Of Doughnut Holes and Simple Math, or, “Even if I Pay Half Price For Brand Name Drugs, Won’t That Still Be $4,350 Out of Pocket Until Medicaid Kicks In?”

Photo by Muu-karhu via Wikimedia

Forgive me if I sound naïve, or perhaps a wee bit skeptical, but I’m somewhat perplexed as regards the bottom line of PhRMA’s well cheered announcement to offer a 50% discount on name brand prescription drugs to seniors stuck in the money pit known as the Medicare “Doughnut Hole.”  The New York Times has said that the “Federal Saving From Lowering of Drug Prices Is Unclear” and the Washington Post has said that  ”It was not clear how much of the savings would accrue to the government side of the ledger and how much would represent lower out-of-pocket payments for consumers.” Unclear as it may be, it may be worth a look. This is not to say that this move announced by PhRMA is not a step in the right direction, just that a closer gauge of the step, as it appears at present, would seem to be in order.

First things first, in its 2008 fact sheet, “Prescription Drug Trends, September 2008,” Kaiser Family Foundation found (pdf. page 2) that

“The average brand name prescription price in 2007 was over 3 times the average generic price ($119.51 vs. $34.34).

Kaiser also found that “For products with a large number of generics, the average generic price falls to 20% of the branded price and lower.” And that “Approximately three-quarters of FDA-approved drugs have generic counterparts.”

When considering the approximately 25% of FDA-approved drugs which do not have generic counterparts, and which would figure largely in any savings under the new PhRMA discount plan, it is probably important to remember that pharmaceutical companies often  engage in what is known as “pay-for-delay:” the practice of paying generic drug manufacturers not to market generic drugs which would compete with their own branded drugs.

Might I suggest that without a concomitant decrease in the breadth of the lapse in coverage known as the “Doughnut Hole,” or some after purchase rebate scheme which allows the full price of the discounted drug to count towards satisfaction of the Doughnut Hole requirement, the net result for many of the hardest hit  seniors will be fairly limited? That they will still have to pull approximately $4,350 per year out of their pockets?

What’s a Doughnut Hole?

The PhRMA discount goes to the price of brand name prescription drugs after the initial cap is met on the Medicare prescription drug benefit. This initial cap on prescription benefit coverage can result in what CMS refers to as “the coverage gap” or what is often referred to as the Medicare Part D “doughnut hole.”

As we reported in a post back in February,

The Dallas Morning News has offered this explanation of “the doughnut hole”

Seniors with Medicare’s standard drug benefit for 2008 pay the full price once their total drug expenses — both Medicare’s costs and their own out-of-pocket deductibles and co-payments — reach $2,510.

They are then on their own for the next $3,216, until their total drug spending exceeds $5,726. At that point, catastrophic coverage kicks in, and Medicare pays 95 percent of their drug costs.

Some seniors are able to avoid the doughnut hole because they qualify for extra government help or buy extra insurance. But everyone else has to mind the gap, which lawmakers included in Medicare’s drug benefit to hold the line on federal costs.
The WSJ Health Blog reports that in 2009, “The coverage gap will open up after beneficiaries and their drug plans have spent a total of $2,700 on medications…. Seniors are then on the hook for the next $4,350.”

We also noted that “In response to that expense, the Kaiser Foundation has shown that many seniors cease or diminish the use of their medications.”

Some simple, if not rudimentary, math
In order to make a complex matter slightly easier, allow me the liberty of making the numbers even: we’ll use $2,500 for an initial cap, and we’ll use $4,500 for the out of pocket or “on the hook number” — that which one must pay until Medicaid kicks in and pays 95% of the cost. [Because of the wide variation in coverage plans, the actual numbers can vary as well, and there is some fluctuation in the amounts reported.]

Again for even number ease sake, consider someone with a large, constituting catastrophic, $12,000 per year brand name prescription bill. That person, regardless of the discount, will still have to take $4,500 out of his or her own pocket during the Doughnut Hole period of non-coverage-unless the Donut Hole itself is changed or eliminated. Looking at the calendar year, if the Doughnut Hole is not changed or eliminated, with or without the discount, the initial cap ($2500 @ 1000 per month) will be met at around the middle of March. The primary difference with the discount is that instead of making it only to August before Medicaid picks up the tab for the consumer, Medicaid will not kick in until December. Under this scenario, the brand name consumer stands to ultimately save roughly $200 as a result of the 5% Medicaid co-pay,  and Medicaid will have to make a payment for the brand name pharmaceuticals for roughly 3 weeks worth of supply. But the consumer’s out of pocket $4,500 still went to the brand name  pharmaceutical.

Although under this scenario Medicaid will have saved roughly four months of payment, it is also important to remember that this is only under the brand name scenario where there is no choice of a generic available. If one considers that “The average brand name prescription price in 2007 was over 3 times the average generic price ($119.51 vs. $34.34)” and that “For products with a large number of generics, the average generic price falls to 20% of the branded price and lower,” the “50% discount” could actually wind up costing the government more if someone capable of taking a generic drug opts for the decidedly  more expensive brand name drug instead (Generics: using the average 1/3 for the price for generics,  $12,000 per year divided by 3 = $4,000 per year = $2,500 initial Medicare payments plus $1500 in consumer Doughnut Hole payment= zero paid by Medicaid (plus $3,000 less for the consumer out of pocket)).

It is true that a senior stuck in the Doughnut Hole who has no choice but to take a brand name prescription drug and whose prescription drug bill does not meet or greatly exceed the Medicaid threshold will stand to gain (or lose less), perhaps considerably, from this discount. It is also true that brand name pharmaceutical companies will stand to gain (or lose less) if seniors decide to not stop taking their medication altogether or switch to a generic– if available– when they get to the Doughnut Hole. And it is even true that in our example above, the consumer will be able to pay for that drug over a greater period of time (in our example, $500 per month for 9 months instead of $1000 per month for 4 ½ months), and that is no small thing. But for those who must take a branded pharmaceutical and will continue to meet and/or exceed the Medicaid threshold, this step by PhRMA will not lessen the burden of that yearly Doughnut Hole $4,350 out of pocket. And anything after that was already covered by Medicaid.

For some, but not all, the benefits of this discount will not be small. But perhaps it all appears a bit smaller when one considers the cost to consumers and the government from “pay-for-delay.”

Referring to pay-for-delay deals, the New York Times reported that

Jon Leibowitz, chairman of the Federal Trade Commission, said these deals would cost consumers tens of billions of dollars in the next decade.

A House subcommittee has approved a bill to ban such “pay-for-delay settlements.” A Senate committee is poised to approve a similar bill this week.

Mr. Leibowitz said, “Drug companies are lobbying furiously against the legislation because they want to preserve their monopoly profits at the expense of consumers.”