Health Benefits: Medicare's Costly Doughnut Hole

Seniors dread this time of year, when they run out of Medicare drug coverage and have to pay out of pocket. Some just stop taking their drugs

For many older Americans, this is a bitter time of year with a deceptively sweet name: the "doughnut hole."

It's not a treat from the local bakery, but rather a coverage gap in the three-year-old Medicare Part D drug program. When Part D was first designed as a way to help elderly patients pay for their prescription drugs, the only way the federal government could afford it was to impose a yearly limit on what it would cover for each member. So once seniors consume drugs up to that threshold—it is $2,510 in 2008—they fall into the doughnut hole. They then have to pay fully out of pocket for their drugs until the end of the year, or until they're eligible for catastrophic coverage, whichever comes first.

The doughnut hole has been a source of angst ever since Part D began in 2004. Now we know why: One way seniors deal with being in the hole is to stop taking their drugs.

More than 3 Million Affected

Only recently have pollsters been able to quantify the fallout of the doughnut hole. In August, the Henry J. Kaiser Family Foundation released results of a survey showing that in 2007, 26% of Part D beneficiaries—3.4 million people—reached the doughnut hole. Part D plans are offered and managed by private insurance companies, so the particulars differ among the 1,600 or so plans that are available. But on average, Part D patients who fell into the doughnut hole saw their monthly out-of-pocket costs double to $196.

Even more alarming was that the study found 15% of people with chronic illnesses stopped taking drugs during the time they were in the coverage gap. "High drug costs are a barrier, but this is the first time we're seeing it documented so plainly," says Tricia Neuman, vice-president at Kaiser Family Foundation, a Menlo Park (Calif.) health research organization. "This raises concerns about the consequences for people with serious chronic conditions."

So what is the purpose of the doughnut hole exactly? It was the only solution to a simple problem: The federal government, which is expected to spend between $395 billion and $534 billion on Part D benefits through 2013, didn't allocate a big enough budget to the program to subsidize an unlimited supply of drugs for every beneficiary. Some of the insurance companies that sell Part D plans offer options that cover drugs during the gap. But, says David Certner, legislative policy director for AARP, "those plans cost more and they only cover generic drugs."

Reconsidering Retirement

Since seniors already have to pay premiums and co-pays on their Part D plans, many choose to risk falling into the hole rather than to pay more for the chance of staying out of it.

Larry Kay of Yukaipa, Calif., is having so much trouble affording the doughnut hole that he's thinking about coming out of retirement. Kay, a former quality-control inspector for a fencing company, hit the hole in May and is now paying $650 a month for drugs to treat his high cholesterol and the lung condition chronic obstructive pulmonary disease, or COPD. "One is $162, another is $226," he says, rattling the exact prices off the top of his head with the tone of both familiarity and annoyance. "They don't have generics."

Kay's pension of $1,198 per month (after taxes) leaves little left over for other essentials. So he has stopped taking his COPD inhaler in the morning, even though he's not supposed to skip doses. "If my doctor knew, he'd be very upset."

Filling the Hole: Different Ideas

Health policy experts believe that the next Administration will be under pressure to address the doughnut hole, and both candidates have expressed some support for reforming the program. Senator Barack Obama (D-Ill.) endorses the idea of letting the government negotiate drug prices for Part D (it doesn't have the right to do so now). Senator John McCain (R-Ariz.) has said that higher-income beneficiaries should pay higher premiums for their Part D plans.

Both ideas—dropping drug prices and shifting more of the up-front premiums to members who can afford to pay—have been bandied about in Washington as potential ways of at least shrinking the doughnut hole without the government having to pony up more to support Part D. The prospect of a $700 billion bailout of the financial industry is certainly taking attention away from health-care reform, but there is little doubt the next President will place the doughnut hole high on his agenda.

"There is a growing recognition that the doughnut hole is impairing people's access to medications," says Dr. Carolyn Clancy, director of the Agency for Healthcare Research & Quality in Rockville, Md., a public service agency of the U.S. Health & Human Services Dept.

Premiums Are Set to Jump

Meantime, the doughnut hole is exacerbating a growing Medicare financial burden on seniors. On Sept. 26, health-care advisory firm Avalere Health released a report predicting Part D beneficiaries will see their premiums rise 24% on average, to $37 a month, in 2009. Those who joined the 10 most popular plans will swallow a 30% increase.

"One frustration seniors voice is that they go through the deductible, then they fall into the gap, then a new year comes around and they have to start all over again," says Karen Fletcher, a spokesperson for California Health Advocates, which assists Medicare beneficiaries.

Some drug companies offer assistance programs, Fletcher says, but only for the lowest-income seniors, and only for those willing to endure a tough application process.

Those who watch Part D carefully worry that some patients may be cutting back on their drug intake altogether to avoid the doughnut hole, even if they're endangering their health by doing so.

"Is the program better than what they had before? Yes," says Judy Lave, chair of health policy and management at the University of Pittsburgh, referring to the fact that most seniors had little or no drug coverage prior to Part D. "But can we design it better? Yes."

Weintraub is a senior writer for BusinessWeek's science and technology department.