Medicare Part D: Prescription Drug Benefits

In 2003, President Bush signed the Medicare Modernization Act, putting into place a prescription drug benefit program for Medicare, a program originally designed to provide medical insurance for those sixty-five years of age and older.

Medicaid Part D offers an unusual set of subsidies with a "hole" in coverage:  below, Corrections depicts the total cost of drugs along with the out-of-pocket costs (oopc) in 2009 as a function of total cost of drugs (click to enlarge).  If Medicaid had no value as a plan, the oopc line would be a 45 degree line passing through the origin.  Because of the deductible, it does for the first $295 in prescription costs.  After that, individuals don't pay the full amount.  However, from $2700 to $6154, individuals again pay the complete marginal cost of coverage:  this is the "Medicaid Part D Gap."

Below, Corrections depicts the average and marginal subsidies for drug coverage:  the "gap" becomes more apparent here (click to enlarge).  Notice that the average "chases" the marginal, at an ever-slowing rate.  Average subsidies quickly approach the 75% subsidy (25% co-insurance) but only slowly approach the 95% subsidy after $6154.

The Affordable Care act mildly mitigates this gap, giving a $250 check to those who enter the gap.  Its longer-term solution, to be achieved by 2020, is to close the gap through the use of generic brand coverage, and a 50% drug manufacturer discount, among other solutions.