Each year, Americans spend nearly $300 billion on prescription drugs. From inexpensive antibiotics for treating common infections, to specialty treatments for serious conditions like cancer, prescription drug expenditures make up a significant part of the cost of health care in this country.
And the burden is even greater on those over age 65. According to a study by the Minnesota Board of Aging in 2010, more than 80 percent of all seniors take at least one prescription medication, with 21 percent taking more than five drugs daily. The cost of all of those medications adds up quickly, with the average annual expenditure creeping up toward the $3,000 mark.
Understanding that many seniors need help paying for their prescriptions, in 2003 the federal government instituted prescription drug coverage as part of the Medicare Modernization Act. Implemented in 2006, the law required all seniors covered by Medicare to have some type of prescription drug coverage, and instituted Medicare Part D, also known as the Medicare prescription drug benefit.
Medicare Part D and the Donut Hole
Seniors who qualify for Medicare have two options for purchasing their Part D plans: either a standalone Prescription Drug Plan (PDP) or coverage via a Medicare Advantage plan. In either case, the senior pays a monthly premium for the plan, which then covers 75 percent of prescription costs after the deductible is met. However, in an effort to contain the costs of managing PDP and MA programs, the laws also included a clause that’s come to be known as “the donut hole.”
For most plans, prescription drug coverage kicks in when the beneficiary spends $325 on prescriptions out-of-pocket. The beneficiary then pays 25 percent of the costs for their prescriptions until they reach $2,970 in combined spending. Once that threshold is reached — which is common when someone is taking an expensive medication — the senior is responsible for paying the entire cost of their prescriptions until they have spent a total of $4,750 out-of-pocket and the coverage kicks back in. This area between $2,970 and $4,750 is called the donut hole, and it represents a significant expenditure for many people.
Closing the Gap
One of the goals of the Patient Protection and Affordable Care Act passed in 2010 was to close the donut hole and make it more affordable for seniors to purchase the prescriptions they need.
As a result of that act, changes in how seniors pay for their prescription medications are already taking place. Since 2010, the threshold for falling into the donut hole has been raised from $2,700 to the current $2,970, and will continue to adjust incrementally over the coming years. As a result, most seniors will have cost-sharing coverage for a longer period, and according to studies on prescription spending, will never experience a gap in coverage.
Another change to the Medicare prescription drug benefit is a lowering of the cost of drugs themselves. The Affordable Care Act requires drug companies to discount the drugs sold to seniors who are in the donut hole. Brand name drugs are sold at a 50 percent discount and generics are discounted by 7 percent. According to the Obama administration, the drug company discounts amounted to $2.1 billion in 2011, and helped more than 3.6 million seniors. These discounts will continue to increase incrementally in the coming years; under the most recent budget proposal, discounts on brand-name drugs will be as high as 75 percent by 2015.
Of course, seniors who are concerned about their prescription drug coverage do have the option to purchase PDP’s that cover a greater percentage of their prescription costs. Some insurers offer gap coverage plans, which allow for a higher spending threshold before out-of-pocket expenses increase. However, these plans generally cost more than standard plans, and may require standard co-payments that are higher than what one would pay under a standard cost-sharing plan.
Government officials note that closing the donut hole for Medicare prescription drug coverage is a priority, as many seniors live on fixed incomes and cannot afford the major expenditures required once they fall into the gap. By raising the donut hole threshold and reducing the costs of drugs, all Medicare beneficiaries can breathe easier knowing that they will be able to afford the treatments they need to stay healthy well into their golden years.
About the Author: Joe Houston is a guest blogger and counselor. He recently purchased long-term care insurance after researching LTC Tree.