Medicare Part D Coverage Gap Proposal Would Not Reduce Drug Spending

Manufacturers’ plan would shift costs to the government and beneficiaries

Medicare Part D Coverage Gap Proposal Would Not Reduce Drug Spending
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Pharmaceutical manufacturers are asking Congress to reduce their contributions to the Medicare Part D program, a change that would boost beneficiary and taxpayer spending under the health insurance program for older Americans but not reduce total drug costs.

Under Medicare Part D, which is administered by insurance plans that provide prescription drug benefits, the insured, the plan, manufacturers, and Medicare pay different amounts for medications in four sequential phases of coverage—starting with a deductible period and ending with catastrophic coverage. In the third phase, the coverage gap or “donut hole” period during which patients face higher out-of-pocket costs, manufacturers of brand-name drugs must offer discounts that reduce health plan and beneficiary spending. Congress this year mandated that the discount be increased from 50 percent to 70 percent as of Jan. 1, 2019.

The manufacturers have proposed reducing that discount from 70 percent to 63 percent, with the remaining 7 percent shifting to beneficiaries and the Medicare program. This would require an additional $4 billion in government spending through 2027, which would have to be financed by taxpayers. And because Medicare subsidizes nearly three-quarters of Part D costs, beneficiaries would likely spend an additional $1.3 billion over that period. All beneficiaries would see higher premiums. Those with brand drug costs greater than $650 per month also would face higher out-of-pocket payments.  

Costs for Brand Drugs Across Medicare Part D Phases, by Payer

There are four phases of coverage over the course of a year:

  • In the first, beneficiaries pay a deductible of $415 to cover the cost of all prescription drugs.
  • Once beneficiaries meet the deductible, they move to the initial coverage phase, where they pay 25 percent of drug costs and the insurance plans pay 75 percent.
  • Once total payments reach $3,820, patients enter the coverage gap, where they pay 25 percent of the cost and the plans pay 5 percent; manufacturers must offer a discount for brand drugs that will rise to 70 percent in 2019. Manufacturers are seeking to change this phase.
  • When beneficiary and manufacturer payments reach $5,100, beneficiaries move to the catastrophic coverage phase, where beneficiaries pay 5 percent of costs, plans pay 15 percent, and Medicare pays 80 percent.

Increased out-of-pocket costs and higher plan spending in the coverage gap

Reducing manufacturers’ brand discount in the coverage gap phase to 63 percent would increase costs for beneficiaries and Medicare in key ways:

For example, beneficiaries do not leave the coverage gap phase until the sum of their out-of-pocket spending and manufacturer discounts reaches a total of $5,100 in a year. But this proposal changes only how much each party pays—not total drug costs—so the reduction in manufacturer discounts means beneficiaries must pick up the remaining costs, dollar for dollar, until total spending reaches the threshold.

Importantly, this also would increase the share of beneficiaries’ prescriptions that fall in the coverage gap—where they are responsible for 25 percent of drug costs—and reduce the share of prescriptions in catastrophic coverage, where they pay only 5 percent. This means the 8.6 percent of beneficiaries who reach catastrophic coverage would see increased out-of-pocket costs for the year because of the greater expenses in the donut hole phase.

The proposed reduction in manufacturer discounts would raise costs to both beneficiaries and taxpayers. Specifically, increasing plan contributions from 5 percent to 12 percent would lead to increased premiums, which are split 25/75 percent between beneficiaries and the Medicare program.

Considerations for policymakers

The manufacturers’ proposal would not reduce total drug costs but would increase beneficiary and Medicare spending. Although Medicare subsidizes most Part D costs, beneficiaries alone could spend an additional $1.3 billion through the end of 2027. These patients would see increased premiums and nearly 10 percent of them would see higher out-of-pocket costs.

While this proposal may reduce direct Medicare spending in the catastrophic coverage phase by shifting costs to the coverage gap, those savings would not offset increases in total Medicare spending needed to support higher premiums. As lawmakers consider any changes, they should weigh the benefits of reducing manufacturer contributions against increased costs for taxpayers and beneficiaries. 

Sean Dickson is an officer and Ian Reynolds is a manager with The Pew Charitable Trusts’ drug spending research initiative.