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Medicare Donut Hole: What to Know
By Donna Frederick
After retiring from a career as an executive travel counselor in 2006, Donna Frederick embarked on a second career as a licensed insurance agent. During that first year, many clients told Donna how ov ...erwhelmed they felt by Medicare, but that her assistance helped them finally understand the Medicare program. That experience inspired Donna to focus her efforts on educating her clients to ensure they fully understand their Medicare options. Today, Donna takes pride in providing outstanding customer service and going the extra mile to make sure each client knows all of their options and has a sound understanding of their Medicare plan, from costs to coverage and all points in between.Read more
Sep 01, 2020
The donut hole is the coverage gap that occurs when you and your Medicare drug plan have reached a pre-determined spending limit for covered drugs. For example, in 2021, once you have spent $4,130 on covered drugs, you enter the coverage gap.
While in this coverage gap, you will pay no more than 25 percent out-of-pocket for the cost of both brand-name drugs and generic drugs until you reach the catastrophic coverage phase. This amount changes every year. In 2021, once your out-of-pocket spending reaches $6,550, you leave the donut hole and enter catastrophic coverage. Once you reach this point, you pay only a small coinsurance or copayment for each covered prescription until the end of the year.
The Medicare Donut Hole Is Now Closed
The Medicare donut hole closed completely in 2020. This has led to some confusion, however, since there is still a coverage gap phase under Medicare Part D.
This confusion mainly comes down to the fact that few Medicare beneficiaries understand how Medicare Part D cost-sharing works, both today and historically. This page explains the four Medicare Part D coverage phases, your costs at each stage, and how you leave the coverage gap to enter the catastrophic coverage phase.
What Are the 4 Phases of Medicare Part D?
The four phases of Medicare Part D are:
- Deductible Phase
- Initial Coverage Phase
- Coverage Gap Phase
- Catastrophic Coverage Phase
During the deductible phase, you are responsible for 100 percent of your prescription drug costs until you meet your Part D plan's annual deductible. The insurance companies that provide Part D plans set their own costs, including deductibles and premiums. However, they must work within guidelines established by the Centers for Medicare & Medicaid Services (CMS). In 2020, the maximum Part D deductible is $445.
The Part D Initial Coverage Phase
Once you meet your Medicare Part D annual deductible, you enter the initial coverage phase. Your out-of-pocket costs during this stage are 25 percent of your plan's negotiated costs for covered medications. You pay this in the form of copays or coinsurance at the time of purchase.
You remain in the initial coverage phase until you and your plan spend a combined total of $4,130 on covered prescription drugs. At that point, you enter the coverage gap phase.
The Part D Coverage Gap Phase
During the coverage gap phase, you continue paying 25 percent of prescription costs. And this is where the confusion seems to strike. Many people assumed "closing the donut hole" meant the coverage gap was ending. That's because they didn't realize how high prescription drug costs were before the Affordable Care Act (ACA, commonly known as Obamacare).
Before ACA passed, seniors who entered the donut hole were responsible for 100 percent of their drug costs until they entered the catastrophic coverage phase. After Obamacare became law in 2010, that 100 percent went down a little every year until it reached the 25 percent beneficiaries paid before they entered the coverage gap.
So, why call it the coverage gap phase if your costs are the same as during the initial coverage phase? Two reasons. First, this stage still determines when you enter the catastrophic coverage phase. Second, the coverage gap is when drug manufacturers start contributing some of the cost of your Part D medications.
Please note that Medicare beneficiaries who qualify for Extra Help do not have a coverage gap phase.
How Does Cost-Sharing Work in the Coverage Gap Phase?
During the initial coverage phase, you pay 25 percent of prescription drug costs and your Part D plan pays the other 75 percent. Once you enter the coverage gap, you continue paying 25 percent. But, your plan's share changes depending on whether it's brand-name drugs or generic.
For generic drugs, the 25/75 beneficiary/plan split continues. But for brand-name drugs, your plan's share drops to 5 percent with the manufacturer carrying the remaining 70 percent of costs.
The Catastrophic Coverage Phase
You enter the catastrophic coverage phase once your total out-of-pocket spending reaches $6,550 in 2021. This includes money you paid for covered prescriptions during the deductible phase. In addition, the manufacturer discount on brand-name prescription drugs counts toward your total out-of-pocket for Part D coverage (i.e. the 70 percent described above).
The monthly premium for your Part D or Medicare Advantage Prescription Drug plan does not count toward this total cost. Neither does the cost of over-the-counter medications.
Once you reach the catastrophic coverage phase, your Part D copayments for the rest of the year are only 5 percent of covered drug expenses. Your plan pays 15 percent and the government (i.e. the Medicare program) pays the remaining 80 percent of prescription drug costs.
Drug Costs That Don't Count Toward Your Total Out-of-Pocket
When figuring your total out-of-pocket Part D spend, exclude the following:
- Costs paid for by a third party, such as a secondary insurance plan through an employer or union
- Drugs not covered by Medicare
- Drugs purchased from a pharmacy outside your Medicare Part D prescription drug plan's network
- Medications that are not covered by your plan's drug formulary (even if you got the plan to make an exception for a non-approved drug)
- Monthly premiums
- Over-the-counter medications
For plan specifics, please contact your Part D provider.
Does Everyone Enter the Donut Hole?
No, most Medicare beneficiaries never enter the coverage gap. Even fewer ever reach the catastrophic coverage stage. Fewer than 5 percent of Part D beneficiaries will reach the donut hole.
Choosing a Medicare Part D Plan
When comparing Medicare Part D plans, one of the first things to consider is the drug formulary. This is the list of prescription medications the plan covers. If it doesn't include yours, you probably want to find a different Part D plan. Even if you get your Part D benefits through a Medicare Advantage plan, you still need to check the drug formulary.
Costs are likely your next concern. To estimate these, you need to look beyond the monthly premium. The drug tiers the plan uses to determine copays will help you figure out what you'll pay for your medications. The lower the tier, the lower your cost. You should also check the plan's yearly deductible.
Comparing Medicare Part D plans is easy with our Find a Plan tool. Enter your location information and coverage start date to begin reviewing Medicare plans in your area.
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