Doughnut Holes and Price Controls

In 2003 citizens of Canada, the United Kingdom, and France paid an average of 34-59 percent of what Americans paid for a similar market basket of pharmaceuticals. This paper explores some issues surrounding the infamous "doughnut hole" in the new Medicare drug benefit which leaves a considerable coverage gap. Specifically the authors examine whether the adoption of some mechanism to control pharmaceutical spending, such as price controls, would allow for the elimination of this coverage gap. They suggest that if the Medicare program were to pay comparable prices for pharmaceuticals, it would be possible to eliminate the "doughnut hole" in its prescription drug benefit and keep Medicare drug spending within the overall limits established by Congress. The authors conclude that this provides Congress with a clear choice: reduce the level of cost sharing and improve beneficiaries' access to pharmaceuticals, or allow the pharmaceutical industry to use the higher prices to fund research and development and to engage in other activities.