The Effect of Raising the Threshold for Medicare Part D Catastrophic Coverage

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The Affordable Care Act temporarily slowed the growth rate of the catastrophic coverage threshold for Medicare Part D, allowing more people to enter the catastrophic coverage phase where the federal government covers most of the costs. This temporary reduction will end in 2020 and the threshold will again reflect the true growth in beneficiary expenditures. The Bipartisan Budget Act of 2018 (BBA) made further changes to Part D. These changes will affect different stakeholders in different ways, but the primary effect has been to increase overall expenditures in catastrophic coverage.

The Medicare Part D prescription drug program provides beneficiaries with robust insurance coverage for outpatient prescription drugs. Part D plans are offered by private insurance companies that negotiate with drug manufacturers to provide patients with access to discounted prices.

Part D prescription drug plans have four phases of insurance coverage:

• The deductible, where the beneficiary must cover all costs until the deductible is reached;
• The initial coverage phase, where beneficiaries pay 25 percent of the cost of their drugs and insurers pay the other 75 percent, until total expenditures reach the initial coverage limit;
• The “coverage gap,” so named for the structure of this phase prior to the ACA when the beneficiary resumed full responsibility for the cost of their drugs until reaching the catastrophic threshold
• The catastrophic phase, where beneficiaries pay 5 percent of all remaining costs until the end of the plan year, insurers pay 15 percent, and the government pays 80 percent.

The ACA included a provision that temporarily slowed the growth rate of just the catastrophic coverage threshold for the years 2014 to 2019. In 2014, the new formula produced no change, and in 2015 the threshold was only $50 less than what it otherwise would have been. But in 2016 the threshold was $450 lower and by 2019 it will be nearly $1,000 lower. This temporarily slowed growth rate has effectively shortened the coverage gap and, as a result, increased the number of beneficiaries who reach catastrophic coverage.

In 2020, the threshold will return sharply to where it would have been had this temporary change never been included in the ACA. As a result, the catastrophic coverage threshold is scheduled to increase from $5,100 in 2019 to $6,650 in 2020—a 30 percent increase.

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Other changes in the ACA and BBA will also result in high-cost beneficiaries moving through the coverage gap and into the catastrophic coverage phase more quickly. Medicare beneficiaries with the greatest expenses have certainly benefitted from this temporary reduction in the catastrophic coverage threshold. From 2016 to 2018, non-low-income-subsidy high-cost beneficiaries have saved $1,594 in the coverage gap and spent an extra $144, on average, in catastrophic coverage, for a net estimated savings from the reduced threshold over this period of $1,450, relative to what they otherwise would have paid.

The BBA’s changes will result in additional savings in 2019, but with the temporary reduction in the catastrophic coverage threshold expiring in 2020, those savings will be short-lived for many of these beneficiaries, as they will suddenly be less likely to move into catastrophic coverage. If the catastrophic coverage threshold increases as scheduled in 2020, beneficiaries that do reach that threshold will pay an extra $461 in the coverage gap, and $71 more in the catastrophic phase, well below their typical cost growth in the catastrophic phase. The ACA’s changes have indirectly affected costs for the two-thirds of non-high-cost beneficiaries, as well. By law, the government must subsidize three-fourths of total program expenditures. As the government’s reinsurance costs have increased (as explained below), the direct premium subsidy has necessarily had to decrease. The federal government’s reinsurance costs move in the opposite direction of those for high-cost beneficiaries and have certainly increased as a result of this temporary slowdown in the growth rate of the catastrophic threshold. Between 2016 and 2018, the federal government has paid an estimated $2,304 in additional reinsurance costs, on average, for each non-low-income-subsidy high-cost enrollee as a result of the reduced threshold.

In 2020 the government’s reinsurance cost per beneficiary will still rise, but the increase from 2019 is expected to be $1,132, on average, if historical expenditure trends continue, compared with an estimated $2,432 increase from 2017 to 2018. Moreover, aggregate reinsurance costs will grow more slowly as fewer beneficiaries will reach catastrophic coverage.

In 2020 drug manufacturers will pay average rebates of $3,488 for each high-cost beneficiary, nearly $1,000 more than what they will pay in 2019.

The effect on insurance companies is less straightforward because they face costs in both the coverage gap and catastrophic coverage, and their liability is different in the coverage gap based on whether the beneficiary is taking generic or brand-name medicines.

The Part D program has justifiably been lauded for keeping costs below expectations since its inception. If the current trend of rapidly increasing reinsurance costs continues, however, that praise may no longer be warranted. It is clear from the evidence that part of the reason for the growth in reinsurance costs is due to the provision in the ACA that temporarily slowed the growth rate of the catastrophic coverage threshold, which caused more beneficiaries to enter catastrophic coverage and to do so more quickly.

With the catastrophic threshold returning to a level reflective of the growth in beneficiary expenditures in 2020, the problem of increasing costs will be somewhat mitigated for the government. High-cost beneficiaries, in contrast, will face significant increases in their out-of-pocket expenditures, relative to increases over the past several years, which may be difficult for many of them to afford. 

Tara O'Neill Hayes is Deputy Director of Health Care Policy at the American Action Forum. 

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