Medicare’s ‘catastrophic insurance’ can be a catastrophe for middle-income seniors

Pam Holt, a teacher and school administrator in Granger, Indiana, was looking forward to her retirement. After her husband died when she was 40, she raised three children alone. She paid into a pension, made Medicare and Social Security contributions, accumulated some savings, and was only three years away from paying off her mortgage when, at age 66, she was diagnosed with multiple myeloma, a cancer that originates in bone marrow. Fortunately for her, taking a pill called Revlimid, made by Celgene, can hold the disease at bay. But its cost began eating her up.

In January of 2017, Holt, facing a monthly list price of $12,837 for Revlimid, discovered how incomplete Medicare’s drug coverage benefits can be. She quickly blew through the initial phases of Medicare’s drug benefit, in which she spent about $3,000 out of pocket on her medicine. At that point, despite the fact that it was still only the first month of the year, she entered Medicare’s catastrophic coverage, in which she had to pay 5 percent of the list price. Even with that seemingly small responsibility, she would owe another $7,000 before the year was out. Her retirement income was only $45,000 a year, so she used credit cards and savings to make the payments. Then she refinanced her house. At 69, her cancer therapy was steadily impoverishing her.

Holt felt she had no choice but to stick with the pills. Revlimid was working. “I need it to stay alive,” she told us.

Holt is among the one million Americans who have discovered that their Medicare drug insurance is not the protection they expected. Unlike Medicare Part A and Part B — the hospital and doctor programs, where supplemental plans can be purchased to cap costs — no such option exists for Part D, which covers drugs. Although Medicare Advantage plans are required to have an out-of-pocket cap for services covered under Parts A and B, even they do not provide a cap on out-of-pocket spending for prescription drugs covered under Part D.

People with lower incomes can qualify for Part D subsidies — 2.6 million who reached catastrophic coverage received these subsidies in 2016 (the last year with complete statistics) — that put a ceiling on their drug costs. But Holt and other middle class seniors, particularly those with chronic conditions, face high and growing out-of-pocket spending on prescription drugs year after year.

The catastrophic phase of Part D is frequently an afterthought in discussions of Medicare because the co-insurance seems so modest. But in a study we recently published in the journal Health Affairs, we found that rapidly increasing list prices for drugs helped drive the catastrophic proportion of total Part D spending (including federal and insurer contributions) from 18 percent in 2007 to 38 percent in 2016. The number of Medicare beneficiaries who aren’t eligible for subsidies who needed catastrophic coverage, such as Holt, doubled in number in that period, and the proportion of their total spending that occurred in catastrophic coverage increased threefold. Though co-insurance is only 5 percent in that phase, the considerable growth in catastrophic spending exposes beneficiaries to higher out-of-pocket costs.

The absence of a cap on that spending is a constant source of anxiety for seniors living on fixed incomes. Unlike the vast majority of beneficiaries in employer-sponsored plans or those available as part of the Affordable Care Act — all of which are required to place a cap on out-of-pocket spending for essential health benefits, including prescription drugs — middle-income enrollees in Part D can see their personal wealth sucked away if they are hit with a costly illness. This defeats the purpose of insurance and undermines its financial protection.

It wouldn’t cost much to fix. We estimated that implementing a cap on out-of-pocket spending in Part D would result in a monthly premium increase of between 40 cents and $1.31 per member, depending on how policymakers chose to handle subsidies for low-income members. That would represent about a 1 to 4 percent increase in the average monthly $30 Part D premium to reduce costs for the more than one million Medicare beneficiaries like Holt who don’t qualify for subsidies, and protect all beneficiaries should they need an expensive drug.

The issue has support from both sides of the aisle. The Trump administration recently proposed a cap in conjunction with broader Part D reforms, which had also been suggested by the Medicare Payment Advisory Commission, a nonpartisan agency that makes policy recommendations about the Medicare program to Congress. Democratic Senator Ron Wyden of Oregon has made such a cap a centerpiece of legislation called the Reducing Existing Costs Associated with Pharmaceuticals for Seniors Act (RxCAP).

So why is there no action? Despite the general agreement, a Part D cap is a low priority in Washington. It is caught in the broader debate over health care and entitlement reform, which is fraught with political drama.

That isn’t fair to Holt and the other seniors whose retirement is in jeopardy. Holt is now getting some financial help from a private foundation, but that isn’t a solution for the million-plus Medicare Part D beneficiaries like her who face rising and uncontrolled drug costs. They deserve solid coverage against catastrophe, not insurance in name only.

Erin E. Trish is the associate director of health policy and Geoffrey F. Joyce is director of health policy at the Leonard D. Schaeffer Center for Health Policy & Economics at the University of Southern California. Pam Holt kindly allowed us to use her story as an example of the pitfalls of Medicare’s current catastrophic coverage system.