President Obama with AARP’s CEO A. Barry Rand, and Sens. Max Baucus, D-Mont., and Chris Dodd, D-Conn. Photo by Yuri Gripas

In a surprise move that will please millions of Medicare beneficiaries, President Obama announced plans to cut in half the prescription drug expenses of those who fall into the Part D coverage gap, universally known as the doughnut hole. They would only pay 50 percent of the cost of brand-name medications in the gap instead of the 100 percent they must pay now.

The new benefit is expected to be part of health care reform legislation that Congress will consider later this fall. If passed, it will likely go into effect in July 2010.

This unexpected shrinking of the doughnut hole, which affects about 26 percent of Part D enrollees, is the result of a deal between the White House and the pharmaceutical industry. All drug manufacturers agreed to donate half the cost of their brand-name and biologic products (but not generic drugs) to people in the gap, at no cost to the government.

The formal announcement of the deal came today at the White House, where Obama—flanked by Democratic senators Max Baucus, Mont., and Chris Dodd, Conn., and AARP CEO A. Barry Rand—said the agreement, "will help close the notorious doughnut hole in  Medicare Part D."

The president called the agreement a "significant breakthrough on the road to health care reform, one that will make a difference in the lives of many older Americans."

AARP's Rand agreed: "This is an early win for reform and a major step forward.  It is a signal the process is working and will work."

In a statement released in conjunction with the White House announcement, the Pharmaceutical Research and Manufacturers of America, PhRMA, the trade group for major drug companies, called the agreement "a major coming together moment."

Rand said the new benefit will mean, "the doughnut hole will be substantially filled for millions of middle-income Americans as part of health care reform."  Too many Americans who fall into the coverage gap, he said, "stop taking their medications because they simply cannot afford them.  They will now have a new opportunity to lead a healthier life."

The discounts will cost the drug industry about $80 billion over 10 years, according to PhRMA.

Part D enrollees in the gap will be able to access the discounts directly at the pharmacy, White House officials say. The amount will be half of the price already negotiated by the Part D plan they're enrolled in. They won't have to apply for the discounts or fill out any paperwork.

Furthermore, the full cost of drugs bought in the gap will count toward the out-of-pocket limit ($4,350 in 2009) that triggers low-cost catastrophic coverage, even though enrollees will actually pay only half of this amount to get there. So the discount will not reduce their chances of qualifying for catastrophic coverage.

The discount program would be run by an independent third party, according to Baucus, chairman of the Senate Finance Committee and a key player in brokering the deal. "The agreement includes a provision to discourage private employers from dropping prescription drug coverage currently provided to retirees," he said in an earlier statement. "It also establishes audits of drug company manufacturers to ensure the discounted prices are appropriately set."

The discount will apply to the great majority of Part D enrollees, though not all. Those excluded are:

• People who pay the income-related Part B premium (in 2009, those with incomes over $85,000, or $170,000 for married couples).
• Low-income people who qualify for Part D's Extra Help benefit, as they already receive full coverage throughout the year, with no gap.

Everybody else, in any one year, will pay about 25 percent of the cost of their drugs in the initial coverage period (until total costs reach a dollar limit set in law—$2,700 in 2009); 50 percent during the coverage gap; and up to 5 percent at the catastrophic level. If their plan charges an annual deductible—up to a maximum $295 in 2009—they will still pay 100 percent of drug costs until it is met.

In 2007, half of the enrollees who got dunked in the doughnut hole reached it by August, and most stayed in it for the rest of the year, according to a study by the Kaiser Family Foundation. Only 4 percent made it through the gap to reach the more generous phase of catastrophic coverage.

The agreement is widely seen as an attempt by the industry to stave off legislative efforts to make it pay more toward the costs of health care reform. For example, under the House’s draft legislation for health care reform, unveiled Friday, drug manufacturers would be required to pay rebates to the government on drugs provided for low-income Medicare beneficiaries, a form of steep discount already used in the Medicaid health program for low-income people.

"Our companies have been exploring ways to address [the doughnut hole] for several years," PhRMA's CEO Billy Tauzin, a former Republican Congressman, said in a statement. "This commitment to support legislation that will help close the coverage gap reflects our ongoing work with Congress and the Administration to make comprehensive health care reform a reality this year."

AARP and other consumer advocates have long lobbied to abolish the doughnut hole completely—a move that would cost the federal government $134 billion over 10 years, according to the Congressional Budget Office. The drug companies were not prepared to foot the entire bill for closing the gap either. Nonetheless, advocates consider the 50 percent deal a major improvement in coverage.

"If [the drug companies] come through with the $80 billion and people can really get discounts in the doughnut hole on any of the drugs that they take, then it's great and we're thrilled," says Paul Precht, spokesman for the Medicare Rights Center.

AARP executive vice-president Nancy LeaMond said "we applaud the leadership of Chairman Baucus and President Obama on this effort, which takes a great step forward to ensuring that older Americans have access to the prescription drugs they need." 

Most Medicare beneficiaries fear falling into the gap, even if their annual drug costs do not exceed the current $2,700 limit on coverage that would put them into it. At present, almost no Part D plans offer coverage for brand-name drugs during the gap, although many cover lower-cost generics. People who are prescribed expensive brands or biologics for which no generic versions are available are especially hard-hit.

Many people can't afford the sudden leap in costs when they fall into the gap. Someone paying a typical copay of $35 to $70 a month early in the year can face a bill of hundreds or even thousands of dollars for the same prescription as soon as they cross the line into the doughnut hole. Many are then forced to ask doctors for free samples, apply to the drug manufacturers or low-cost community clinics for assistance, skip doses or just fail to fill prescriptions. Doctors and consumer advocates frequently express concern about the consequences to patients' health.

Patricia Barry is a senior editor at the AARP Bulletin.