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Managing Medicare's Costs

Controlling Medicare's Part D costs (2 of 3)

Prescription drug costs pose a greater financial risk for many retirees than do medical expenses. This year, for example, Medicare’s catastrophic coverage limit for prescription drug costs is $4,550, not including plan premiums. That limit applies to any Part D plan, and after people reach the limit, they pay only 5% of their drug costs.

By comparison, out-of-pocket limits for medical costs are usually lower. In 2011, Medicare recommends that Advantage plans have a $3,400 out-of-pocket limit for medical costs, not including plan premiums. And while most Medigap plans do not have out-of-pocket limits (Plans K and L are the exceptions), they offer comprehensive coverage that will typically constrain retirees’ cost-sharing to amounts well below $4,550.

Catastrophic coverage is just one measure of financial risk, to be sure, particularly since most retirees will not reach that level. For prescription drug costs, only nine percent of Medicare beneficiaries reached the catastrophic level in 2008, according to the Medicare Payment Advisory Commission’s Report to Congress that was released earlier this month.

Another way of assessing financial risk is to look at retirees’ annual cost-sharing, which is the amount they pay in addition to premiums. A 2010 Kaiser Family Foundation chart shows that Medicare beneficiaries had greater cost-sharing for prescription drugs in 2006 (the first year of Part D coverage) than they did for hospital, skilled nursing facility, and home health care combined. And since 2006, it’s likely that the proportion of retirees’ out-of-pocket spending on prescription drugs has expanded, primarily because brand-name drug prices and Part D stand-alone plan premiums have grown at almost double-digit rates since then.

The bad news for retirees is that over time these price hikes will push more of them into the doughnut hole, the coverage gap that occurs before they reach the catastrophic limit. The good news is that they will no longer pay the full retail cost for drugs once they reach the doughnut hole, since beginning in 2011 they will get 50% discounts on the purchases of brand-name drugs and 7% discounts for generic drugs.

There are often ways for Medicare enrollees to reduce their prescription drug costs. If they are among the 27+ million who have Part D plans, the simplest and most effective tactic is to use Medicare’s annual open enrollment period to review their plans’ costs and to change to less expensive plans when possible.

A handful of retirees also try elaborate approaches that take advantage of Part D’s intricate design. Thus a retiree whose spending will take her into the doughnut hole may time her drug purchases to save money. If she pays close attention, she may be able to refill an expensive brand-name drug prescription (perhaps a 90-day refill) before she reaches the coverage gap.

If she is able to do that, she will probably pay one-half as much for that refill as if she’d waited (she will pay about 25% of the retail cost of a brand-name drug before she reaches the coverage gap and 50% after she’s in the gap). So, if her prescription is for a 90-day supply of Nexium, a widely prescribed drug, she will save $110 or so.

While this approach sounds simple, it may not be. She may need to buy one or two of her generic drugs outside the plan in order to make sure that, when it is time for her brand-name refill, there is sufficient spending room before she reaches the doughnut hole. And her savings may be slightly reduced because she will likely pay $2-$3 more for the off-plan generic purchases that if she’d bought them through her plan. Finally, she may need to get a new prescription for the drugs she buys off-plan.

The complexity of these timing tactics guarantees that they will be rarely used. But other, easier-to-use approaches, including the three listed below, can often lower costs. The first two of these require that physicians write new prescriptions:

Choosing the least expensive refill schedule. In many cases retirees can save money by choosing a different refill schedule. The Medicare web site’s Plan Finder, for instance, shows the costs for both 30-day and 90-day refills. While not always the case, mail-order (or 90-day) refills are typically cheaper. Some retail pharmacies like Walgreen’s, Wal-Mart and Costco advertise that 90-day refills can be picked up at their local stores (Costco membership is not required to use its pharmacy). These discount pharmacies, however, may not be in some Part D networks.

Splitting pills for certain brand-name drugs. Although pill-splitting sounds vaguely unethical, it has been recommended by Consumer Reports and the Harvard Men’s Health Letter, among others. It can work effectively for about 20 brand-name drugs, and in a few cases it will save hundreds of dollars annually. To read an earlier blog item about pill-splitting, click here.

Buying outside the plan. If seniors can buy a 90-day supply of a generic drug for $10 at Wal-Mart but must pay $17.50 to purchase it through their Part D plans, they may want to buy outside their plans. Because most off-plan purchases do not count toward the catastrophic limit, there is a risk for people who might otherwise reach the limit. Medicare’s rules do allow people to be credited for certain low-price off-plan drug purchases in the doughnut hole, as long as the purchases are not associated with ongoing drug discount programs. To get credit for doughnut hole purchases made outside the plan, enrollees will need to submit receipts purchases to their plans.

To be continued next week.

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