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Details may cause adverse reaction to drug plan

Updated: May 3, 2013 12:14PM

Originally published: November 27, 2003

Before you sit down to give Thanksgiving for the Medicare drug plan for seniors, you might want to take a closer look at the stuffing inside this turkey. Leaving all politics aside, which is difficult, the details of this drug plan are not only complicated but in some ways very deceiving. Seniors will still be paying a lot for their prescriptions, drug prices could continue to rise at two to three times the rate of inflation, and it’s likely to be excruciatingly difficult to figure out which specific drug plan is best for you.

Let me try to sort it out.

First, everyone who decides to opt into the Medicare prescription drug plan, which takes effect in 2006, will pay $35 a month, or $420 a year in premiums -- even if you never buy one prescription drug.

Second, there is a $250 deductible before any drug benefits kick in. So right away, you’re out $670 ($420 plus $250) before you get any benefits.

Then, the government will pay 75 percent of your drug costs (leaving you to pay 25 percent) up to $2,200.

Totaling up the cost

So, for example, someone who currently spends $500 on prescription drugs would pay $732.50 for those same drugs under the new plan. (Arithmetic check: $420 + $250 + 25 percent of the next $250 or $62.50 = $732.50.)

The results look slightly better at spending levels of $1,000, where you’ll wind up paying only $857.50 for $1,000 worth of drugs. But that’s still nothing like the “cheap drugs” that many seniors are expecting.

The real hole in this plan shows up for spending between $2,250 and $3,600. Seniors will have to pay the entire cost of those purchases out of pocket, before a catastrophic drug benefit kicks in for drug costs above $3,600 a year. At that point, the government will pay 95 percent of subsequent costs.

This so-called “doughnut hole” is more like a black hole. Seniors will have to pay that $1,350 out of pocket before they get to the really useful drug benefits (95 percent government subsidy) that are paid out on bills over $3,600 a year.

Even someone who takes $500 a month in drugs, or $6,000 a year, will still be paying $4,065 out of pocket for those drugs each year under this new plan.

In fact, the “doughnut hole” is likely to cause many seniors to simply stop taking medicines for which they can’t afford to pay 100 percent of the costs. Then they’ll get sick again, and wind up in the hospital raising overall Medicare bills.

A special note: There are some provisions for very low-income seniors -- those making less than about $12,000 a year. They’ll get nearly complete coverage -- about the same level of benefits they get now from Medicaid. But for the average senior couple, who may each take eight prescription drugs, costing an average of $80 a prescription each month, and spending between $800 and $1,000 a month, there will be relatively little relief.

But the relatively meager benefits of this program are not the worst part. Seniors will be faced with some very complex choices in the programs they’ll be offered in the fall of 2005.

The first big choice is whether to stick with Medicare at all. You can stay with Medicare and not buy any drug plan. Or you can stick with Medicare and choose between the $35-per-month drug plans likely to be offered by pharmacy benefits managers (PBMs) like ExpressScripts and Medco, by drugstore chains like Walgreens and CVS, or by others, probably including AARP and some insurance companies.

You’ll have to choose among these offerings based on their then-current prices for the drugs you take or are likely to take. And you’ll be locked into their plan for a year -- without any guarantees that the drug prices in that plan won’t go up during the year.

Or you can opt out of Medicare completely, and instead sign up for a private health insurance program that will include drug coverage. Likely to offer that type of plan are HMOs, the Blue Cross family, and perhaps other insurers.

Consumers make the choice

But you get to make the choice -- whether to stick with Medicare or not. And which drug plan to use if you stay with Medicare.

Our only hope is that somewhere between now and 2006, Congress will realize what a huge and messy program it has created and somehow make rules to simplify this turkey. Otherwise, we’ll all have indigestion. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange and McDonald’s Corp.

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