New Report: Gaps In Medicare Coverage Account for Soaring Prescription Drug Costs

Reforms to Medicare's Part D cost-sharing structure could alleviate seniors' cost burden

NEW YORK, NY – Every week there’s a new headline about America’s senior citizens, 81 percent of whom struggle with chronic medical conditions, being crushed beneath the weight of prescription drug prices. While drug prices for the general population have remained relatively stable or even decreased, spending has skyrocketed within Medicare's drug program for seniors. A new report from Manhattan Institute senior fellow Chris Pope adds context to the larger story and makes suggestions to reform Medicare Part D and rein in seniors’ drug costs.

Pope’s analysis finds that the astronomical increase in spending is mainly the product of Medicare Part D’s cost-sharing structure. The federal government covers 80 percent of enrollees' drug costs beyond a $9,719 “catastrophic threshold,” which encourages manufacturers and Prescription Drug Plans (PDPs) to inflate list prices and rebates for pharmaceuticals—at the public’s expense. As prices and rebates have gone up, so have the number of Part D enrollees who reach the program’s catastrophic threshold and their out-of-pocket costs.

Two solutions, detailed in this report, would serve to rationalize the cost-sharing structure of Medicare Part D, eliminate the perverse incentives for inflating list prices, and cap out-of-pocket costs for seniors within Part D. These reforms include:

1. Eliminate the “Donut Hole" in Medicare Part D: Rationalizing Medicare Part D’s cost-sharing structure means eliminating a coverage gap known as the “donut hole.” Currently, the program’s cost-sharing structure encourages Prescription Drug Plans (PDPs) and manufacturers to inflate pharmaceuticals’ list prices and rebates, thereby driving more enrollees past the catastrophic benefits threshold, where costs will be picked up by the federal government. But this phase of the payment structure is an outdated vestige of Part D’s original design. Congress should eliminate it and extend the initial coverage arrangement up to the catastrophic threshold, making PDPs responsible for all non-out-of-pocket costs up to that point. They should also consider moving drug manufacturer rebates to the catastrophic phase of Part D. Such a reform would increase PDPs’ incentive to keep drug costs down, while eliminating the incentive to manipulate list prices and rebates—which would reduce seniors’ out-of-pocket costs.
2. Add an out-of-pocket cap to Medicare Advantage Part D: Because taking medications can prevent costly hospitalizations, MA plans typically offer prescription drug coverage with lower premiums and cost-sharing than in traditional Medicare, making them especially popular with beneficiaries who seek to enroll in Part D. Since MA plans already bear full responsibility for medical costs of their members, Congress should be able to cap out-of-pocket drug costs in MA without diminishing the appeal of MA plans or adding to federal expenditures.  

Click here to read the full report.