Midterm feedback:
For the most part people did well. Grades ranged from a 85% (B) to 97% (A).
The biggest problems seemed to come from question 1 and question 2. I was impressed with your
handling of Q3 on whether or not the donut hole should be closed. Lou also mentioned that you all did
very well on Q4.
Below are some specific items and pointers that could be relevant for the final exam.
1) People who cited literature for both the theory and the empirics tended to do well on this
question.
 For health insurance, some people who did cite empirics did still lose points because the
papers cited and/or the answer did not take into account the fact that the correlation
between health and health insurance is NOT enough to show that health insurance has
a causal impact on health. You really need exogenous variation in health insurance
status (such as the RAND experiment, Oregon experiment, or others) to answer this
question.
2) The question was “What did and what does Medicare do?” not “What is Medicare”. So if you
spent a substantial amount of time/space describing the Medicare program, you likely didn’t do
as well since you didn’t have space/time to talk about the effects of the program. I was also
looking for answers concerning the historical impacts (ie when introduced) vs. today.
 Some people brought up the introduction of the exchanges or Medicaid expansions as
part of Obamacare. However, there was little to no connection made to these policy
changes and Medicare in your answers. (People on Medicare would look for Medigap
plans, not exchange plans, if they wanted additional insurance. Otherwise they would
pay for double-coverage, not just supplemental coverage filling in the gaps (deductibles
and co-pays) in Medicare.) Obamacare IS relevant because of changing Medicare policy
on payments on hospital readmission, ACO formation, closing the donut hole – but few
mentioned these issues when discussing Obamacare in this answer.
 A few people brought up adverse selection – but did not make it clear as to why that is
relevant in the Medicare market. It is – when talking about FFS vs. HMO Medicare (Part
C), but if you only mentioned it in terms of the exchanges or employer sponsored
insurance without tying it to Medicare policy, you did not get credit for it.
Some sample answers your classmates gave are below.
Question 1:
The use of health care is one of many inputs in the Grossman model that produces
health . In the model, individuals use health care for the consumption benefits (i.e. utility) and
production benefits (i.e. higher earnings) that good health allows. However, this viewpoint is not
shared by everyone. The main criticism seems to stem from the positive relation between health
and health care in Grossman’s model. A review of empirical literature by Zweifel and Breyer led
them to conclude that the positive relation should be rejected2. One study of various determinants
of mortality in many countries indicated health care usage was positively related to mortality3. A
potential reason for this discrepancy could be due to differences in socioeconomic status. A
recent study concludes that the “optimal” path for an individual demanding health care is
actually a “health threshold” where healthy individuals actually demand less health care4.
1
2. Exercise
Exercise is also an investment into our health production. Choosing to go to the gym is a decision
made weighing the opportunity cost of time with the investment exercise contributes to health production.
This increased health provides immediate utility and is also an investment in productivity by lengthening
life and potentially increasing future wages. Research has found commitment contracts to be a useful
behavioral economics tool to increase exercise frequency or intensity2. By facilitating financial penalties
when fitness goals are not met, commitment contracts can help motive individuals to reduce intangible
health risks and invest in long-term health production. Successful public health interventions should
continue to target people’s “dynamic inconsistency” when wanting to do something in the future and then
not doing it when the moment comes3.
2. Exercise
While for some people exercise caries inherent utility (one might simply enjoy the act of running), it also
serves as a behavioral time investment to improve health. From theoretical models, time spent exercising
will be optimally set when the returns from the marginal cost (e.g. wages) equal the marginal health
benefits experienced (1). Empirical evidence additionally demonstrates that time invested in exercise lead
to returns in health outcomes such as the reduction of chronic diseases, mental illness (4). However,
unlike theoretical predictions in the human capital model, exercise is not currently consumed at a level in
America which would optimally impact health (5).
