Closing the "Doughnut Hole" in the Medicare Prescription Drug Benefit

    • February 3, 2005

Researchers analyzed data on the costs of the 30 drugs with the highest total spending in the United States that also are sold in the United Kingdom, France and Canada. They then compared the current Medicare prescription drug benefit with an alternative plan, under which drug prices were reduced 45 percent. The analysis appears in the July 21, 2004 issue of Health Affairs as a Web exclusive. The analysis, "Doughnut Holes and Price Controls," was funded by the Commonwealth Fund and the Robert Wood Johnson Foundation.

Q: Is "doughnut hole" a technical term?

A: If you're inside the (Washington) Beltway, it's familiar—otherwise it might be new. It refers to the gap in Medicare coverage for prescription drugs. Medicare covers 75 percent of the first $2,250 spent on prescription drugs. After that, there is no coverage for prescription drugs until a beneficiary has spent more than $5,100, at which point Medicare will cover 95 percent of costs.

Q: What was the key finding here?

A: We looked at how much more the United States pays than other countries for drugs and found it pays about twice as much. Then we asked: If the U.S. matched the prices other countries paid, would the U.S. be able to increase the benefits for Medicare beneficiaries? We found that it would. You could fund full pharmaceutical benefits for Medicare if the United States paid the same prices for drugs as other countries do.

Q: You found that drug prices were much lower in France, the United Kingdom and Canada. Did you explore reasons for this? Could those countries? socialized medical systems have anything to do with it?

A: What these other countries have is a variety of price control mechanisms. They negotiate with the drug companies in bulk for all the drugs that will be used in that country. Some use regulatory power and while others use their huge bulk purchasing power to negotiate effectively.

Purchasers in the United States don't have regulatory power, nor do they have the bulk purchasing power. However, the departments of Veterans Affairs and Defense do great jobs of bulk purchasing. They're getting prices that are close to those of Canada and other industrialized countries.

Q: Why did you choose a 45 percent discount? Is that the minimum needed to close the "doughnut hole," or would a smaller discount do it?

A: According to our model, the 45 percent discount on drug prices would mean that Medicare's costs would be exactly the same as they would be under the current scenario. The doughnut hole was originally developed to hold Medicare drug spending below $400 billion over a 10-year period. We felt constrained to stay within that limit. If the discount were smaller, there would not be equivalent expenditures and Medicare would be paying more.

However, it turns out that the 45 percent discount also is within the range of what other countries spend on pharmaceuticals.

Q: Wouldn't people tend to buy more drugs if they cost less?

A: We estimated an increase in utilization of about 15 percent would come with the discount. This increase would especially important for people with chronic conditions who feel the pain of high drug costs and high cost sharing. If you can eliminate the cost sharing, these people will better be able to afford drugs—some of which they couldn't afford before—and will buy more of them.

Q: How can Medicare lower drug prices?

A: The key is for Congress to say to the pharmaceutical companies, "This is how much Medicare is willing to pay." We can get there in a number of ways. We could use the marketplace or use regulation, but the key is that the international drug prices are a standard. Our paper sets a benchmark that is clearly feasible because it's been achieved in other countries.

Q: An introductory paragraph to your study mentioned an April 2004 survey that found only 40 percent of seniors know about the new drug coverage under Medicare. Does that worry you?

A: I think most people didn't know about the drug benefit because it's not going to be implemented until 2006. Once the benefit becomes available, most beneficiaries will be aware of it and either will be aware of the limitations or will understand, if we can eliminate the hole, that they have fairly generous coverage.