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Waste in the Medicare Drug Benefit: Why the Doughnut Hole    [

    Unnecessary Pain: The Medicare Drug Benefit
    By Dean Baker
    t r u t h o u t | Perspective

    Tuesday 01 August 2006

    When I was growing up, I was taught to respect the elderly. Congress apparently had a very different attitude when it designed the Medicare prescription drug benefit that took effect this year. Congress designed a bill that is far more costly and complicated than necessary. As a result seniors have been forced to waste billions of hours shuffling through insurance plans. Many seniors will also find that they face substantial drug bills even with the new drug plan in effect, as they fall into the notorious "doughnut hole" gap in coverage.

    There was a simple way to design a drug benefit, simply add on the benefit to the existing Medicare plan. Medicare is by far the most efficient part of the country's health care system (with the possible exception of the Veteran's Administration hospitals). It would have been relatively simple to just attach the new drug benefit to the already existing Medicare program, so that Medicare could offer assistance in paying for drugs just like other health insurance plans.

    There are three main benefits from this approach. First, Medicare is far more efficient than private insurers, which is one reason that the vast majority of people over age 65 opt to stay with the traditional Medicare program. Adding the drug benefit to the existing program would take advantage of Medicare's efficiency, saving almost $5 billion a year in administrative costs, according to the Congressional Budget Office.

    The second advantage of this system is that Medicare, as a huge buyer, would be able to negotiate large price discounts with the drug industry. There is a large gap between the price that the Veterans Administration negotiates with drug companies and the price charged to private insurers. In fact, private insurers pay almost twice as much on average as the Veteran's Administration for the same drugs. If Medicare administered the drug benefit, it would be an even larger buyer of drugs than the Veteran's Administration, and therefore would have even more market power. It surely would have been able to negotiate discounts that were at least as large.

    The third major advantage of having the program administered through Medicare is simplicity. The benefit approved by Congress has proven to be very difficult to understand. Plans offer very different types of coverage and often have large differences in prices for important drugs. Selecting among plans is further complicated by the fact that insurers' prices (and beneficiaries' health conditions) can change over the course of the year, but beneficiaries are locked into a single plan for the whole year.

    According to a recent survey conducted by a Medicare advisory commission, half of the beneficiaries enrolled in the Medicare drug plan spent more than 8 hours - a full working day - deciding between the different plans. If Congress had allowed the plan to be offered as a simple add-on to Medicare, the vast majority of beneficiaries could have saved this time and anxiety. Of course, those who wanted to sign up with a private insurer would still have that option, as they do now under Medicare.

    The excess complexity of the Medicare drug plan has also placed an unnecessary burden on pharmacies who have attempted to navigate between plans to ensure that their customers can get the drugs they need. Doctors have also been forced to spend time studying the plans in order to ensure that their patients will be able to afford the drugs they prescribe.

    The worst part is that many seniors with large drug bills are going to find themselves falling into the "doughnut hole," a $2,850 gap in coverage. Once their drug expenses for the year hit $2,250, seniors must pay the full cost of their drugs, until the bill reaches $5,100, at which point the insurance kicks in again. Most seniors did not expect to reach this doughnut hole and have not budgeted for the extra expense. Even worse, as seniors fall into this coverage gap in which they get no benefits, they are still liable for their monthly insurance premium. You won't find many insurance policies like this in the private sector.

    Last week several major drug companies reported large gains in profits. The increased sales and high prices made possible by the Medicare prescription drug benefit were an important factor in boosting profits. Seniors will be pleased to know that, even if the drug benefit is causing them serious difficulties, it is helping to keep the drug companies healthy.