3. Age
4. Health insurance
In economic theory, health insurance does not affect health. Health insurance increases the
utility of a risk-averse person by giving them their expected wealth (if the insurance is
actuarially fair) given the risk of health shocks and expected health care expenses. In reality,
with expensive health care treatments, having health insurance may be essential for obtaining
those treatments unless a person has substantial wealth to pay for them out-of-pocket, so by
influencing access to health-enhancing and even life-saving treatments, health insurance can
have an effect on health in specific situations. In the RAND HIE, participants were enrolled in
insurance options with different levels of cost-sharing, and the different groups had similar
health outcomes. There were a few benefits for the poorest participants who were enrolled
in the free plan with zero cost-sharing suggesting that insurance may affect health in certain
contexts when it truly eliminates financial barriers to access as was hypothetically described
above.
What did, and does, Medicare do? (~ 1000 words) Bring in reading from class (theory and empirical
papers) as well as additional literature to bolster your argument.
Medicare is arguably the single most important institution in the United States (US) health care sector.
In 2015, Medicare will insure approximately 55.2 million Americans, more than one-sixth of Americans,
including 46.1 million elderly (aged 65+) enrollees and 9.1 million non-elderly disabled enrollees
representing (CMS 2014). Medicare spending totaled $572.5 billion in 2012, which made up 20.5% of
national health expenditures and 3.5% of GDP (CMS 2014). In the fifty years since it was enacted in
1965, Medicare has grown enormously to reach its current size, and, in addition, Medicare’s function
has substantially grown and evolved from its initial role.
Initially, Medicare was a social security extension for the elderly aged 65+, whom constituted 19 million
individuals at the time Medicare was implemented in 1966 (CMS 2005) when the US population was
196.6 million. A social health insurance program for the elderly has a strong behavioral economics
rationale: people are known to overly discount the future (Rice 2013), and therefore insufficiently save
for old age, so Medicare makes people smooth their consumption by requiring them to finance it over
their lifetimes by payroll tax contributions (the Part A benefit). In addition, there were the practical
realities that the elderly who were no longer working would not be eligible for employer-sponsored
insurance and did not have the income to afford private health insurance in most cases. There was no
prohibition of risk-based rating of insurance in the 1960s, so available insurance for the elderly would
have reflected their high risk of illness and been very expensive. With those forces favoring it,
Medicare’s initial implementation increased health insurance among the elderly by 75% points
(Finkelstein 2007) and soon would cover nearly all elderly, crowding out the private insurance market.
Medicare’s benefits initially included Part A for hospital care and Part B for outpatient care. Part A had
initial cost-sharing of a deductible for the first 60 days in the hospital equal to the cost of one day’s
hospital stay and daily coinsurance for stays over 60 days. Part B was voluntary and 50% funded by a
premium with initial cost-sharing of a $50 deductible and 20% coinsurance. Crucial to early spending
trends, Medicare initially paid all costs it deemed “reasonable and necessary”. Eligibility was extended
in 1972 to non-elderly persons who were disabled or had end-stage renal disease with an initial
enrollment of two million of those persons
Econometric analyses in the past decade (Finkelstein and McKnight 2008; Finkelstein 2007) estimated
Medicare’s initial effects on key outcomes of interest. Medicare reduced financial risk of medical
expenses: Finkelstein and McKnight estimated that the elderly in the top quartile of the out-of-pocket
spending distribution had a 40% reduction in out-of-pocket spending during 1966-1970. They also
estimated that the reduction in risk of medical expenses generated welfare gains corresponding to twofifths of the costs of Medicare. Medicare increased hospital costs though 37% for all ages during 19651970 due to roughly equal contributions of the introduction of new hospitals and the growth of existing
hospitals (Finkelstein 2007). The cost increases are much greater than the 5.6% increase in hospital
spending predicted by the price elasticities found in the RAND Health Insurance Experiment (Finkelstein
2007), which indicates that the introduction of Medicare was a fundamental market-wide change in the
hospital market. For health outcomes, Finkelstein and McKnight did not find any Medicare effect on
elderly mortality in the first ten years of its existence. The initial Medicare outcomes, therefore, give an
impression of high costs for modest benefits, although it should be noted that the no effect on mortality
does not necessarily mean no quality of life or other benefits.
