Widespread misconception of Medicare Part D enrollees' out-of-pocket exposure

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Late last year, I took some pains to tease out the out-of-pocket (OOP) exposure of Medicare Part D enrollees up to the point where they reach the so-called "catastrophic threshold" of coverage. Beyond that point, they're responsible for a comparatively low 5% of subsequent costs until the end of the coverage year. 

The answer is no real mystery: it's well understood by involved professionals and scholars. It's just awfully hard to derive from general news coverage and even trade press coverage or scholarly coverage.

The exposure up to the catastrophic threshold in 2022 is $2,937, despite an often-cited cap of $7,050, referred to in the trade as the trOOP cap, or true out of pocket cap. 

That's because the ACA enacted a gradual closing of the so-called "donut hole" in Part D coverage -- a phase that kicks in when an enrollee exhausts the "initial coverage phase," which happens when the enrollee and the insurer together have spent $4,430 in 2020. In the donut hole phase, enrollees originally paid 100% of costs until they reached the "catastrophic threshold" where their share dropped to 5%.  

The catastrophic threshold still exists, but during the donut hole phase drug manufacturers now cover 70% of costs and insurers 5%, leaving enrollees to pay 25%,  the same percentage that they pay in the initial coverage phase (after they pay their deductible, which is capped at $480). Enrollees' mode of payment when they reach the donut hole does often shift from copay to co-insurance.

To simplify, enrollees pay a deductible of close to $500 (sometimes less), then pay about 25% of costs up to a bit beyond $10,000, for total exposure close to $3,000 before they reach the catastrophic phase.

I've deliberately let this sound as confusing as it is, to highlight how insanely complex the Part D structure is, with four payers (enrollees, health plans, drug manufacturers and a federal "reinsurance program") paying varying and shifting shares in four coverage phases.  

Democrats are often criticized for creating benefits that are administratively complex and semi-submerged, so that beneficiaries don't know what they're getting. But the Republican-designed Part D takes the cake on this front -- all because of our national shibboleth that private markets are superior to government-administered programs and the pharmaceutical industry's success in staving off Medicare price negotiation. Democrats, for their part, managed to legislate substantial but almost invisible, gradually phased-in partial relief.  

This confusing tale matters most immediately at present because the Inflation Reduction Act, which should be signed into law within a week, not only reduces enrollees' total OOP to $2,000 in 2025 (which is easy to understand) -- but first eliminates in 2024 the catastrophic phase of coverage (in which enrollees now pay 5% of total costs). 

You will be challenged to glean from coverage of the IRA what enrollees' total OOP exposure will be in 2024. Long story short: it's about $3,200, i.e. the current exposure up to the catastrophic threshold plus an annual adjustment for Part D spending growth.

You will probably not see that figure even in in-depth coverage of the IRA. Instead, you may read in the New York Times:

It [Part D] includes the provision for catastrophic coverage, in which the government picks up the full cost of medicines — except for 5 percent, paid by the patient — after an individual spends $7,050 a year out of pocket. The Kaiser Family Foundation says that 1.3 million Medicare beneficiaries hit the catastrophic threshold each year; 1.4 million have out-of-pocket costs of $2,000 or more.

And even in Health Affairs -- the ultimate in reliable delineation of healthcare laws and provisions:

This [elimination of the catastrophic phase of coverage] should benefit not only the millions of Part D enrollees who have incurred spending in the catastrophic phase over the last several years, but also millions of seniors who have spent more than $2,000 per year over the last several years but who may not have spent enough to move into the catastrophic phase (an out-of-pocket threshold not met until $7,050 in 2022). 

Why this confusion? It seems that HHS, and therefore healthcare policy professionals, regard the phased-in closing of the donut hole as a series of patches, conceptually separate from the enrollee's original (and therefore conceptually "true") responsibility for 100% of costs. In technical documents, HHS refers to total spending in the hole (plus the enrollee's costs in the initial phase) with the acronym trOOP -- true out-of-pocket costs -- as if those costs are still the enrollee's responsibility, and drugmakers and insurers just kind of wander by and pick up most of the tab.  

You can see this conceptualization in the language of the one expositor of Part D cost sharing I'm aware of that spells out enrollees' current OOP exposure, the Kaiser Family Foundation:

In 2022, the catastrophic threshold is set at $7,050 in out-of-pocket drug costs, which includes what beneficiaries themselves pay and the value of the manufacturer discount on the price of brand-name drugs in the coverage gap (sometimes called the “donut hole”), which counts towards this amount. Under current law, beneficiaries who use only brand-name drugs in 2022 have to spend about $3,000 out of their own pockets (rising to around $3,500 in 2025) before qualifying for catastrophic coverage...

The manufacturer's share of donut hole costs (70%) is cast as a discount, as if the enrollee were "truly" responsible for it but happened on a coupon.  

Even KFF here treats as TMI an additional wrinkle: the insurer pays 5% of costs after the initial coverage phase (leaving the enrollee with 25%), but that contribution does not count toward the catastrophic threshold, leaving a truly mind-bending calculation for enrollees' OOP share before the catastrophic phase -- and therefore their total OOP share in 2024.

The disjunct between the oxymoronically named trOOP and actual (not "true") Part D OOP has mattered for some time, because people who are not immersed in the Part D maze get the impression that enrollees' exposure is considerably larger than it is. The confusion extends to White House staff:

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

In fact, according to KFF estimates, in 2020 1.4 million Part D enrollees had OOP spending above $2,000 -- about 3% of enrollees. In 2019, per KFF, 308,000 had spending above $3,100 (close to the real OOP cap in 2024), and 122,000 had spending above $5,348.  Almost three quarters (72%) of enrollees whose total spending by all payers exceeds the catastrophic threshold receive Low Income Support (a.k.a. Extra Help) and therefore pay far less than $2,000.

None of this is to diminish the impact of capping Part D OOP costs, first at $3,200 and then at $2,000. Well more than a million Part D enrollees per year do pay more than $2,000, and their ranks would rise over time. Each enrollee is at risk of joining their ranks at any time, over an average enrollment tenure of say 15 years. The absolute caps mean a lot to personal security, as did the ACA's ban on lifetime and annual caps on coverage in private health plans. 

But the fact remains that an exaggerated picture of Part D enrollees' current exposure is pervasive.

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Photo by Alex Green