competition lowers prices.

The combination of more prescription drugs added to Medicare Part D coverage, more popular drugs coming in cheaper generic form, and the vanishing “donut hole” should all help make the move toward retirement a lot less frightening than it used to be.


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