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“What's Happening with the Donut Hole?”

Health Care Reform and Medicare Part D: Changes in Prescription Coverage

by Robert J. Lemen

As many of us know, the Patient Protection and Affordable Care Act (P.L. 111-148) – signed by President Obama on March 23, 2010 – was immense. Thousands of pages of legislation make it difficult for most Americans to decipher exactly how this bill will affect their medical coverage. The private and public pieces of how Americans are covered for their medical expenses are getting more mixed.

For those of us who receive coverage through Medicare, we already know how intermingled the government and insurance carriers can get in today's healthcare system. With various public and private parts in a complete Medicare coverage program, it's hard to tell what Medicare is paying, or what the Medicare Supplement is paying. With the coming of health care reform, Medicare recipients can also expect to see changes in the near future. This change is most notable for those with Medicare Part D coverage.1

Medicare Part D, in short, is the component of Medicare that covers your prescription drugs. It is a supplemental policy to original Medicare (A & B) regulated and partially funded by the government, but purchased and insured through private carriers. While Part D seems like a typical prescription drug plan at first glance, those who use it frequently soon discover otherwise. Beginning in 2006, beneficiaries enrolled in Medicare Part D have been required to pay 100% of their prescriptions after their total drug spending exceeds $3,610 (as of 2010). This is the case until drug spending reaches what is known as catastrophic coverage, or $6,000 of total drug spending (as of 2010). After this amount, the Part D coverage again kicks in. This is known as the "Medicare Donut Hole" or prescription drug gap. In 2007, an estimated 3.4 million Part D enrollees (or 14%) reached this gap.2

One of the major goals of the Patient Protection and Affordable Care Act (also known as H.R. 3590) is to fill the gap. According to the legislation, this will happen over a 10-year period, but government subsidies are planned to start as soon as this year. Enrollees in Part D whose prescription drug costs take them into the donut hole are planned to receive a $250 rebate check for the year of 2010.

The bill's ambitions go further than that for the future. From 2011 onward, the gap is intended to be picked up on a much larger percentage basis. The following timetables highlight the progression of government subsidies from 2010-2020 for both brand name and generic drug coverage:

Over this 10-year period of time, the gap will begin to close from 100% of out of pocket drug costs for the member to a much smaller 25%. The subsidy, if all goes according to plan, would greatly improve the value of Part D prescription drug plans. But the real question remains: How will the health care industry react to this subsidy over the 10-year period?

Right now, there are two major avenues that are followed when supplementing original Medicare: Medicare Advantage plans and Medi-Gap polices. Medicare Advantage plans are administrated directly through an insurance carrier. Original Medicare is replaced by the carrier, and all claims are paid directly by that carrier. In exchange for taking on this additional risk, the carriers receive a subsidy from the government for each individual they enroll in their Medicare Advantage program. Medi-Gap policies, on the other hand, simply pick up the additional out-of-pocket costs associated with original Medicare. Therefore, both the carrier and original Medicare (as administered by the government) share in the risk. Carriers offer different levels of supplemental coverage, hoping to match an appropriate coverage level to fit an enrollee's budget. Medicare Part D is considered a supplemental Medi-Gap policy, as original Medicare does not include prescription drug coverage.

What we may see in the industry is a higher focus on Medi-Gap coverage. One of the main selling points for Medicare Advantage plans was that there was no donut hole in prescription coverage for their plans. Now, with this hole being mostly closed for Part D, that selling point really starts to fade away. Carriers should react accordingly to these subsidies. In the near future, we may see a major change in how the carriers value and price their Part D prescription drug plans.

Rob Lemen is the president of AccesseHR Insurance Services. He can be reached at rlemen@ accessehr.com.

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