Where did the Part D donut hole come from?

(cross posted at freeforall)

Avik Roy’s recollection of how the structure (donut hole) of Medicare’s prescription drug benefit (Part D) was devised doesn’t match mine (a 2005 Health Affairs paper on the topic). I located lecture notes from my Intro to the U.S. Health Care System class that I was teaching at Duke at the same time Congress was debating its passage to recall how I framed the benefit design question at the time. I described the choice as being between two competing policy goals:

  • Address the problem of poor seniors being unable to afford prescription drugs. Such a policy motivation played out in the Part D discussion of the day would lead to a program that subsidized private coverage for low income Medicare beneficiaries.
  • Address the problem of catastrophic costs. Such a policy motivation would target subsidy toward persons with high drug expenditures.

Then I framed the final structure as a political calculation designed to provide all Medicare beneficiaries with access to Part D coverage, but with the odd “donut hole” benefit structure arising due to a desire to hold total federal costs of the plan to a set level (noted as $400 Billion over 10 years at  the time; it actually ending up costing ~$1Trillion over 10 years).

Fast forward to the present, and my most most vivid experience with the program has been helping my mother in law pick a Part D plan when the firm that had been providing retiree benefits (from her deceased husband’s job) stopped doing so. When I tried to explain the donut hole concept (her prior coverage was much better) she said “that makes no sense” is it due to Obamacare? I said no, the donut hole notion comes from one of President Bush’s main policy achievements. I then explained that there were some reductions in the cost outlay for her in the donut hole, that are due to Obamacare.

She didn’t believe me on either account….

update: I edited the post for clarity; commenter was correct, it was not clearly written and I apologize for the sloppiness.