President Barack Obama Sunday released plans to cut in half the prescription drug expenses of Medicare Part D beneficiaries who have reached the coverage gap (doughnut hole) in their prescription benefit. Simultaneously, pharmaceutical companies agreed to foot the bill for $80 billion in Medicare drugs over the next decade for this population.

Under Obama's plan, these recipients would pay 50 percent of the cost of brand name medications in the gap, instead of the 100 percent they must pay now. The new benefit is expected to be part of healthcare reform legislation that Congress will consider later this fall. If passed, it is expected to take effect July 2010. These initiatives would only take effect if Congress passes healthcare reform legislation.

AARP said that this "shrinking of the doughnut hole," which affects about 26 percent of Part D enrollees, is the result of a deal between the White House and the pharmaceutical industry. U.S. drug manufacturers agreed to donate half the cost of their brand name and biologic products - but not generic drugs - to people in the gap, at no cost to the government.

At a White House press conference Monday with AARP and the industry trade group Pharmaceutical Research and Manufacturers of America (PhRMA), Obama said that this move by the pharmaceutical companies is a "significant breakthrough on the road to healthcare reform, one that will make the difference in the lives of many older Americans."

"In addition, the entire negotiated price of the Part D covered medicine purchased in the coverage gap would count toward the beneficiary's out-of-pocket costs, thus lowering their total out-of-pocket spending. Importantly, the proposal would not require any additional paperwork on the part of the beneficiary nor would an asset test be used for eligibility," according to PhRMA President and CEO Billy Tauzin and PhRMA Board Chairman David Brennan, who is also CEO of AstraZeneca.

AARP said that the discount program would be run by an independent third party, according to Senate Finance Chairman Max Baucus, D-Mont., who helped broker the deal. "The agreement includes a provision to discourage private employers from dropping prescription drug coverage currently provided to retirees," he said in a statement. "It also establishes audits of drug company manufacturers to ensure the discounted prices are appropriately set."

The discount will apply to the great majority of Part D enrollees, though not all. Those excluded are:

• People who pay the income-related Part B premium (in 2009, those with incomes over $85,000, or $170,000 for married couples).
• Low-income people who qualify for Part D's Extra Help benefit, as they already receive full coverage throughout the year, with no gap.