Bob’s Journal for 1/25

What You Should Know About the New Medicare Prescription Drug Spending Limit

This year marks the beginning of the phaseout of unlimited out-of-pocket prescription drug spending for Medicare beneficiaries in the “catastrophic zone” of prescription drug spending.

The rules apply only to those who have Medicare Part D prescription drug insurance.

Those in Medicare Advantage plans will have different spending limits developed by their plans. Those in original Medicare who opted not to take out a Part D insurance policy are on their own for prescription drug spending.

At its inception, Part D had a coverage gap, or doughnut hole. After the individual’s prescription drug spending exceeded a certain level, he or she had to pay for all prescription drug costs until a second spending level was exceeded and the individual entered the catastrophic zone. The spending levels changed each year with inflation.

In the catastrophic zone, the policyholder paid 5% of all subsequent prescription costs without a dollar limit as coinsurance.

The Inflation Reduction Act of 2022 enacted a two-step change for those in Part D plans with high prescription drug spending.

In 2024, the 5% coinsurance by the policyholder is eliminated. Once the policyholder’s out-of-pocket prescription exceeds about $3,300, the policyholder won’t pay any more for prescriptions this year. Insurance companies and drug manufacturers will pay most of the costs.

There’s a bigger change coming. In 2025 and after, everyone in a Part D prescription drug plan has an annual out-of-pocket cap of $2,000.

There are some details to know about these changes, because they might not reduce your costs as much as you expect.

As I stated, the limits apply only to those who have Part D prescription drug policies. The changes also cover only outpatient prescription drugs. Drugs administered in doctors’ offices or hospitals generally are covered under Medicare Part B, not Part D. Over-the-counter medications aren’t covered.

Insurers and drug manufacturers pay a lot of the costs patients no longer pay after their spending limits are reached, so those companies are taking actions to reduce their costs.

You might find that premiums for your Part D insurance increased for 2024 or will increase in 2025.

In addition, the spending limits apply only to covered drugs. An insurer decides which drugs its policies cover (and can change the coverage during the year).

Some insurers are eliminating certain drugs from their lists of covered drugs, known as a formulary. Expensive brand name drugs are the most likely to be eliminated.

Insurers also might require a patient to try a cheaper drug first before a more expensive drug will be covered. Pre-approval by the insurer might be required for certain drugs to be covered. If the insurer concludes the medication isn’t medically necessary for that patient, it won’t be approved and won’t be covered.

Most people won’t be affected much by the changes. The bulk of prescriptions are for generic drugs or relatively low-cost brand name drugs.

The most expensive drugs generally are those you see advertised on television. Also, cancer drugs that aren’t administered in doctors’ offices or hospitals tend to be expensive pills and are likely to be subjects of the changes.

Users of those medications are most likely to benefit from the spending limits but also need to review their Part D policies during Medicare’s annual open enrollment to see if any significant changes are being made for the following year. The spending limits are estimated to affect about 1.5 million people.

Bitcoin ETFs Finally Approved and Trading

After a series of losses in court, the Securities and Exchange Commission was forced to approve ETFs that buy and sell Bitcoin at its spot price.

For several years, the SEC has approved a few ETFs that attempted to track prices of futures contracts of Bitcoin.

But the regulator steadfastly refused to approve ETFs that proposed to buy and hold Bitcoin or other digital currencies. These ETFs would have effectively allowed investors to buy and sell Bitcoin at its current market price, known as the spot price, simply by buying and selling shares of the ETFs.

After the court losses, the SEC stalled for as long as it could and finally approved trading of 11 ETFs that offer exposure to Bitcoin at its spot price.

The ETF provider Grayscale fought most of the legal battles against the SEC and incurred most of the costs. Grayscale quickly issued a spot Bitcoin ETF by converting a closed-end fund into an ETF.

But the Grayscale ETF has an expense ratio of 1.5%. That’s down from the 2.0% rate of the closed-end fund, but still is high for an ETF that simply tracks a commodity.

ETFs from Franklin Templeton, Bitwise, Fidelity, Invesco and some others initially are charging 0% fees for periods from six months to a year. They will charge fees after that. Franklin Templeton says its fee will be 0.19% while the others expect fees of 0.20% or 0.25%.

Vanguard stated that despite its strong position in the ETF market, it will not issue a Bitcoin ETF and won’t allow access to other Bitcoin ETFs on its brokerage platform. Vanguard has taken the position that Bitcoin isn’t a solid long-term investment.