In the 1970s, Medicare’s initial large spending growth continued at over 10% per year (Boccuti and
Moon 2003). The spending growth prompted substantial payment changes to Medicare in the 1980s
(CMS 2005). In 1983, Medicare initiated the hospital prospective payment system (PPS) for acute illness
hospital stays meaning hospitals would be paid based on a statutory fee schedule of diagnosis-related
groups (DRGs) replacing cost-basis payment replacing the “reasonable and necessary” costs. In 1989,
physician payment based on charges was also replaced by the resource-based relative value scale
(RBRVS) fee schedule. The adoption of the statutory PPS and RBRVS fee schedules changed Medicare
from being a price-taker to being a price-setter. Private payers subsequently incorporated the fee
schedules to determine the relative prices between services, although generally with multipliers to
produce higher prices than Medicare’s relatively modest payments.
Since the 1980s there have been two additional major changes to Medicare, Medicare Advantage and
Medicare Part D, which were each substantively modified by the Affordable Care Act. In 1997, Medicare
Advantage (MA) was established, a system of privately administered Medicare health plans, mostly
Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs). MA
enrollment was 15.7 million, 30% of Medicare enrollees, in 2014, which is a 41% increase in enrollment
from 2010 (Kaiser Family Foundation 2014a). The increased enrollment is despite MA payment
reductions in the Affordable Care Act designed to bring MA costs in line with the costs of the traditional
fee-for-service Medicare program. As of 2013, 54% of counties had completed their MA payment cuts,
and another 24% of counties will complete payment cuts in 2015 (Kaiser Family Foundation 2014b). In
addition, monthly premiums decreased in recent years from $44 on average in 2010 to $35 in 2014.
The other major Medicare change was the enactment in 2003 of Medicare Part D private health plan
coverage for prescription drug insurance coverage. Medicare Part D now accounted for 11% of
Medicare spending in 2013 (Kaiser Family Foundation 2014c). Medicare Part D has been generally
positively received, except for the unpopular “doughnut hole” coverage gap. The coverage gap will be
closed by the Affordable Care Act in 2020.
Medicare has expanded substantially and undergone major reforms in its first half century, which
incorporate multiple approaches including price-setting and private health plans to more cost-effectively
provide an increasing range of health benefits.
References
Boccuti and Moon 2003. Comparing Medicare And Private Insurers: Growth Rates In Spending Over
Three Decades. http://content.healthaffairs.org/content/22/2/230.full.pdf+html
CMS 2005. Key Milestones in Medicare and Medicaid History, Selected Years: 1965-2003.
https://www.cms.gov/Research-Statistics-Data-andSystems/Research/HealthCareFinancingReview/downloads/05-06Winpg1.pdf
CMS 2014. CMS Fast Facts. http://www.cms.gov/Research-Statistics-Data-and-Systems/StatisticsTrends-and-Reports/CMS-Fast-Facts/
Finkelstein 2007: THE AGGREGATE EFFECTS OF HEALTH INSURANCE: EVIDENCE FROM THE
INTRODUCTION OF MEDICARE
Finkelstein and McKnight 2008. What did Medicare do? The initial impact of Medicare on mortality and
out of pocket medical spending.
Kaiser Family Foundation 2014a. Medicare Advantage 2014 Spotlight: Enrollment Market Update
http://kff.org/medicare/issue-brief/medicare-advantage-2014-spotlight-enrollment-market-update/
Kaiser Family Foundation 2014b. Medicare Advantage: Take Another Look
http://kff.org/medicare/perspective/medicare-advantage-take-another-look/
Kaiser Family Foundation 2014c. The Facts on Medicare Spending and Financing.
http://kff.org/medicare/fact-sheet/medicare-spending-and-financing-fact-sheet/
1. What did, and does, Medicare do? (~ 1000 words) Bring in reading from class (theory and empirical papers) as
well as additional literature to bolster your argument.
Medicare is a health insurance program offered by the United States federal government
for citizens age 65 and older or for persons with certain disease states. Medicare was created in
1965 to provide health insurance to people would have high health risk or increased health care
demand, who would otherwise be rejected by private health insurances or pay considerably
more for their health insurance plans. The creation of Medicare has had a phenomenal impact
on health and health care in the United States, and the purpose of this essay is to define and
understand its impact.
