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Medicare Part D Improvements Help Beneficiaries and Taxpayers

Fifteen years ago, President George W. Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act which, among other things, created Medicare Part D to cover outpatient prescription drugs. Today, more than 40 million Americans are enrolled in Medicare Part D prescription drug plans.

Medicare Part D has since benefited from a number of changes that helped reduce prescription drug-related expenses for older Americans. Unfortunately, this important progress is now under threat.

Basics of Medicare Part D

The standard Medicare Part D benefit includes (1) an annual deductible, (2) an initial coverage period when enrollees pay 25 percent of their drug costs, and (3) catastrophic coverage that limits enrollees’ spending to roughly 5 percent of their drug costs.

The benefit also includes a “doughnut hole,” or coverage gap, where enrollees are required to pay the full cost of their prescription drugs. The doughnut hole begins when enrollees’ total drug spending reaches a certain amount and ends when their out-of-pocket expenses exceed the threshold for catastrophic coverage. Research has consistently linked this design feature to enrollees not taking their prescription drugs as prescribed, presumably due to cost concerns.

Important improvements

Fortunately, as part of the Affordable Care Act, the coverage gap is gradually narrowing and is scheduled to close completely in 2020. Once the gap closes, enrollees will be responsible for 25 percent of their prescription drug costs from the time they meet their deductible until they enter catastrophic coverage.

Further improvements came earlier this year when Congress passed and President Donald Trump signed the Bipartisan Budget Act of 2018. The law effectively closed the coverage gap for brand name drugs one year earlier than scheduled. Now beneficiaries will be responsible for 25 percent of their brand name drug costs starting in 2019, rather than the 30 percent cost-sharing required by the Affordable Care Act.

The Bipartisan Budget Act also helps save seniors money by requiring brand name drug companies to pick up a greater share of costs in the coverage gap. Currently, brand name drug makers pay 50 percent of enrollees’ brand name drug costs while they are in the doughnut hole. Under the new law, they will pay 70 percent starting in 2019. The higher manufacturer discounts—which count towards enrollees’ out-of-pocket spending limit—will help push enrollees through the coverage gap more quickly and into catastrophic coverage, where they pay substantially less for their medications.

The Bipartisan Budget Act is expected to save people who are enrolled in Medicare Part D $6.7 billion in premiums and cost sharing between 2020 and 2027. Taxpayers will also benefit since the Medicare program is expected to save nearly $12 billion over the next 10 years.

What’s at stake

Regrettably, brand name drug companies are actively lobbying Congress to reverse the Bipartisan Budget Act’s doughnut hole improvements to avoid paying more coverage gap discounts. Of course, any increase in such obligations is partly driven by their own pricing behaviors. An AARP Public Policy Institute Rx Price Watch Report found that the retail prices of brand name drugs widely used by older Americans increased by an average of 15.5 percent in 2015.

The brand name pharmaceutical industry is also using the recent doughnut hole improvements to raise alarm about the expiration of a separate Affordable Care Act provision that temporarily slowed the growth of the Medicare Part D out-of-pocket spending limit. The spending limit—which marks the beginning of catastrophic coverage and grows annually based on Medicare Part D per capita spending—is currently $5,000. Once the Affordable Care Act provision expires, the out-of-pocket spending limit is expected to jump from $5,100 in 2019 to $6,350 in 2020.

The Medicare Part D out-of-pocket spending limit is already high, and allowing it to resume growing at a higher rate will increase enrollees’ out-of-pocket costs. Fortunately, the higher manufacturer discounts provided by the Bipartisan Budget Act will help protect Part D enrollees from this change by pushing them into catastrophic coverage more quickly.

Medicare beneficiaries have greatly benefited from Part D, and those benefits will only increase as the doughnut hole closes and brand name drug manufacturers are required to pick up a greater share of costs. Reversing the improvements made by the Bipartisan Budget Act would be a substantial step backward that could negatively affect the health and finances of millions of older Americans.


Leigh Purvis is the director of health services research in AARP’s Public Policy Institute. Her primary areas of expertise are prescription drug pricing, biologic drugs and prescription drug coverage.

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