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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.