Perhaps the most notable and direct consequence of the creation of Medicare is that it
provided health insurance to a significant portion of the uninsured and high-risk population in
the United States. As expected from the outcomes of the Rand Health Insurance Experiment
(HIE), utilization in health care in this population greatly increases due to the decrease in outof-pocket costs for patients1. Additionally, as predicted from the HIE, outcomes did not
significantly improve in this population despite the huge increase in health care utilization1.
This was observed by Finkelstein and McKnight, who state that despite a 75% increase in
coverage for this population and 40% decline in out-of-pocket payments, mortality rates did not
significantly change compared to comparative populations in the first 10 years2. Instead, the
main outcomes of Medicare were an increase in the number of hospitals, admissions, and visits
to physicians3. The increased capital from Medicare lead to an expanded market for health care,
meaning there were now more people that could be hospitalized and receive treatment3. As a
result, there was more money to go into medical research, leading to the development of new
pharmaceuticals and health technologies3. Medicare helped revolutionize health care delivery
in the United States3 and around the world thanks to the amount of money it was able to devote
to the health care industry. Additionally, there are some improved patient-centered outcomes
observed with Medicare. We can rationalize that rather than improving length of life, Medicare
had an impact on improving quality of life, which is seen in the increase in the number of
elective surgeries. We also know that there was increased utilization in health care, which may
not have translated to increasing the length of life, but could have some impact on quality of
life, though there is no data to support this claim4. Nonetheless, the overall effect of the
implementation of Medicare was not an improvement in the mortality rate of the elderly, but
revolutionizing the health care market in the United States by providing capital for more
hospitals, research and development, health technologies and other health-related industries.
However, those effects were observed and documented after Medicare’s implementation
in 1965 with most of the data analyzed going to 1975. How does Medicare function now, after
multiple reforms and new implementations, such as Medicare Part D? Despite numerous
payment reforms, such as the Omnibus Budget Reconciliation Act of 1989 which drastically
changed how Medicare would pay physicians, Medicare is still highly inefficient in how its
payments translate to patient outcomes. Skinner et al. suggests that up to 20% of Medicare’s
expenditures are inefficient4, meaning that despite numerous reforms, there is still considerable
waste in the Medicare system. However, there is some evidence that Medicare helps reduce
mortality when compared to other forms of health coverage, at least in severely ill-patients who
present to the emergency room5. When comparing similar populations, Card et al. found that
there was a 20% decrease in the death rate among Medicare enrollees than younger patients
with other forms of payment (including no health insurance). It could be argued that this
would be true for any health insurance when there is a population without health insurance,
but it stands to show that having Medicare as a universal coverage helps reduce mortality
overall. Medicare Part D also had a considerable impact, increasing medication utilization by
70% though there were no observed improvements in health outcomes6. Moreover, Medicare
Part D lowered the average costs associated with pharmaceuticals for Medicare enrollees 7.
However, there are other effects of Medicare beyond those observed in the Medicare
population. In fact, as Medicare continues to exist in the United States, it will have a
considerable impact on the private health insurance market for people who are not eligible for
Medicare.
One of the most notable effects of Medicare is that it became the primary health
insurance plan for high-risk people or people prone to high health care demand. By providing
coverage to these people, this means that the pool of people seeking private health insurance
drastically improved. What Medicare effectively did in 1965 is drastically reduce the amount of
high-risk people seeking health insurance, thus leaving a low-risk population seeking private
health insurance. According to the Rothschild and Stiglitz model, the equilibrium with a
heterogeneous population before 1965 offered a less complete insurance to low-risk people due
to the presence of high-risk people in the market. With Medicare removing this population, the
equilibrium shifted since the population was more homogenously low-risk, or rather lower risk,
meaning a more favorable, or complete, insurance could be offered. With the equilibrium
shifting down to reflect this change, the private health insurance market was able to capitalize
by offering better insurance plans for its enrollees. This meant that more people would be
incentivized to purchase health insurance since it met their needs better. And this effect has
continued to this day, especially with the rising demand in health care and the growing elderly
population. Additionally, as mentioned before, Medicare helped revolutionize the health care
industry in America, which lead to more hospitals, physicians, pharmaceuticals, and health
technologies3, which, while helpful to the Medicare population, would also be used to help
improve health for non-Medicare populations. It could be argued that Medicare had a more
drastic impact and continues to have a drastic impact on improving the health and health care
of non-Medicare enrollees in the private health insurance market due to the indirect
consequences of Medicare.
