How Much Time and Money Does the Medicare Drug Plan Waste? 

For Immediate Release:  July 25, 2006

Contact: Lynn Erskine, 202-293-5380 x115

Washington, DC: Millions of seniors and disabled Americans enrolled in Medicare Part D drug plans are discovering the "doughnut hole" -- the $2,850 gap placed into the plan in order to save the government money. However, this gap was only necessary because the plan's overall design added significant costs and complexity, according to a report by the Center for Economic and Policy Research.

"Waste in the Medicare Drug Benefit: Why the Doughnut Hole is Unnecessary,"  by economist Dean Baker, shows that the excess costs of the drug benefit plan are considerably larger than the size of the doughnut hole. 

The report notes:

  • If the drug benefit had been administered through the existing Medicare system, rather than through private insurers, the doughnut hole could be considerably smaller at no additional cost to the government.
  • If Medicare had been allowed to bargain directly with pharmaceutical companies -- as is done by the Veterans Administration and many countries -- the savings would be more than twice the size of the doughnut hole. This would allow for elimination of the doughnut hole, in addition to substantial savings for the federal and state governments.
  • The drug benefit plan also imposes costs on beneficiaries in the form of time spent choosing policy options. (The typical beneficiary spent more than 8 hours reviewing the competing plans, according to a survey by the Medicare Payment Advisory Council.) This cost is also imposed on health care providers and pharmacists as they counsel their patients. A conservative estimate of 1.5 hours per week in terms of physicians' time would amount to more than $1 billion a year.

"A full assessment of the cost of the Medicare drug plan should include these and other costs that have been imposed on providers due to its complexity. While providers may initially absorb many of these costs, over the long-term, they will be passed on to consumers," said Baker.

What is the doughnut hole? After an initial deductible, Medicare beneficiaries pay 25 percent of drug costs until they incur $2,250 in expenses for the year. At that point, the beneficiary is directly liable for all additional annual expenses until the costs exceed $5,100. Above that level, insurance will again provide benefits, paying 95 percent of additional expenses.

To read the report, click here.

The Center for Economic and Policy Research is an independent, nonpartisan think tank that promotes democratic debate on the most important economic and social issues affecting people's lives. CEPR's Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.