Monday, July 16, 2012

The Medicaid Donut Hole Explained

Here is what the Medicare Prescription Drug Coverage Gap (Donut Hole) looks like:

The much maligned and hated coverage gap, commonly known as the donut hole, is actually a quite intentional and effective policy tool to control costs. (Pardon the inexact numbers - they are always changing) Patients have to have 25% co-pays for the first $3,000 spent, 50% co-pays when it reaches $7,000 (the donut hole), and then back down to 5% for everything over that. Patients, knowing that they will have to pay 50% of the prescription drug prices, start paying attention to what things cost, therefore demanding generics and drug alternatives before they hit this point. Better, cheaper medicine is the result. Good policy, but bad politics.

The Supreme Court ruling created what we can refer to as the Medicaid Donut Hole. Conceptually, the coverage gap is the exact same idea; calling it such puts it on more familiar terms. This time, though, states are the ones facing the decision as opposed to individuals. Controlling costs, in this instance, translates to millions of people not receiving health insurance, but is it worth raising taxes to do so? Bad politics - no matter what is decided. 

The bottom part of the donut is what states are currently covering - as a certain percentage of the poverty line - therefore contiuning to cover it is not much of a marginal cost. The donut hole itself is that bottom part of the donut and the top part where the federal government only reimburses 60 percent of what is spent. At the top of the donut hole - between 100 and 138 percent of the poverty line - the federal government covers 100 percent.

Now the fear of most state governments is as eligibility level rises, a lot of people who incorrectly believed that they didn't already qualify for Medicaid all come out of the woodwork at once. Now the state gets the 60 percent reimbursement rate for the new participants instead of the 100 percent one. Ouch.


Some states will have to spend a whole lot of money before they get to the top of the donut: the free federal dollars. The distribution of income among the US population means that there are considerably more people in the 100-138 bracket than the the 26-100 bracket. Knowing this, many governors will choose to spend the extra money even if they currently have spartan Medicaid programs because the return on investment is incredible. For every state dollar spent, the federal government might be pitching in 10 or more; all depending on how far the state government has to go. Even federal-state highway programs tend not to be so generous.  Let me tell you, the states love them some highway money.

On a state by state level, each governor's office is going to be doing their own calculations to figure out their own cost-benefit analysis. They also going to have their fingers on the political pulse of their state. Based on these political and policy calculations, I wouldn't be surprised if a few states opt out but I would be very surprised if its more than a few.

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