Overall, we have found that Medicare has had and continues to have a significant
impact on health and health insurance in the United States. Medicare drastically increased the
amount of elderly and high-risk people covered, which did not translate into better health
outcomes but rather, lead to increased health capital in the United States. Medicare has also
had a substantial impact on the non-Medicare population and private health insurance market
by removing high-risk populations and improving coverage options and enrollment for these
people.
1. RAND. The Health Insurance Experiment A Classic RAND Study Speaks to the Current
Health Care Reform Debate. RAND Health. RAND, 2006.
2. Finkelstein A, McKnight R. What Did Medicare Do (And Was It Worth It)?. NBER Working
Paper No. 11609. Sep 2005.
3. Finkelstein A. The Aggregate Effects of Health Insurance: Evidence from the Introduction of
Medicare. NBER Working Paper No. 11619. Sep 2005.
4. Skinner J, Fisher E, Wennberg JE. The Efficiency of Medicare. Analyses in the Economics of
Aging: University of Chicago Press. August 2005.
5. Card D, Dobkin C, Maestas N. Does Medicare Save Lives? NBER Working Paper No. 13668.
Nov 2007.
6. Kaestner R, Khan N. Medicare Part D and its Effect on the Use of Prescription Drugs, Use of
Other Health Care Services and Health of the Elderly. NBER Working Paper No. 16011. May
2010.
7. Duggan M, Morton FS. The Effect of Medicare Part D on Pharmaceutical Prices and
Utilization. NBER Working Paper No. 13917. Apr 2008.
3.
Discuss the economic arguments, both for and against, closing the Part D coverage gap
(aka donut hole). Which should dominate – ie should we close the donut hole as
schedule in 2020? (~1000 words)
The Medicare Part D coverage gap, or the Medicare donut hole, is the gap between the
initial coverage limit and the catastrophic-coverage threshold in Medicare Part D
prescription-drug program administered by the United States federal government. The
donut hole lies between $2,850 and $6,425, in which patients have to pay all costs out of
pocket. Anything above $6,425, Medicare covers ninety-five percent of it and the
beneficiary pays only five percent. Between the drug cost of $310 and $2,850, Medicare
covers about ninety-five percent of the cost. Lastly, anything from $0-$310 is the
deductible out of pocket. Now with the passage of the Affordable Care Act (ACA),
individuals who fall within the donut hole will receive a $250 rebate within three months
of reaching the coverage gap. According to the Medicare website, they hope that this plan
will get rid of the donut hole by 2020.
According to the United States Department of Health and Human Services, there is more
than a quarter of Part D recipients that stop following their prescribed regimen of drugs
when they fall within the donut hole. According to Christianne Roumie, many patients
who fall in the donut hole try to save money by cutting back on their medications and
thereby increasing their risk for that particular disease state.3 The Briesacher et Al. study
showed that the cost of medication is an important predictor of cost-related
nonadherence, regardless of whether the patient has insurance or not.4 Medication
adherence is divided into 2 concepts: adherence and persistence. Adherence refers to the
use of the medication as intended, and persistence refers to the maintenance of the
medication over time. Medication adherence and persistence are growing concerns to
clinicians and third-party payers because of the mounting evidence that medication
nonadherence is associated with worse clinical outcomes and higher costs of care,
especially among those with cardiovascular disease (highest rate of death among
diseases).
Also, pharmaceutical companies may not develop drugs that would follow in that price
range because the demand is not very high. This could potentially hinder the innovation
of new drugs, especially those that are important for chronic diseases. In fact, many
pharmaceutical companies have agreed to pay $80 billion over the next 10 years to help
finance the donut hole reform. Pharmaceutical companies are offering a fifty percent
discount within the donut hole as well because they believe that the drug usage overall
will help create more income.
