"Closing" Medicare's Donut Hole: Why You Shouldn't Feel Relieved

Last Updated Mar 24, 2010 5:12 PM EDT

Our leaders are proudly proclaiming that they've "closed" the hated Medicare Part D donut hole in prescription drug coverage for seniors. Should you feel relieved? I don't think so. Here's why.

First, take a look at the table below to understand the schedule of benefits as they exist under the current law. Medicare Part D has a schedule of deductible and co-insurance amounts that I've applied to prepare this table.


The "donut hole" is the part of the coverage in which you pay 100 percent of the cost of the drugs that fall into that range. As you can see in the above table, that range is $2,830 to $6,440.

So let's look at some examples of what you might pay for your prescriptions under the current coverage:
  • If your total annual drug costs are $310, you pay the full amount--$310--out-of-pocket.
  • If your total drug costs are $1,000, you pay $482.50 out-of-pocket ($310 plus 25 percent of the excess of $1,000 over $310).
  • If your total drug costs are $3,000, you pay $1,110 out-of-pocket ($940 plus 100 percent of the excess of $3,000 over $2,830).
  • If you have really high total drug costs--say $5,000--you pay out-of-pocket $3,110 ($940 plus the excess of $5,000 over $2,830).
Now let's look at the provisions of the health care reform bill. First, in 2010, if you have drug costs that fall into the donut hole, you get a subsidy of $250. That's for a donut hole that's $3,610 wide. Big deal!

Looking beyond 2010, health care reform phases in discounts for prescription drugs that fall into the donut hole, eventually reaching discounts of 75 percent in 2020.

But note that the discount only applies to drugs that fall into the donut hole and not to the cost of drugs that fall below or exceed the donut hole. So this opens everybody up to a complicated set of rules to determine when the discounts apply and how much they'll be. And that last item will be tricky: Could the discount be 75 percent off an inflated price? I'm skeptical. If you've ever looked closely at advertisements that promote drastic discounts, you know what I mean.

But let's assume for the moment that the original price of drugs doesn't get inflated and that we truly will get 75 percent off a fair price. In effect, here's what the schedule of benefits would look like by 2020.

Now let's crank through the same examples as described previously.
  • If your total annual drug costs are $310, you still pay the full amount--$310--out-of-pocket.
  • If your total drug costs are $1,000, you still pay $482.50 out-of-pocket ($310 plus 25 percent of the excess of $1,000 over $310).
  • If your total drug costs are $3,000, you pay $982.50 out-of-pocket ($940 plus 25 percent of the excess of $3,000 over $2,830).
  • If you have really high total drug costs--say $5,000--you pay $1,482.50 out-of-pocket ($940 plus the excess of $5,000 over $2,830).
When you compare the above examples before and after health care reform, you can see that health care reform has the potential to provide significant relief by 2020 for those people whose total drug costs exceet $2,830. But even with the discounts fully phased in, your out-of-pocket costs can still run $1,000 or more per year. And if you're planning on retiring well before the provisions are fully phased in, you'll get a lower discount, resulting in even higher out-of-pocket costs.

My recent post, High Costs of Prescription Drugs Deliver Rude Awakening for Retirees, ended with a recommendation that's still applicable after the passage of the HCR bill.

"Ask your doctor about participating in a medically supervised lifestyle program to safely wean you off lifetime maintenance drugs. Addressing such issues as high blood pressure, high cholesterol, smoking or obesity with a doctor's help can improve your health and help you save boatloads of money. Most Americans need to make every dollar count in their retirement years, so this can be a very important part of your retirement planning."

What it really comes down to is, don't count on the government to bail you out. Do what you can to bring down your own medical bills--your bank account will thank you.
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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