## Drug Plan Decision V - Expense Used to Calculate the Donut Hole

It is not obvious what costs go into figuring when you have exhausted the first \$2250 of "expense" and enter the donut hole, where you pay it all, and the magic figure \$\$5100, after which you pay only 5% of the cost, so it is worth going over it in more detail. The "expense" is whatever your insurer charges for each particular drug. That varies by insurer, sometimes a lot. One insurer might charge \$200 a month for your particular mix, while another might charge \$225. You might think that that means the difference is only \$25 a month, and your portion only a fourth of that, or \$8. Unfortunately, the difference is a lot more than that.

With the \$200 charge you will last 11 1/4 months before you pay the full price. So that last month you will pay \$150 more than you have been paying. With \$250 charge you last only 10 months, and get hit with the full charge for 2 full months. And that is \$500! On the government web site that is factored in to calculating the annual cost, but you will have to dig to find the actual charges used by the insurer. That is shown at the bottom of the detail cost page, and only when you click on "show detail".

Just to repeat, the charges used in these calculation are NOT the "you will pay" numbers on the pharmacy list page, and NOT what you have been paying before January 1.

## Drug Plan Decison IV - Donut Hole and Discussion

In this exchange, Mike Pennachi and Chuck Cooper discuss Medicare part D, the donut hole, and some guesses at future complications. Medicare and the private insurers pick up part of the cost up to \$2250 annually, and most of the cost above \$5100, but nothing in between, the gap called the "donut hole". This can complicate the choices for someone with drug expenses in the gap.

Mike: I went through the Medicare planning process. The bottom line is that it looks like my estimated annual out-of-pocket expenses is \$2,601.00. The Medicare planner was 2,847.00.
I went about this by listing my monthly drug costs and figuring how many months I would be under the plan (\$2250.00) and how many months I would be carrying the whole amount. It came out that I would be covered for 8 months of co-pays and 4 months without co-pays. I added in the monthly premiums for all 12 months plus 4 months at the full cost of the drugs.

It would help if the planner showed the transition point so that people would know when they reached the donut hole. In other words, it would be helpful to know that for X number of months my monthly costs will be Y and then they will jump to Z for the rest of the year.
This of course is a moving target since the drug costs will change and so might the number and type of drugs one will take in a year.

After all is said and done, I will save about \$775.00 per year under this program. The drug companies could do the same thing for me by cutting their costs by 23%. I'm sure there are lots of holes in my logic, but hey, what can you expect from a Folk Artist.

Chuck: No, I think your logic is right on. The donut hole of course will not affect the decision for anyone who does not already have some form of drug coverage, simply because something is better than nothing, even if you are back to nothing at \$2250. But if you run over \$2250 retail cost, you won't be able to figure your cost exactly. The run over will usually be in the middle of a month, so you will pay something different three months running. The web site is presumed to calculate this exactly, so it's what we have to rely on. The donut hole is also very important if you have drug coverage with an employer or a medigap policy. Even if Part D is better than your medigap cover for the first \$2250, right now no medigap coverage cuts off at that point, so depending on your expense level, overall the medigap could be better since it continues to share the cost above the \$2250 cut off of Part D.

Same with employer retiree drug coverage. Employers who continue to provide drug coverage equal to or better than Part D will receive a federal subsidy, so you would guess that employer coverage is more likely to last, and not be revised to stop at the donut hole, than will the medigap policies. After the end of this year, Medigap insurers can no long issue policies that include drug coverage, although the policies already in force can continue. But once drug coverage is no longer helpful in selling medigap policies, you would expect insurers to cut back on outstanding coverage at renewal. That is going to be a tough decision, to stay with a medigap drug cover, but I would still do it if I was in the donut hole and the payments over the whole range were significantly better than Part D. Even if there is a late join penalty, you can switch to Part D when your Medigap cover goes south. Of course, you also have to consider what happens after \$5100. There medigap cover will probably not be as good as the generous Part D.

Mike: Do you think that with so many drug plans that some of them might go the way of the HMOs? It seems to me that it takes a "critical mass" to make these programs viable. Could there be a possibility of several companies backing out after a year or two? I think this should go into the selection process as well. Anyone for a crystal ball?

