The Effect of H.R. 3200 on Medicare Part D Premiums

August 28, 2009

Today CBO released a letter on the changes in Medicare Part D premiums that would result from certain provisions of H.R. 3200, Americas Affordable Health Choices Act of 2009, as introduced on July 14. According to CBOs estimates, enacting those changes would lead to an average increase in premiums for Part D beneficiaries of about 5 percent in 2011, rising to about 20 percent in 2019. However, beneficiaries spending on prescription drugs apart from those premiums would fall, on average, as would their overall prescription drug spending (including both premiums and cost sharing). The net effect on drug spending would differ among beneficiaries depending on the amount of their purchases in a year. As with CBOs other estimates related to this bill, this analysis is preliminary and does not reflect any modifications or amendments made after July 14.

Under current law, the standard outpatient prescription drug benefit under Part D of Medicare has the following features: an annual deductible for which the beneficiary is responsible; a dollar range of coverage in which the beneficiary pays 25 percent of the cost of covered drugs; and a catastrophic threshold above which the beneficiary pays about 5 percent of the cost of covered drugs. In the gap between the end of the initial coverage range and the catastrophic thresholdcommonly referred to as the doughnut holebeneficiaries generally are liable for all of their drug costs. For their Part D insurance coverage, most enrollees pay premiums that finance about 25 percent of the cost of the coverage (on average); the federal government pays the remaining 75 percent. For low-income individuals, however, the federal government subsidizes a larger share of their prescription drug costs, including their premiums and their spending in the doughnut hole.

H.R. 3200 proposes several changes to the Medicare Part D program that would affect federal spending: creating a new rebate program, phasing out the doughnut hole, and requiring pharmaceutical manufacturers to provide beneficiaries who are not eligible for the low-income subsidy program a discount on their spending in the doughnut hole for covered brand-name drugs. CBO estimates that enacting the proposed changes would collectively save the federal government about $30 billion over the 20102019 period. CBO has not estimated the impact of each provision separately because their effects are so closely connected.

Those provisions would also increase beneficiaries premiums for two reasons. First, prescription drug plans would be covering some costs in the doughnut hole and above the catastrophic level that they are not required to cover under current lawand those higher insured costs would raise premiums. In return for those higher premiums, enrollees would receive greater protection against incurring high drug costs. The reduction in cost sharing would outweigh the increase in premiums, on average, because of the subsidies provided by the federal government, so beneficiaries total prescription drug spending would fall on average. The effect on total spending would vary among beneficiaries: Those who ended up purchasing a relatively small amount of drugs in a year would pay more in additional premiums than they would gain from lower cost sharing, while those who purchased a relatively large amount of drugs in a year would gain more from lower cost sharing than they would pay in higher premiums.

Second, the responses of pharmaceutical manufacturers to these provisions of the legislation would also increase Part D premiums. Drug manufacturers would probably charge higher prices for new drugs and lower the rebates they pay to prescription drug plans. Those responses would lead to an increase in beneficiaries premiums and an increase in beneficiaries payments for cost sharing.