A Better Deal from Medicare’s Part D Drug Plans?

Part one

Today begins a three-part package about major changes taking place in Medicare, private health plans, and Social Security. These were the topics of a podcast I did with fellow Substacker Mark Miller, creator of RetirementRevised.                                                    

Mark is one of the nation’s top writers about retirement, and regularly covers developments in Medicare and Social Security. He is a frequent contributor to The New York Times, and writes columns for Reuters, Morningstar.com and WealthManagement.com. His books include “Jolt: Stories of Trauma and Transformation” (Post Hill Press) and “The Hard Times Guide to Retirement Security” (Wiley).

You can listen to the full podcast at RetirementRevised. We had a long chat, so I decided to present it here in three segments.

Phil Moeller (top); Mark Miller

Mark: Phil Moeller, welcome to the program.

Phil: Thanks, Mark. Good to be here.

Mark: We’ve got a lot to talk about. We have sort of a Medicare chat today. And there's definitely news going on, as we're taping this. It looks like Congress might very well approve the first important reform to the Part D prescription drug program and Medicare, really since its creation. It's something that's been talked about for quite a while as a real sort of gap in coverage in those plans.

Today, there is not any kind of out of pocket limit on what a Medicare enrollee would spend. So there's a couple other important reforms in here, too, including allowing Medicare to start to negotiate some prescription drug prices with manufacturers. But I think a $2,000 out of pocket cap strikes me as kind of a big deal. What's your take on it?

Phil: I agree with you, but I'm in uncertain territory, because I find myself getting optimistic about actually changing Medicare for the first time in many, many years. I mean, you and I have spent years talking about possible reforms, the need for reforms, the problems with the program. And it's really interesting today, because a lot of the response to the proposed legislative changes, has been negative. It's been like, well, this is not nearly enough, or we should go further.

I just want to take a step back and say, let's have a timeout for at least a small round of applause. Because if this set of changes goes through, it will be the most substantial enhancement to Medicare benefits since the creation of the Part D program, which is now 16-17 years ago. So it's a big, big deal. And I think the other element beyond the $2,000, which would kick in in 2025, is that the proposal will eliminate the 5 percent coinsurance requirement in the so-called catastrophic phase of the Part D program.

Now, unfortunately, I take a very expensive medication, and I go into the catastrophic phase in February every year. So for me, 5 percent of a big number is still a big number. So that elimination takes effect in 2024, which is a year sooner than the price cap. So that, to me is a big, big deal.

Mark: And you and I can talk about rolling the dice about how likely it is these changes are gonna occur. And my crystal ball doesn't extend to Capitol Hill, right? I mean, as we're speaking right now, it looks like this could well happen. It could even happen by the time this podcast is out. I'm reading this morning that Congress might vote on this stuff next week. But we'll have to wait and see. But it let's talk a little bit about why it's such an important change.

If I'm a person who has relatively modest prescription drug needs, you know, Part D is really not that onerous, or that much of a big deal. But as you were saying a minute ago, with an increasing number of very sophisticated and very expensive medications available, which I guess really wasn't so much the case when Part D was created. And over the last couple of decades, we've seen a lot advent of lot more of these high cost, and some cases very important life-saving medications, but you get more people who then get socked with these unexpected, you know, high costs in the Part D program. And one of the things that's always struck me about Part D is that defenders of the program like to argue that marketplace competition has been effective at controlling costs and that they like to point to premiums. It's true that part D premiums have generally stayed pretty flat or grown modestly.

Phil: That's true. A couple of observations. Again, I think you and I agree on many of these sort of important points, but we're talking about insurance. And the point of insurance, and pardon me for going into insurance 101, is that insurance has to deal with a risk pool. And so you want to provide insurance to the people who need it. In this case, people with serious drug needs. And it's paid for by the people who don't need it. I mean, that's the concept of insurance. And I don't want to forget that because what this proposal does is basically reinforce the value of insurance, which is that we're going to protect people who need health care, and it's going to be paid for by others.

So in this case, the idea of whether we've gotten a bargain in Part D premiums, is, to me a specious argument. Premiums aren't the most significant aspect of what you pay for drugs. I believe that it's been convenient for pharmaceutical companies, and even to some extent for Medicare, to focus on the stability of Part D premiums. But we haven't had stability in our out of pocket spending. So this will, this will create stability in out of pocket drug spending.

The other thing to note just quickly is that insurance is for the future you, not the present you. And so even if people are healthy now, as we age, there's no doubt that more and more of us are going to need medications. The other corollary to that is we are well into the era of miraculous drugs with miraculous price tags. We’re moving towards targeted health care, using the human genome, using all sorts of things we know about the ability to target health care for you individually.

