The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Fix the BBA Allocation Flip and Medicare Cliff in Part D

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


Congress is back from its summer hiatus and there will be a flurry of activity the next few weeks.  With the elections just around the corner, there is a lot to get done before mid-October, when members will be returning home to campaign.  Citizens Against Government Waste (CAGW) hopes Congress will use this time to fix some of the harmful changes made to our healthcare system thanks to the Patient Protection and Affordable Care Act (ACA), or Obamacare.  Congress could start with repairing damage done to Medicare Part D that was further aggravated with a policy change implemented in the 2018 Bipartisan Budget Act (BBA).

These two problems, which are now coming to fruition, concern the reallocation of resources between mandatory drug discounts and insurance drug plans’ payments in the “donut hole.”  Secondly, Congress should fix a budget gimmick that, if not corrected, could cost some Medicare beneficiaries an additional $1,250 in January 2020.

Under Medicare Part D, drug overage decisions fall into four phases.  In addition to the monthly premium, which can vary depending on the plan a beneficiary chooses, there is also the annual deductible phase.  For 2018, deductibles can be no higher than $405 and the beneficiary pays all retail costs of the drug until the deductible is reached.  Next comes the initial coverage phase where the drug plan and beneficiary share costs at 75 and 25 percent respectively, up to $3,750.  This is where the third phase begins, called the coverage gap or the “donut hole.”  The beneficiary will stay in the “donut hole” until out-of-pocket spending reaches $5,000 in 2018.  From there, the beneficiary will move into the fourth, or catastrophic phase.   Once in this this phase, the beneficiary pays 5 percent for the rest of the year, with insurance picking up 15 percent and taxpayers paying 80 percent.  These cost phases are determined by the Medicare Part D statute and grow at the rate of beneficiary spending.

When Medicare Part D was originally created, drug discounts in the donut hole were negotiated between insurance drug plans and drug companies but the beneficiary was entirely responsible for the cost of their drugs.  Under ACA, starting in 2011, the “closing of the donut hole” began; the beneficiary’s payment for the cost of their drugs were to gradually be reduced while their insurance drug plan was mandated to cover a corresponding increase.  By 2020, insurance drug plans would cover 25 percent and beneficiaries would pay 25 percent for the drug costs in the donut hole, with the pharmaceutical manufacturers picking up the other half of the equation, providing a 50 percent discount for the drugs in the donut hole.  These are price controls.

With the passage of the BBA on February 9, 2018, the closing of the donut hole was accelerated to 2019 and ironically, a Republican-controlled Congress decided to double down on price controls.  Instead of the drug manufacturer being responsible for a 50 percent discount, the BBA required manufacturers to provide a 70 percent discount in the donut hole, while insurance drug plans’ responsibility was reduced to five percent.  Beneficiaries’ contributions remained at 25 percent.  This substantial change to Medicare Part D was done behind closed doors without public hearings or input.  If not reversed, this huge increase will cost pharmaceutical manufacturers $44.1 billion over ten years.

While some may be pleased with that the change, it will damage the Medicare Part D program while increasing costs for pharmaceutical manufacturers.  The price controls required in the Medicare Part D donut hole further distort the pharmaceutical marketplace and they will end up being paid for through increased costs in Medicare Part D and in private-sector health plans; with less research and development; through manufacturing lay-offs; or more likely, a combination of all the above.

Not long after the BBA was passed, the Centers for Medicare and Medicaid (CMS) expressed deep concern about these changes in the April 2, 2018 Medicare Advantage and Part D Rate Announcement and Call Letter, stating “We remain concerned about the impact these changes will have on drug costs under Part D in 2019 and future years, particularly as plan liability in the gap significantly decreases for brand name drugs beginning in 2019.  We remain committed to addressing the rising cost of prescription drugs for seniors and will closely monitor the effects of the changes enacted in the BBA of 2018 on drug utilization and the pace of progression of beneficiaries into the catastrophic phase of the benefit.”

In other words, because an insurer’s drug plan has a liability of only five percent, there is less of an incentive to negotiate aggressively with a pharmaceutical manufacturer for lower prices.

The other ill-advised change the ACA made to Medicare Part D was to artificially slow the rate of growth in the donut hole between 2014 to 2019.  This was done for budgetary reasons (required under the complex Budget Reconciliation Rules.)  But, come 2020, the piper must be paid.  As a result, the upper level for the donut hole will go from $5,100 in 2019 to $6,350 in 2020, a 24.5 percent increase.  This increase, called the “Medicare cliff,” will force beneficiaries to spend an additional $1,250 more before entering the catastrophic phase, where they will finally get substantial relief from taxpayers.

How Congress intends to fix these two problems remains a mystery, but there appears to be a bipartisan desire to do so in the House of Representatives.  On June 13, Inside Health Policy reported that separate letters, signed by 200 Republicans and 50 Democrats, were sent to House leadership, urging them to reverse the 50 to 70 percent allocation change made in the BBA and to fix the “Medicare cliff.” 

With regard to the 50 to 70 allocation change, Republicans wrote the “Congress should fairly rebalance the policy in the coverage gap so Medicare Part D continues to contain appropriate incentives to help control costs and the policy matches the federal savings originally intended in the BBA” while Democrats said the BBA change “could undermine coverage and ultimately hurt the long-term sustainability of the Medicare Part D program.”

The letters also called on leadership to immediately address the “Medicare cliff.”  To reduce the impact on beneficiaries, Republicans asked to “responsibly phase in the correction” while the Democrats provided no specific solution.

CAGW hopes Congress will be able to reverse the BBA allocation and fix the donut hole “Medicare cliff” immediately.  In an era when bipartisan collaboration to address public policy problems is exceedingly rare, these developments offer Congress a golden opportunity to implement a correction.

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