Lower Drug Costs in the Doughnut Hole

EDITOR'S NOTE: This article, which was originally published in the February 2011 issue of Kiplinger's Retirement Report, has been updated as of October 2011. To subscribe, click here.

Medicare beneficiaries have had much to celebrate this year. The dreaded "doughnut hole" in the Part D prescription-drug plan has started closing through a combination of government subsidies and drug-company discounts. By 2020, beneficiaries will pay just 25% of the costs of their generic and brand-name drugs while in the coverage gap.

Beneficiaries who use brand-name drugs that have no generic versions got the most help in 2011. Once they entered the gap, they got a 50% discount from drug companies on their brand-name drugs.

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In addition to the company discounts, the federal government will start phasing in a subsidy for brand-name drugs in 2013. By 2020, Medicare will pick up 25% of the cost of brand-name drugs, while the drug companies will continue with their 50% discount.

Also in 2011, beneficiaries who entered the doughnut hole received a 7% government subsidy on generic drugs. For 2012, the subsidy jumps to 14%. By 2020, the government will pay 75% of the costs of generic drugs for beneficiaries in the doughnut hole.

The pharmaceutical industry agreed to the brand-name discounts as part of the health-care overhaul. The new law, however, does not control the underlying costs of the drugs, and some worry that drug companies eventually will raise prices. "Past history shows that they will find ways to make themselves whole," says John Coster, senior vice-president of government affairs for the National Community Pharmacists Association.

The rest of the Part D program has not changed. As they have in the past, drug manufacturers negotiate with each Part D plan to establish prices for both brand-name and generic drugs. Prices vary among plans, and some plans may not cover your drugs.

Even with the 50% discount for the brand-name drug, the generic version is still likely to be a better deal. “If you have a drug that works for you, you should stick with that drug,” says Ilene Stein, policy counsel at the Medicare Rights Center.

The coverage gap for 2012 begins when a beneficiary’s total drug costs reach $2,930. Catastrophic coverage, with the government picking up most costs, begins when a patient’s out-of-pocket costs reach $4,700.

Even though the 50% discount reduces your out-of-pocket costs, you won't end up spending extra time in the doughnut hole, says Tricia Neuman, vice-president of the Kaiser Family Foundation. "With this discount, you will pay 50% of the price for the brand-name drug, but the entire price, including the 50% discount the drug company pays, will count toward the amount you need to qualify for catastrophic coverage," she says.

In and Out of the Doughnut Hole

Here's how the discount and subsidy work. Let's say you use a brand-name drug that's priced at $120. If you have a $20 co-payment in your Part D plan, you will pay $20 for that drug. You'll reach the doughnut hole when your co-payments and the plan's payments to the pharmacies total $2,930.

In the past, you would have paid the entire $120 brand-name drug cost when you were in the doughnut hole. Now you'll pay $60 when you buy the drug, either at the pharmacy or if you order it through the mail. You may also have to pay a pharmacy dispensing fee of about $2, which will be added to the discounted drug cost. The entire $120 will count toward your total drug costs and will help you move out of the coverage gap.

The government subsidy for generics works almost the same way. Say your generic drug costs $30. With the 14% subsidy in 2012, the drug will cost you $25.80. However, the amount covered by the subsidy will not count toward total drug costs for purposes of leaving the doughnut hole.