So, there will be a the Mark Miller health care plan, and it will increase substantially over time. But those treatments are going to be pricey. So having protection for the Medicare population, I think, is really essential, at least at this point. And it's going to really pay off more and more in the future.

Mark: I mean, with respect to your point about the current universe and the future you, one of the things that's interesting with Part D is that it's a segment of Medicare that is fairly easy to, well, I shouldn't say easy, but it's possible to change your coverage annually. Most people don't reshape their coverage or kind of bother with that, although there's a good argument that you should recheck it during the open enrollment each fall, or at least some kind of regular basis. But at least there is an ability to change as your needs change in the program, which is I think, a good thing, right.

Phil: I share the frustration of people who say we have this great ability to reset our coverage every year. And people don't do it. And I would just go back to when I did the Social Security book I wrote in 2015. The same things were said about Social Security, that people leave money on the table, they don't understand the claiming. But that's changed a lot in the last five or six years. So I believe that the IQ of people when it comes to Medicare can be elevated. I just think you and I and lots of others need to keep at it, we need to hammer away at this stuff. Open enrollment is like Charlie Brown's football, and every year I write about open enrollment like, well, maybe this year people will pay attention. I just think we have to keep at it.

Mark: The job’s never done. Every fall that rolls around, I kind of take a deep sigh and say, what is there possible to say that’s new about this or do about it?

Phil: I think there's going to be more and more new to say about open enrollment, because one of the things that we're not smart enough to predict is how private insurers will react to these new rules. But one thing I know about them is that they'll figure out ways to game them, because that's what insurers do. I keep saying the leopard still has spots. This is not going to get rid of the spots. So it's almost a fiduciary responsibility of private companies to try to figure out how to optimize their financial returns in any kind of marketplace situation. I expect them to do that here.

So I would expect Part D premiums to go up. There's sort of like no longer any reason for these guys to continue this charade that somehow Part D premiums mean you're getting a good deal. But with [spending] caps on your meds, I think you're going to see a lot of variation in Part D premiums. And what that means is that the value of open enrollment is going to be really much more substantial than it has been in years past. If you focus on premiums, whether it's $32 or $33 a month is no big deal. But if the premium range is like $27 to $127, then I think people are going to shop.

Mark: Yeah, that's a really interesting point, because the program becomes more robust. And so you know, a little bit less like, you know, very high deductible coverage, but you're gonna have other elements that change.

Phil: Yeah, and I've written before that the only part of health care inflation that hasn't run amok is the part of health care that we pay out of pocket. So, over the counter medications that we have to pay for, they have a lot of vigorous price competition. And, you know, the traditional Adam Smith capitalism works in that sector of healthcare, [but] it doesn't work so well in any of the others. But I think we're gonna see some interesting competitive responses to this legislation, should it be enacted.

Mark: What's your take on the provision of the bill that empowers Medicare, to start negotiating some drug prices with manufacturers. This is something that people have called for, for a long time. You have it in a couple other important government run health care programs, notably the VA [Veterans Administration] and Medicaid both have the ability to do negotiation. There have been studies that indicate that there's a lot of savings to be had there. But what's your view on that?

Phil: Insofar as Medicare goes, my jury is still out. I don't know how aggressively Medicare will implement that program. I don't know if they'll go after the so called low hanging fruit in terms of outrageously priced Part D prescription drugs. I can imagine that they're gonna get pounded on by pharmaceutical companies to try to reduce the potential negative impact of those price negotiation processes. I don't underestimate the ability of pharmaceutical companies to win the game at the end of the day. So I think it's an interesting proposal. It sort of just scratches the surface. And the question I have, and I can't answer it, Mark is whether, over time, is this going to lead to changed behavior and drug pricing for all medications? Is the writing going to be on the wall enough for pharmaceutical companies to say, well, we have to rethink how we do this?

I'm particularly interested in the extent to which pharmaceutical companies start to look to other countries to recoup their outrageous prices that they charge to American consumers. I mean, we subsidize the world, we Americans pay for global drug discoveries, all those capital charges that the drug companies say, “Well, we have to have these or we're not going to be able to work for you.” I think it's time to figure out a way for the U.S. to lean into other countries and say, “It's time for you guys to bear your fair share.” This proposal might have put a little finger on the scale there in terms of creating some rationale for pharmaceutical companies to take a more global approach to pricing.

Tomorrow: Here’s a Primer on Major Medicare Changes Coming Your Way

Philip Moeller is the principal author of the Get What’s Yours series of books about Social Security, Medicare, and health care. @PhilMoeller