For older adults in the United States, obtaining and paying for prescriptions can be a challenge. Although most Americans over age 65 are eligible for prescription drug coverage under the Medicare Part D, understanding and navigating the benefit can be difficult. The Center for Medicare and Medicaid Innovation (CMMI) recently launched a new payment model known as Part D Senior Savings (PDSS), which aims to reduce this complexity by offering enrollees with diabetes in participating plans a fixed co-payment of no more than $35 for a 30-day supply of insulin. In doing so, CMMI has also patched a long-running and little-known quirk in the structure of the Part D benefit in a way that could serve as a roadmap for future reforms.
What Makes Part D So Complex?
Cost-sharing Under Part D’s Defined Standard Benefit (click for full-size figure)
The Part D benefit has four phases. Each has different rules for how much of the total cost of a prescription the beneficiary must pay out of pocket. Under the Defined Standard Benefit (as of 2021), beneficiaries who do not qualify for low-income subsidies begin in the “Deductible” phase, where they are responsible for 100% of their first $445 of spending. They then transition to the “Initial Coverage” phase, where they pay 25% of total costs and the Part D plan pays the remaining 75%. After $4,130 of total spending, the beneficiary enters the “Coverage Gap” phase. They remain in the gap until reaching $6,550 of out-of-pocket spending. They then enter “Catastrophic Coverage,” where Medicare reinsurance covers 80% of total costs.
From the beneficiary’s perspective, the Initial Coverage and Gap phases are identical under the Defined Standard benefit, in that they continue to be responsible for 25% of total spending. Under the surface, however, there are important differences in how the benefit is administered.
Costs in the Coverage Gap
When Part D was first implemented, the Gap (also known as the “Donut Hole”) was aptly named. It was essentially a second deductible, where beneficiaries were responsible for the full cost of their medications. The Affordable Care Act (ACA) amended the Part D benefit to effectively eliminate the Gap from the beneficiary perspective over time—mandating the manufacturer discount on brand-name drugs and increasing plan liability amounts so that by 2020 the beneficiary’s responsibility aligns with the 25% level of the Initial Coverage phase.
Most Part D plans do not strictly adhere to the Standard benefit. Instead, they offer alternatives that are either actuarially equivalent or offer enhanced coverage at additional cost. Many such plans eliminate the deductible and offer a consistent, fixed co-payment for covered drugs through the initial coverage phase. However, these benefits tend to be far more limited once beneficiaries reach the Gap. For brand-name medications, under the Defined Standard benefit, the plan is only responsible for 5% of total spending. The remaining 70% is covered by a manufacturer discount. Unlike the Initial Coverage phase, however, most plans do not offer supplemental coverage in the Gap. This leaves beneficiaries responsible for a full 25% of the cost of their prescription. For the 3.3 million Medicare beneficiaries who use insulin on a regular basis, this can be a significant jump in out-of-pocket costs.
The Quirk in the Benefit
The key reason Part D plans do not offer supplemental coverage in the Gap is the way cost sharing is calculated. The manufacturer discount for brand-name medications in the Gap is calculated based on the beneficiary’s portion of total drug spending AFTER subtracting special benefits offered by the plan. Plans offering fixed co-payments in the Gap are taken into account first. This effectively shifts the responsibility for any costs above the co-payment from the manufacturer to the plan. This increased plan liability is further compounded because the 70% manufacturer discount is counted as out-of-pocket spending in determining when beneficiaries reach Catastrophic Coverage and Medicare reinsurance kicks in. In short, even plans with enhanced benefits have little incentive to offer more generous cost-sharing in the Gap.
How Part D Senior Savings Works
The PDSS model effectively corrects this oversight—at least for insulin. For eligible beneficiaries in participating plans, the 70% manufacturer discount will be applied before other cost-sharing is calculated. Beneficiaries will then face a consistent co-payment of no more than $35 for a 30-day supply. Plans will be responsible for the remainder of the cost.
Cost responsibilities in the coverage gap under different Part D scenarios for a $500 expenditure (click for full-size figure)
Consider the example presented above for prescription costs of $500. The first bar (Basic) shows the basic Part D benefit for a brand-name drug in the gap. The second (Enhanced 1) shows what happens if an Enhanced plan offers a $35 co-payment without PDSS. Under this approach, the manufacturer discount only applies to the $35 co-payment. Most of the total drug cost ($465) is shifted to the plan and the beneficiary only pays around $11. PDSS (shown in the last bar) allows plans to implement simpler fixed co-payments for Insulin without significantly increasing their own costs. This change will likely generate considerable savings for beneficiaries who use insulin with only modest changes for plans and manufacturers.
Next Steps for Senior Savings and Beyond
All of the major insulin manufacturers have agreed to participate in PDSS, and participating plans are available nationwide. However, we do not yet know how many insulin-using beneficiaries will actually enroll, nor how many of those were already enrolled in these plans before PDSS began. The model also appears primarily aimed at lowering out-of-pocket costs and improving beneficiary access for a life-saving medication that has received a great deal of attention in recent years for its high prices. This—by itself—is an important goal and may result in both health gains and future savings to the Medicare program.
What is less emphasized by the model is the overall price of insulin—which continues to increase year over year. Currently, manufacturers cover 70% of spending in the Gap and Medicare Reinsurance covers 80% of spending in the catastrophic phase. This remains unchanged in PDSS. Plans therefore have little additional incentive to negotiate. Prices will therefore likely continue to increase.
CMMI is also testing a second payment model known as Part D Payment Modernization. That model includes broader incentives for plans to reduce spending. However, it does not include the changes to the manufacturer discount being tested in the PDSS model. If PDSS is successful in reducing costs and improving adherence and outcomes, it could serve as a template for broader changes to the Part D benefit in the future.
Benjamin Silver
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