Another issue you might want to discuss is where the money from the Feds is going. Let's say that they are contributing 70 percent of the cost. The cost of what? Does it go to offset the "real" cost of the premium. If I pay \$30.00 per month, does Medicare pay the provider \$70.00? I know they are not paying it to the drug companies, or are they.

Chuck: Most of the players, and particularly the national ones, are already very large. Beyond a certain point it is doubtful if there is much in the way of economies of scale. The federal subsidy is stuctured to pay some to subsidize the basic coverage, to pay more for sicker patients and still more if the claims significantly exceed what the insurer expected. The carriers say that the government has pretty much eliminated the risk of significant financial loss, at least in the early years. I don't think you will see many insurers getting out very soon. The risk is more that insurers that are low-balling will raise premiums or co-pays. That will depend on how the federal subsidy is structured, i.e. whether one that estimates losses way low can get more subsidy. I don't have a guess on that yet. And since you can't do anything to ameliorate that risk in your choice, it is probably best to ignore it, and go with one of the lower cost offers. I am going to pick an insurer I know is big, even if it is not exactly the cheapest, just for the reasons you are talking about.

## Drug Plan Decision III - Horseshoes and Hand Grenades

Does "close" count in chosing your drug plan? Yes. It is far more important to get started with a plan than it is to delay and dither trying to figure out the very cheapest approach. Why is that, when money is tight? Several important reasons.

First, between now and December 31, you can change your choice every day. Even after December 31, you get one more free change up until May 15. So choosing a plan now that looks right is not a final decision, so close is good enough.

Second, the plans themselves are changing, as the carriers are adjusting their plans, and can make changes once a week. When you look at your list of plans and see that some are 2 and 3 times as expensive as the least, you might wonder who on earth would pick the more expensive. Well, so do the carriers. Whenever the internet allows this kind of easy price comparison, prices either converge, or someone doesn't make any sales. So you are going to have to keep checking the web site up until December 31, and then periodically before May 15 of next year, and be ready to change plans.

Third, as I mentioned in Part II, below, on the Medicare web site the three costs under "What You'll Pay" may not add up to the "estimated annual cost". That is because of the "donut hole". The insurance you see only covers the first \$2250 of expense, and that means the RETAIL expense, not what you see there as the monthly under "What You Will Pay", and maybe not even what you are paying now. If you have one of the discount cards that predated this new program, you hopefully have been paying something less than the full retail. You can get the retail cost used in the calculation by clicking on "show details" down where the detail cost page shows what you pay in the donut hole. There is a surprising difference between plans. So you see what I mean by "close" being good enough. That's all you are going to get.

Be sure you click on "View Cost Details" before choosing. There you will see the mail order pharmacy annual cost, which can be a huge difference. For my set, the second plan had the annual cost at \$1439 in the list, but the mail order annual cost was only \$1000. I like getting mail anyway. Another point- mail order may save you more than you think because the lower retail cost defers the donut hole.

Fourth, some insurers are using agents and other marketing devices to push their plans. If an agent knocks on your door, or sponsors a seminar you attend, what do you think the odds are that the plan you are shown is the cheapest or the best for you? Put yourself in the shoes of the insurance company. If your plan is at the top of the list on the Medicare site, you are getting almost all the sign ups, so why pay agents? Of course, if you are down there charging twice as much, it might be a pretty good idea. You aren't going to see any business otherwise. So sign up now for what looks the best on the web site, and every time someone tries to sell you a different one, haul out yours and ask them if theirs is cheaper. If they say yes, count your fingers.

Incidentally, I did call the Medicare 800 number to ask about the totals that don't add up. There was a bit of a language barrier, but the first answer I think was "that annual total is only an estimate". What? To my suggestion that it was a pretty poor estimate, being out over 40%, she said "yes". Has anyone else mentioned this to you? She said "yes, many times". So here we have a fifth reason for going for "close". This lady had been told of the discrepancy "many times" but had never tried to find the answer. You will do better calling one or more of the insurance carriers with questions. Note that the plan name is a link, and clicking on it will get you to the 800 number of the carrier.

Speaking of trust, you may have noticed a new pix for this entry. I threw in the dog and the gray hair to appear more reliable.