Other brokerage firms also apparently have been slow to add the Bitcoin ETFs to their platforms. For many of the brokerages, the delay is a normal byproduct of their legal due diligence processes.

On their first day of trading, the Bitcoin ETFs had more than $4.6 billion worth of those assets either bought or sold.

Though it approved spot Bitcoin ETFs, the SEC has not approved ETFs that hold other digital currencies.

I don’t plan to include Bitcoin ETFs in my portfolios in the near future. It is difficult at this point to know which factors cause Bitcoin’s price to move.

If you want to have a small, speculative position in Bitcoin in your portfolio, the new ETFs are the best way to own and trade it. Stick with those that have relatively high trading volume. That reduces the potential of a large gap between the fund’s share price and Bitcoin’s price. Buy after a market decline, not during a speculative surge.

The Bitcoin ETFs with the most total assets so far are Grayscale, BlackRock, Fidelity and iShares. But Grayscale quickly lost assets after investors learned its expense ratio is much higher than those of other spot Bitcoin ETFs.

The Emerging Market Bond Opportunity Gains Attention

The investment opportunity in emerging market bonds is attracting more believers.

We added emerging market bonds denominated in local currencies to our portfolios in May 2023. Since then, our position in DoubleLine Emerging Markets Local Currency Bond (DLELX) has generated solid returns.

I recommended DLELX because many emerging economies were in a different and more favorable part of their economic and investment cycles than the United States. Also, the U.S. dollar had been strong for a long time. Fiscal difficulties in the United States seem likely to cause the dollar to lose value against some of the strong emerging market currencies.

Recently, the investment firm GMO issued a paper making these and other points in identifying emerging market bonds denominated in local currencies as “a once-in-a-generation opportunity.”

GMO wrote that the dollar is likely to fall against many other currencies. The firm believes that emerging market bonds are the best way to take advantage of that potential.

The paper examines valuations, diversification considerations, and the potential for alpha (or profitable trades) and concludes that the potential in emerging market bonds is the best in 20 years.

GMO believes alpha is the most exciting opportunity because the markets for emerging economy bonds tend to be inefficient. Traders and tactical investors can make profits that exceed the index returns by making good decisions.

That’s one reason I like DLELX. It doesn’t follow an index. The fund’s managers analyze each emerging economy and determine which they want to be exposed to.

The Data

The economy improved a bit in the first half of January according to the flash readings of the PMI Indexes.

The PMI Manufacturing Index increased to 50.3 in mid-January from 47.9 at the end of December.

The PMI Services Index was 52.9 in mid-January compared to 51.4 at the end of December.

That brought the PMI Composite Index to 52.3 at mid-month. It was 50.9 at the end of December.

Housing starts declined by 4.3% in December after increasing 10.8% in November. December’s decline in housing starts was preceded by four months of gains.

Single-family home starts declined 8.6% in December, their biggest one-month decline since July 2022.

Existing home sales fell 1.0% in December. They had increased 0.8% in November. Over 12 months, sales declined 6.2%.

The rate of existing home sales in December was the lowest since August 2010. And total sales for calendar year 2023 were the lowest in almost 30 years.

The Consumer Sentiment Index from the University of Michigan for the first half of January increased to 78.8 from 69.7 at the end of December. The index’s mid-January reading is the highest since July 2021.

There were substantial increases in consumer sentiment about both current conditions and expectations, and the outlook for inflation improved.

Over December and January, the index improved by 29%. That’s the largest two-month increase since 1991.

The Philadelphia Fed Manufacturing Index improved a little to negative 10.6 in January from negative 12.8 in December. The index has been in negative territory for 18 of the last 20 months.

The Richmond Fed Manufacturing Index declined to negative 15 in January from negative 11 in December.

New unemployment claims decreased by 16,000 to 187,000 in the latest week. That’s the lowest level since September 2022.

Continuing claims, which lag a week behind new claims, decreased to 1.806 million from 1.832 million.

The Markets

The S&P 500 rose 2.09% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.50%. The Russell 2000 increased 2.69%. The All-Country World Index (excluding U.S. stocks) added 0.22%. Emerging market equities advanced 0.34%.

Long-term treasuries lost 0.97% for the week. Investment-grade bonds fell 0.39%. Treasury Inflation-Protected Securities (TIPS) declined 0.48%. High-yield bonds retreated 0.09%.

Meanwhile, the U.S. dollar gained 0.33%.

Energy-based commodities increased 2.23%. Broader-based commodities rose 0.73%. Gold was unchanged for the week.

Bob’s News & Updates

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