Understanding the Medicare Part D Donut Hole

Learn About the Medicare Part D Coverage Gap

It's important to understand the Medicare Part D donut hole. soupstock/iStockphoto

 

Hitting the Donut Hole

The donut hole, or coverage gap, is one of the most controversial parts of the Medicare Part D prescription drug benefit and of concern to many people who have joined a Part D drug plan.

Although all prescription drug plans must explain the coverage gap in their literature and advertising, the donut hole comes as a shock to many enrollees when they go abruptly from making copayments for their drugs to paying 100% of the cost.

The good news is that the Affordable Care Act is gradually closing the donut hole, and it will be eliminated by 2020.

How the Donut Hole Works in 2016

This is the standard Part D drug prescription plan for 2016 required by Medicare.

  • If you join a Medicare prescription drug plan, you may have to pay up to the first $360 of your drug costs. This is known as the deductible.
  • During the initial coverage phase (after the deductible is met, assuming the plan has a deductible), you pay a copayment or coinsurance, and your Part D drug plan pays its share for each covered drug until your combined amount (including your deductible) reaches $3,310.
  • Once you and your Part D drug plan have spent $3,310 for covered drugs, you will be in the donut hole. Prior to 2011, you had to pay the full cost of your prescription drugs while in the donut hole. However, starting in 2011, a discount began to apply to the cost of drugs while enrollees were in the donut hole. In 2016, you pay 45 percent of the cost of a covered brand-name prescription drug while in the donut hole, and 58 percent of the cost of covered generic drugs.
  • The donut hole continues until your total out-of-pocket cost reaches $4,850. This annual out-of-pocket spending amount includes your yearly deductible, copayment, and coinsurance amounts, and it also includes the manufacturer's discount on the drugs that you get while in the coverage gap (so although you pay 45 percent of the cost of brand name drugs while in the donut hole in 2016, 95 percent of the cost of the drug is counted towards your out-of-pocket costs, helping you get out of the donut hole sooner).
  • When you spend more than $4,850 out-of-pocket, the coverage gap ends and your drug plan pays most of the costs of your covered drugs for the remainder of the year. You will then be responsible for a small copayment or coinsurance. This is known as catastrophic coverage. In most cases, your costs will be minimal once you reach the catastrophic coverage level, but if you're taking an expensive specialty drug, the coinsurance is 5 percent — which can still add up if the drug is very expensive — and there's no cap on how high your out-of-pocket costs can be.

The expenses outlined above only include the cost of prescription medications. It does not include the monthly premium that you pay for the prescription drug plan.

It is important to understand that your Part D prescription drug plan may differ from the standard Medicare plan only if the plan offers you a better benefit. For example, your plan can eliminate or lower the amount of the deductible. And, your plan can pay for generic or brand name medications in the coverage gap.

Health Reform and Medicare Part D

Section 3301 of the Affordable Care Act, signed into law on March 23, 2010, makes changes to Medicare Part D to reduce your out-of-pocket costs when you reach the donut hole, including:

  • In 2010, if you had expenses in the coverage gap, you should have received a $250 rebate from Medicare.
  • Beginning in 2011, if you reached the donut hole, you were given a 50% discount on the total cost of brand-name drugs while in the gap.
  • Medicare began phasing in additional discounts on the cost of both brand-name and generic drugs, from 2012 onward. As of 2016, you pay 45 percent of the cost of brand name drugs while in the donut hole, and 58 percent of the cost of generic drugs.

By 2020, these changes will effectively close the coverage gap and rather than paying 100% of the costs, your responsibility will be 25% of the costs.

Donut Hole Examples

Charley Smith
Charley Smith takes three medications to treat his high blood pressure and high cholesterol. These medications will cost him about $1,200 in 2016. Charley is switching to a Medicare prescription drug plan that has a low premium and offers the standard Medicare drug benefit, including a deductible and no drug coverage in the donut hole.

This is what his prescription medications will cost in the plan he has selected:

  • Charley will pay a deductible of $360
  • He will then pay 25% (coinsurance) of the remaining $840 cost of his medications ($1200 - $360 = $840). His additional out-of-pocket cost during this initial coverage period will be $225 ($840 X 25% = $225)
  • Since Charley did not reach the $3,310 initial coverage limit, he will not enter the donut hole.

Charley’s total estimated annual out-of-pocket prescription drug cost with his Medicare Part D plan will be $360 + $225 = $585 (plus his monthly premiums for the Medicare Part D plan).

Mary Jones
Mary Jones takes three medications to treat her type 2 diabetes, high blood pressure, and high cholesterol – all of them brand name drugs. These medications will cost her about $3,900 in 2010. Mary is planning to join a Medicare prescription drug plan that offers the standard Medicare drug benefit, including a deductible and no coverage for generic medications in the donut hole.

This is what her prescription medications will cost in the plan she has selected:

  • Mary will pay a deductible of $360
  • She will then pay 25% of the cost of her medications for the next $2,950 (that's $3,310 minus the $360 deductible) until she reaches the coverage gap. Her additional out-of-pocket cost during this initial coverage period will be $737.50 (since $2,950 X 25% = $737.50)
  • Since Mary did reach $3,310 in drug spending ($360 + $2,950 = $3,310), she will enter the donut hole. Prior to 2011, Mary would have been responsible for 100% of the remaining cost of $590. However, since all of Mary’s medications are brand names, she will only have to pay about 45% of the drug costs while in the donut hole (45 percent of $590 means she'll pay about $265.50 while in the donut hole).

Mary’s total estimated annual out-of-pocket prescription drug cost with her Medicare Part D plan will be $360 + $737.50 + $265.50 = $1363 (plus her monthly premiums for the Medicare Part D plan).

Sources:

Medicare.gov. Closing the Coverage Gap—Medicare Prescription Drugs Are Becoming More Affordable, Revised January 2015.

Medicare.gov. Costs in the Coverage gap.

Patient Protection and Affordable Care Act, Setion 3301. Enacted March 23, 2010.

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