More than 55 million Americans rely on Medicare to help cover their overall healthcare costs, and with the addition of Medicare Part D prescription drug coverage a decade ago, almost 40 million Americans get financial help with their drug costs under Medicare as well. Yet because of the specific provisions of the initial Part D law, millions of Americans ended up having to cover hundreds of dollars in prescription-drug costs.
Now, as a recent release from the Department of Health and Human Services emphasized, provisions of the Patient Protection and Affordable Care Act, better known as Obamacare, have helped Americans save even more on their prescription drugs, with savings of $15 billion since 2010 for more than 9.1 million Medicare participants. Last year alone, almost 5.1 million Americans saved a total of $4.79 billion on their drug costs, equating to $941 per participant.
Let's take a closer look at the original provisions that created a coverage gap in prescription drug coverage and what Obamacare's provisions have done to close the gap.
How prescription drug coverage works
What you pay for drugs under Medicare varies greatly depending on how much you spend on prescriptions. Most Part D plans charge upfront monthly premiums that you have to pay even if you don't end up using any prescription drugs at all. In addition, plans can impose deductibles of up to $320 in 2015, meaning you have to spend at least the deductible from your own pocket before coverage starts to kick in.
Usually, after you meet any deductible, you'll only have to make a small payment to get a drug, whether it's a fixed-dollar copayment or a percentage-based coinsurance amount. Medicare Part D plans are individually tailored by the insurance companies that offer them, with each plan having its own list of covered prescription drugs. Typically, insurers categorize different types of drugs into various tiers, with lower-tier drugs featuring lower copayments or coinsurance amounts to participants than higher-tier drugs. Often, a generic equivalent will be on a lower tier than a brand-name drug, encouraging participants to use generics wherever possible in order to cut overall costs.
As it turns out, though, most prescription drug plans have a coverage gap, which many people call the "donut hole" because of the lack of benefits in the middle of the drug-cost spectrum. If you spend more than $2,960 on drugs in 2015 but less than $4,700, then you'll be in the donut hole. Beyond that, catastrophic coverage provisions kick in, and most plans once again impose little or no cost for prescription drugs above that amount.
Under pre-Obamacare law, Medicare participants had to pay the full cost of any drugs within that coverage gap, making it prohibitively expensive for many retirees and putting huge financial strain on drug-plan participants. The provision received huge amounts of criticism, and that's a big part of why provisions to close the coverage gap made their way into the legislation that enacted Obamacare.
What Obamacare did to the donut hole
Obamacare took steps to lessen the impact of the coverage gap on Medicare participants. In 2010, anyone who hit the donut hole got a $250 rebate to partially offset its impact. Then, beginning in 2011, discounts began to phase in to eliminate more of the costs of donut-hole-related drug expenses.
How it works is that in 2015, Part D participants will get a discount of 55% on brand-name drugs and 35% on generic drugs while within the donut hole. So, for example, if you spend $3,960 on brand-name drugs in 2015, then you'll be $1,000 into the coverage gap. Because of the 55% discount, you'll only have to pay $450 out of that $1,000. However, for purposes of going beyond the coverage gap and qualifying for catastrophic coverage, you'll still get credit for the full $1,000 amount -- even though you only paid 45% of it out of your own pocket.
How much you can save
How much Obamacare's provisions saved specific Medicare recipients depends on how much of the coverage gap the typical person ended up using. Looking at state-by-state data, you can see dramatic variations in the average amounts people saved. In New Jersey, for instance, more than 214,000 residents saved an average of $1,139, the most of any state. By contrast, Mississippi residents took the least advantage of the provisions, with its 41,000 participating residents saving an average of just $747, finishing dead-last among the 50 states and the District of Columbia.
Still, the savings are substantial, and people will save even more as further discounts phase in. By 2020, Medicare recipients will get a 75% discount for both generic and brand-name drugs. Furthermore, some believe that the donut hole might eventually disappear entirely, giving Medicare recipients full coverage without a gap.
The Affordable Care Act will remain controversial for years to come, with proponents and critics debating the positives and negatives of the legislation. For Medicare Part D recipients, though, the ACA's provisions have made a substantial difference in eliminating what had been an onerous hole in healthcare coverage that many retirees struggled to cover on their own.
Dan Caplinger has been fortunate with his lack of needing prescription drugs -- at least for now. He has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.