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Medicare drug costs to fall in 2014, but donut hole widens

Hospital beds in a file photo. REUTERS/Lee Celano
Hospital beds in a file photo. REUTERS/Lee Celano

By Mark Miller

CHICAGO (Reuters) - There will be good and bad news next year for seniors using Medicare's prescription drug program.

Overall, enrollees can expect a year of flat or decreasing Medicare prescription drug costs, according to data released last week by the federal government. The government said Medicare's per-beneficiary drug costs fell 4 percent last year. As a result, some of the most important numbers in the program's 2014 Part D will drop by roughly the same amounts.

The number that will matter most to seniors is the standard annual plan deductible. The federal Centers for Medicare & Medicaid Services (CMS), which administers Medicare, said last week that it will be $310, down from $325 this year (the numbers are proposed, and still could be revised).

And insurance plan premiums - which won't be known until this fall - could reflect the decline in drug prices. Although some Part D premiums jumped sharply in 2013, average rates have been flat for several years, ranging from $37 to $40, according to Jack Hoadley, research professor at the Health Policy Institute of Georgetown University.

"Premiums are driven by insurance plan estimates of what their average cost will be to treat a patient, so it's fair to say we're likely to see relatively flat premium growth next year," he says.

WHY COSTS ARE GOING DOWN

The moderation in drug costs is in sync with a broader slowdown in healthcare expenditures. The Congressional Budget Office said earlier this month that Medicare per-beneficiary spending rose only 0.4 percent in fiscal 2012, and overall Medicare spending was up just 3 percent.

The lower spending on prescription medicines results mainly from the expiration of patents on some of the most widely used drugs, such as Lipitor, made by Pfizer Inc.

"There's been a major shift to much less expensive generics," Hoadley says. "It's not just the drugs that went off patent, but also competing drugs that are still on patent, but where the patient can switch to a generic."

The exception, he notes, has been new biologic drugs used to treat conditions such as cancer, rheumatoid arthritis and multiple sclerosis. Those drugs remain relatively expensive, but may save healthcare dollars in other areas. "Biologics could put upward pressure on drug costs in the years ahead, but that could still be a good thing if it leads to better treatment and outcomes."

THE BAD NEWS

The wrinkle in the outlook is that because of the lower prices, for the first time in the Part D program's history, beneficiaries will enter the infamous "donut hole" more quickly than before. And that will likely cause confusion and consternation among the 19 percent of seniors affected by it.

Seniors fall into the "donut hole" when spending on drugs (the combination of what the individual and the insurance company spend) reaches a predetermined threshold. This year, the number is $2,970; after that point, the senior pays 50 percent (a new change this year from the Affordable Care Act) of brand-name drug costs, until individual spending exceeds $4,750.

But for 2014, the CMS has proposed that beneficiaries enter the hole when combined spending reaches $2,850 - $120 less than in 2013. That means seniors would start paying more out-of-pocket at a lower level of spending. That will surprise seniors, since one of the key touted benefits of President Barack Obama's healthcare reform law is the gradual closing of the donut hole entirely between now and 2020.

What is going on here?

The donut hole entry point isn't related to the ACA at all. It is determined by a formula tied to per-capita total Part D drug expenses - that 4 percent decline. Meanwhile, the out-of-pocket maximum is determined by the ACA and it also will be smaller next year - $4,550, down $200. Overall, the size of the donut hole shrinks by $80.

With me so far? Good - because the big thing going on with the donut hole under health reform is the reduction in the share of drug costs borne by seniors who enter the gap.

Before passage of the ACA, seniors in the gap paid 100 percent of all drug costs. Now, they pay 50 percent out-of-pocket for brand-name drugs, with the rest made up by insurers and discounts from pharmaceutical manufacturers. For generics, they pay 79 percent. Enrollees' out-of-pocket burden for brand-name and generic drugs will gradually fall to 25 percent by 2020 - the same percentage applied for standard coverage.

"More people could reach the coverage gap next year, but there will be better coverage in the gap once you get there," says Tricia Neuman, vice president of Kaiser and director of the foundation's Medicare policy work.

(The writer is a Reuters columnist. The opinions expressed are his own. For more from Mark Miller, see http://link.reuters.com/qyk97s)

(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance. Editing by Beth Pinsker and Dale Hudson)

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