Lastly, there are many plan choices in Medicare Part D and can ultimately make choices
which are inconsistent with optimization under full information. According to Abaluck
and Gruber, the percentage of choosing the donut hole coverage is virtually flat
throughout the spending distribution at about ten percent. In one of the graphs, the
investigators show that individuals in between the tenth and eighty-fifth percentile of
spending distribution choose the donut hole coverage. Even if the individuals are willing
to pay extra for protection provided by the donut hole coverage, it is hard to rationalize
that all people use the same proportion of individuals from the tenth percentile to the
eighty-fifth percentile choose the donut hole coverage. Also, they estimated that the share
of the sample with some coverage in the donut hole gap would fall by forty percent if
these inconsistencies were corrected. Abaluck and Gruber explain the three major
problems with the donut hole and Medicare Part D in general. The first thing they found
was that the elderly place more weight on plan premiums than they do on the expected
out of pocket costs that they will incur under the plan. Therefore, they do not really weigh
all the options and also are not that well informed about their decisions. Secondly, they
found that Medicare Part D beneficiaries appear to value plan financial characteristics
more than any impacts on their own financial risk or expenses. The investigators found
that individuals mostly care about what benefits they will receive, but do not really care
about the financial burden or implications bestowed upon them if they choose those
plans. Lastly, they found that consumers substantially under-value variance reducing
aspects of alternative plans.
As for arguments against keeping the donut hole, the donut hole thresholds were designed
encourage seniors to be wise about their pharmaceutical spending, while giving them
insurance against catastrophic drug bills. About $586 billion dollars are spent on
Medicare every year (at least in 2013 it was), and also the American economy is in debt.
The premise of the donut hole from the government’s standpoint is to lower Medicare
spending and also wasteful spending. With the donut hole, Medicare Part D has spent
thirty percent less money than the Congressional Budget Office originally projected it
would.
Also, Medicare Part D covers most of the drugs and almost all of the generic drugs. From
personal experience, insurance companies will not pay extra money for the brand name
drug when the generic is available because of wasteful spending. The only exception is
when we deal with patients that have ADHD or on anti-psychotic medications. According
to the Joyce et al. study on “Digesting the Donut hole,” more than ninety percent of the
drugs are covered by Medicare Part D.5 This is because Medicare Part D covers the
generic of all major disease states, such as hypertension, diabetes, etc. However the study
did find that coverage gaps do disrupt the use of prescription drugs among seniors with
diabetes. This is because the management of diabetes is very difficult and time
consuming. Patients on diabetes medication are on many different medications and also
have to test their blood sugar daily (sometimes before every meal). However they found
that the decline in usage of diabetes medication was modest and concentrated among
higher cost, brand-name medications.
Lastly, this study found that lower adherence to medications is not exactly associated
with increases in medical service use. The investigators state that “poor adherence to
medications can come about through three different behavioral pathways: reduced
initiation of drug therapies, worse adherence among, worse adherence among existing
users, or more frequent discontinuation. They measured every single group, including a
control groups with the same categories, and found that there was no correlation for poor
adherence among those in the donut hole and those that are not.
3. Discuss the economic arguments, both for and against, closing the Part D coverage gap (aka
donut hole). Which should dominate – ie should we close the donut hole as schedule in
2020? (~1000 words)
Medicare was established in 1965 as a way to provide universal health insurance
coverage to the elderly and disabled. The most recent subset of it was Part D, which was created
in 2006 and offers beneficiaries the options of enrolling in drug plans administered by
commercial plans1,2. Once enrolled, there is a deductible that is paid, followed by a 25%
coinsurance rate until a total of $2930 on prescription drugs is covered in a given year.
Afterwards, the enrollee must pay the full cost of medications in this coverage gap (i.e. donut
hole) until a “catastrophic” limit of $6658 in total drug spending is reached at which point
coverage resumes1. The donut hole is being phased out under the Patient Protection and
Affordable Care Act but this break in coverage will exist until 2020. One study estimates that 68% of enrollees repeatedly (i.e. 2 consecutive years) enter the donut hole while 7-10% entered in
at least one year3. Those who entered the donut hole were 5 to 8 times more likely to enter
catastrophic coverage, and those who repeatedly entered had 6 to 8 times as much medication
costs as those who never entered3.
