No Limit: Medicare Part D Enrollees Exposed to High Out-of-Pocket Drug Costs Without a Hard Cap on Spending – Issue Brief

Introduction

Prescription drugs play an important role in medical care for 59 million seniors and people with disabilities.  Medicare beneficiaries have access to outpatient prescription drug coverage through the Part D prescription drug benefit, which is administered by private stand-alone prescription drug plans (PDPs) and Medicare Advantage drug plans (MA-PDs). Since the start of the Medicare Part D program in 2006, the drug benefit has helped to lower out-of-pocket drug spending for all enrollees. Beneficiaries in Part D plans with low incomes and modest assets are eligible for additional assistance with plan premiums and cost sharing through the Low-Income Subsidy (LIS) program, reducing out-of-pocket costs even further for this population.

The Centers for Medicare & Medicaid Services (CMS) establishes guidelines that all Part D plans must follow for the design of the drug benefit and the value of coverage that must be offered. Plans are allowed to vary, however, along dimensions that affect beneficiaries’ access to and costs for medications, including which drugs are covered and cost-sharing requirements. The standard Part D benefit in 2017 includes a deductible ($400), followed by 25 percent coinsurance for prescriptions up to an initial coverage limit ($3,700 in total costs), and then a coverage gap where enrollees without low-income subsidies pay a larger share of their drug costs until their out-of-pocket drug spending exceeds a catastrophic coverage threshold ($4,950). The Affordable Care Act (ACA) included a provision to phase out the Part D coverage gap by requiring plans to cover a growing share of total drug costs and providing a manufacturer price discount of 50 percent for brand-name drugs filled in the gap, with the amount of the manufacturer discount counting towards the out-of-pocket threshold that triggers catastrophic coverage. Once enrollees’ drug spending reaches the catastrophic threshold, those without the LIS pay up to 5 percent of their total drug costs; those who qualify for the full low-income subsidy pay nothing for their drugs in this phase of the benefit. Plans typically place drugs that cost over $670 per month on a specialty drug tier, with coinsurance that ranges from 25 percent to 33 percent.

Concern has been rising in recent years about the growing cost burden on Medicare and beneficiaries posed by new, unique, and expensive specialty drugs used to treat a range of diseases. The Medicare Boards of Trusteesand the Medicare Payment Advisory Commission have documented this rising cost burden on the Medicare program, which is reflected in higher Part D program spending overall, as well as higher spending for reinsurance of high-cost Part D enrollees who reach the catastrophic coverage phase of the benefit, where Medicare pays for 80 percent of drug costs. Although Part D provides coverage of catastrophic drug expenses, enrollees who do not receive the LIS are still responsible for up to 5 percent of their drug costs in this phase of the benefit. For very high-priced medications, this relatively small coinsurance rate can translate to a significant amount of out-of-pocket costs for beneficiaries who do not receive low-income subsidies.

This analysis examines the out-of-pocket prescription drug cost burden for Medicare beneficiaries in Part D plans who do not receive low-income subsidies, focusing on those enrollees who have drug costs that exceed the catastrophic coverage threshold. We refer to this group as Part D enrollees with high out-of-pocket drug costs. Although these enrollees do not comprise the entire group of enrollees who have high total drug spending that exceeds the catastrophic coverage threshold, they are exposed to a potentially large cost burden because they do not receive the financial protection of the low-income subsidies. We analyze Medicare prescription drug event claims data for 2015, the most recent year of publicly available Medicare claims data, and trends since 2007, the first full year of the Part D drug benefit. For detail on the data and methods, see the Methodology.

Discussion

In recent years, the high and rising cost of prescription drugs has emerged as a pressing issue for consumers, public programs, and private insurers. As our analysis shows, Medicare beneficiaries who do not receive the additional financial protection provided by low-income subsidies are not insulated from this cost burden and can incur substantial out-of-pocket costs for their medications. We find that one million Medicare beneficiaries in Part D plans who were not receiving low-income subsidies had high out-of-pocket costs in 2015—that is, drug spending above the catastrophic coverage threshold—and their annual out-of-pocket spending averaged over $3,000 in 2015.

Our analysis indicates that out-of-pocket costs above the catastrophic threshold represent a growing concern for people with Medicare, and both MedPAC and Medicare’s actuaries have shown that rising spending for catastrophic coverage has placed greater fiscal pressure on Medicare. Our analysis also shows that the number of Part D enrollees who did not receive low-income subsidies and had out-of-pocket spending above the catastrophic threshold has increased over time. Looking to the future, we would expect to see continued increases in the number of enrollees reaching the catastrophic coverage threshold in 2016 and later years, due in part to the ACA changes to the coverage gap as well as the greater availability and use of high-priced drugs. These trends have cost implications both for beneficiaries and, as the Medicare actuaries have projected, for Medicare.

Part D enrollees with high out-of-pocket costs in 2015 spent an average of $1,215 out of pocket on their prescriptions filled above the catastrophic threshold, or $1.2 billion in the aggregate. In other words, Part D enrollees would have collectively saved $1.2 billion if Part D had a hard cap on out-of-pocket spending, rather than requiring enrollees to pay up to 5 percent coinsurance in the catastrophic coverage phase. Placing a hard cap on out-of-pocket spending under Part D would save money for enrollees, but would increase costs to Medicare and would not address underlying concerns related to high-priced drugs.

While Part D has helped make drugs more affordable for people with Medicare, and the ACA has provided additional relief to enrollees with high drug costs by gradually closing the coverage gap, the absence of an annual out-of-pocket spending limit under Part D exposes enrollees to significant costs—unless their incomes and assets are low enough to qualify for low-income subsidies. Various proposals to reduce drug costs—including allowing the federal government to negotiate prices for Medicare beneficiaries, and allowing Americans to import drugs from Canada and other countries—enjoy broad, bipartisan public support. With a growing number of people on Medicare facing high out-of-pocket drug costs, alleviating this burden remains an issue for federal policymakers to address.