Few Medicare enrollees pay huge prescription drug costs out of pocket

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The scaled-back prescription drug cost control measures belatedly added to the Build Back Better bill include a $2,000 annual cap on out-of-pocket costs for enrollees in Medicare Part D.

That's a vital reform, since Medicare enrollees' exposure to drug costs is currently open-ended, and can run to many thousands for the most expensive drugs, e.g., for cancer or rare diseases. 

But the complex Part D payment formula can leave some observers with the impression that more enrollees are paying astronomical costs than is the case. Specifically, references to amounts paid by all payers in each of the first three coverage phases often give the impression that those total costs are paid by enrollees. Such confusion appears to have recently reached the White House:

Millions of seniors pay more than $6,000 a year on prescription drugs in cost-sharing. President Biden’s Build Back Better Act puts an end to this burden, and ensures that seniors never pay more than $2,000 a year for their drugs under Medicare Part D.

— The White House (@WhiteHouse) December 4, 2021

Millions of seniors do not pay more than $6,000 a year on prescription drugs. In 2019, out of 64 million Medicare enrollees, 1.2 million paid more than $2,000, and  308,000 paid more than $3,100, according to the Kaiser Family Foundation (KFF). 122,000 spent more than $5,348. Exposure is open-ended, and those dependent on the most expensive drugs can spend far more, but their numbers are small.

The payment formula for all payers in Part D -- the insurer, the enrollee, and drug manufacturers themselves -- is Kafkaesque, divided into four payment phases. In the standard plan, however, enrollees' out-of-pocket exposure boils down to this: a $480 deductible, then 25% of the next $9,826 spent, then 5% of all subsequent costs, no matter how high they go. The point at which the 5% share kicks in is called the catastrophic phase. By the time the catastrophic phase is reached, the enrollee will have spent just shy of $3,000 out of pocket.* Insurers can vary the standard formula, but plans must offer the "actuarial equivalent" of this design.

By the time the enrollee reaches the catastrophic threshold, all payers combined will have spent a bit more than $10,000 (though one major payer class is the manufacturers, who pay 70% of costs in the so-called "coverage gap" phase, kicking in after the first $4,430 is spent). 

The majority of enrollees who reach the threshold in total spending qualify for low income assistance (LIS), which covers almost all costs for the enrollee. In 2017, according to a prior KFF analysis, of 3.6 million enrollees whose total spending reached the catastrophic threshold (8% of all Part D enrollees), 2.6 million obtained LIS, while 1 million paid their full share of what was then about $8,000 in total costs.

The system is wantonly expensive, because private payers negotiate their own rates and pay far more than the rates negotiated by government (for all payers) in other wealthy countries. It's absurdly complex: enrollees who reach the catastrophic cap pass through no fewer than four payment schedules.  It's laden with risk: the absence of a cap undermines a core concept of health insurance. It's designed to benefit pharmaceutical companies, insurers, and pharmacy benefit managers.  It's expensive for low income enrollees who don't qualify for LIS.

But it does not impose catastrophic costs on a large percentage of enrollees.

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* As to how exactly the enrollee's out-of-pocket costs break down up to the catastrophic threshold, take a breath...Louise Norris helped me to a precise breakdown, verified by KFF's Juliette Cubanski, coauthor of the briefs cited above. Here goes: in a standard plan in 2022, the enrollee pays the first $480 as a deductible, then pays 25% of subsequent charged costs up to $4,430.  Total enrollee tab to this point: $1,468 ($480 + $988). Next comes the so-called "coverage gap," which is no longer a gap, since the enrollee now also pays 25% of costs in this segment. Nominally, the total out-of-pocket share up to the catastrophic phase is $7,050 -- but in the coverage gap, the manufacturer now pays the lion's share, 70%, and that counts toward the $7,050 cap (but the insurer's 5% share doesn't). So, in addition to the $1,468 paid up to this phase, the enrollee pays 25% of the remaining $5,876, or $1,469 (almost identical to her share prior to the coverage gap, $1,468). Total out-of-pocket tab: $2,937 -- plus 5% of all subsequent costs for the year. Simple and elegant, right?

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