Advocates for closing the donut hole point to substantial reductions in Part A and B
spending with the introduction of Part D and reason that the reduction in medical service use
would be even greater if enrollees did not cycle in and out of medication coverage4,5. It has also
been shown that the donut hole is associated with reduced adherence to drug therapies5,6,
although the adverse health effects as a result of lower adherence is not conclusive. At a broader
level, 20% of enrollees in the donut hole were found to discontinue, reduce, or switch
medications7. One of the characteristics of the enrollees who reach the donut hole is that they
have multiple chronic illnesses, especially diabetes mellitus5. Since diabetes is associated with
multiple comorbidities and cardiovascular effects, disrupting steady medication treatment could
be harmful.
However, not everyone is in favor of closing the donut hole. Some argue that the adverse
effects of the donut hole are overstated as research suggests that behavior responses may mitigate
potential short term health effects1. It may also provide economic incentive for patients to use
generic medications if available as many retail pharmacies now offer $4 generics and forces
enrollees to take a closer look at choosing more generous/optimal plans the following year1.
Moral hazard is another issue that is brought up as the donut hole was created as a cost-sharing
measure against overspending and utilization8. Without the donut hole, enrollees have less of a
reason to limit their spending and the RAND Health Insurance Experiment would likely argue
this as well. It has been estimated that from 2010 to 2019, as the cost-sharing scheme changes in
favor of enrollees, there will be an extra $20 billion in drug spending as patients have less of an
incentive to switch from brand to generic and more of an incentive to spend through the donut
hole as quickly as possible to reach catastrophic coverage8.
I believe both sides have merit in their argument. If long term health outcomes could be
perfectly measured, I have no doubt that breaks in medication adherence or complete
discontinuation lead to adverse effects in health. Whether the consequences can be reversed once
treatment begins again is questionable. It is not surprising that those who enter the donut hole are
in general sicker2 and have more chronic illnesses as mentioned above. It does not make sense
that those who need it most should have to make the hard decisions about whether or not they
should get their medicine.
On the other hand, I also do believe if the donut hole is eliminated completely, similar
results as the RAND HIE will occur with an uptake in healthcare utilization and spending.
Considering the donut hole was created by actuaries to find optimal price points and was not
determined arbitrarily, it seems to be a fair system. In the end, I would argue for keeping the
donut hole with some minor tweaks. One thing that could be done is to increase the coverage
(e.g. up to $3500) that makes mathematical sense after looking at data. Similar to high
readmissions, a penalty could be imposed on enrollees who are “repeat” offenders (i.e.
consecutive years) as it may encourage patients to use more preventive care services, eat
healthier, etc.
References
1. Joyce GF, Zissimopoulos J, Goldman DP. Digesting the donut hole. J Health Econ
2013;32(6):1345-1355.
2. Riley GF, Levy JM, Montgomery MA. Adverse selection in the Medicare Prescription Drug
Program. Health Affairs 2009;28(6):1826-1837.
3. Roblin DW, Maciejewski ML. Repeat experience with the doughnut hole in Medicare Part D.
Med Care 2011;49:436-442.
4. McWilliams JM, Zaslavsky AM, Huskamp HA. Implementation of Medicare Part D and
nondrug medical spending for elderly adults with limited prior drug coverage. JAMA
2011;306(4):402-409.
5. Zhang Y, Donohue JM, Newhouse JP, Lave JR. The effects of the coverage gap on drug
spending: a closer look at Medicare Part D. Health Affairs 2009;28(2):317-325.
6. Polinski JM, Donohue JM, Kilabuk E, Shrank WH. Medicare Part D’s effect on the underand overuse of medications: a systematic review. J Am Geriatr Soc 2011;59(10):1922-1933.
7. Sipkoff M. Everybody wants to close the doughnut hole. Manag Care 2009;18(11):17-18.
8. Roy A. Why closing Medicare’s ‘donut hole’ is a terrible idea.
http://www.forbes.com/sites/theapothecary/2012/05/23/why-closing-medicares-donut-holeis-a-terrible-idea/ Published 2012. Accessed 2/8/2015.