What is the Medicare Part D Donut Hole and How Does It Work?
Donuts are awesome, but when it comes to insurance, the “donut hole” isn’t as great as you might think.
Medicare prescription drug plans (also called Medicare Part D) have a coverage gap, and that gap is commonly referred to as the “donut hole.” The coverage gap applies to both stand-alone Medicare Prescription Drug Plans and Medicare Advantage Prescription Drug plans.
This coverage gap – the “donut hole” – begins after you and your drug plan have spent a certain amount for covered drugs.
We get a lot of questions about this coverage gap, including:
- Why is there a “donut hole”?
- How does the “donut hole” work?
- How much will you pay for drugs once you enter the “donut hole?”
- Does the “donut hole” ever end?
- Does everyone enter the “donut hole?”
- How can you get out of the “donut hole?”
This whole concept can seem strange (and very unwelcome!), but once you understand how this coverage gap works, you’ll have a better idea of what your potential prescription drug costs will be.
Why is there a “donut hole”?
When it comes to Medicare, there’s a common theme: save money!
Medicare spends a huge amount of money on healthcare costs, which means they’re always looking for ways to cut costs and incentivize seniors to save where possible.
The idea behind the “donut hole,” or the time when you enter a total coverage gap in your Part D drug plan, is that you’ll be incentivized to look for cheaper drugs.
Medicare thinks that by introducing this coverage gap, seniors will look for cheaper, generic drugs over expensive, brand-name drugs. The coverage gap, or the donut hole, requires seniors to pay a share of their drug spending above a certain threshold to make sure they have “skin in the game” – and to discourage them from wasteful spending.
The actuaries who helped establish the guidelines for the “donut hole” designed the system so that Medicare would pay for basic drug coverage while giving the incentive to use generic drugs.
And it has seemed to work – Medicare has spent 30% less than they thought they would as of 2012.
The problem is that if you need costly drugs, you might enter the donut hole, which means your prescription drug bills will be quite high until you’re able to get out of it.
How does the “donut hole” work?
As of 2018, here are the guidelines for the “donut hole” from Medicare:
- The coverage gap begins after you and your drug plan have spent $3,750 on covered drugs.
- Once you reach the coverage gap in 2018, you'll pay no more than 35% of the plan's cost for covered brand-name prescription drugs.
- In 2018, Medicare will pay 56% of the price for generic drugs during the coverage gap. You'll pay the remaining 44% of the price.
- What you pay for generic drugs during the coverage gap will decrease each year until it reaches 25% in 2020.
- Although you'll pay no more than 35% of the price for the brand-name drug in 2018, 85% of the price – what you pay plus the 50% manufacturer discount payment – will count as out-of-pocket costs which will help you get out of the coverage gap.
- Once you've spent $5,000 out-of-pocket in 2018, you're out of the coverage gap.
We know this can be a bit confusing if your first time hearing about the donut hole, so here’s an example.
Donut Hole Example
Let’s say that Ms. Smith joins the ABC Prescription Drug Plan. Her coverage begins on January 1, 2018. She uses her Medicare Part D drug plan membership card when she buys prescriptions, and she pays a monthly premium throughout the year.
1. Yearly deductible
Ms. Smith pays the first $360 of her drug costs before her plan starts to pay its share.
2. Copayment or coinsurance (what she pays at the pharmacy)
Ms. Smith pays a copayment, and her plan pays its share for each covered drug until their combined amount (plus the deductible) reaches $3,750.
3. Coverage gap
Once Ms. Smith and her plan have spent $3,750 for covered drugs, she’s in the donut hole. In 2018, she pays 35% of the plan’s cost for her covered brand‑name prescription drugs and 44% of the plan’s cost for covered generic drugs. What she pays (and the discount paid by the drug company) counts as out‑of-pocket spending and helps her get out of the coverage gap.
4. Catastrophic coverage
Once Ms. Smith has spent $5,000 out‑of‑pocket for the year, her coverage gap ends. Now she only pays a small coinsurance or copayment for each covered drug until the end of the year.
How much will you pay for drugs once you enter the “donut hole?”
Once you enter the donut hole, here’s what you’ll pay for your prescription drugs in 2018:
- 35% of the plan's cost for covered brand-name drugs
- 44% of the plan’s cost for generic drugs
To give you an example of what these percentages could actually mean, we’ve generated a sample using Medicare’s Plan Finder.
Donut Hole Example 1
At random, we’ve chosen a very expensive brand name drug called Cuprimine and a very common generic drug called atorvastatin calcium to run this sample.
The lowest-cost drug plan has a monthly premium of $27.30 and a deductible of $405.
There are 5 tiers of drugs, from preferred generic to speciality.
Here is how they work at a standard retail pharmacy:
- Tier 1 (Preferred Generic): no copays!
- Tier 2 (Generic): $1 copay per month
- Tier 3 (Preferred Brand): 20% coinsurance
- Tier 4 (Non-Preferred Drug): 35% coinsurance
- Tier 5 (Specialty Tier): 25% coinsurance
You will reach the “donut hole,” or the coverage gap phase, when you and your plan pay $3,750. During this time, you pay 44% of the generic drug and 35% of the brand-name drug until you pay a total of $5,000 out of pocket. Then, you enter “catastrophic coverage,” which means you only pay:
- 5% of $3.35 copay for generic drugs (whichever is greater)
- 5% or $8.35 copay for brand-name drugs (whichever is greater)
Got all that?
No worries. Here’s an example of how this would work for our example. Atorvastatin calcium is considered a Tier 2 drug on this plan, and the Cuprimine is considered a Tier 4 drug.
In our example, you can see how you’re in the donut hole for the first month, which means your prescription drug bill is pretty painful. However, once you get out of the donut hole and reach catastrophic coverage, your monthly cost goes down.
This example is using a very expensive brand-name drug, and while the costs seem high, here’s what this same drug list would cost if you didn’t have a drug plan and only had Original Medicare.
As you can see, having a drug plan can be a lifesaver when it comes to drug costs!
Donut Hole Example 2
Here is one more quick example of how the donut hole works. This time, we’ll do slightly less expensive brand-name drugs so that you can see how the donut hole might work if it came in the middle of the year.
We’ve chosen Advair Diskus, a brand-name asthma inhaler, Plavix, a blood thinner, and Esomeprazole Magnesium, the generic for Nexium.
The lowest cost plan available has these benefits:
- $16.70 monthly premium
- $405 deductible
- $0 copay for Tier 1 drugs
- $3 copay for 1 month of Tier 2 drugs
- $47 copay for 1 month of Tier 3 drugs
- 41% coinsurance for Tier 4 drugs
- 25% coinsurance for Tier 5 drugs
In this cost example, you can see how the deductible is met in month 1. Then, the plan pays normally until month 5, because you’ve reached the donut hole. You’re in the donut hole until month 11, when you reach catastrophic coverage. Then, your monthly drug cost drops until the year is over.
Does the “donut hole” ever end?
As you can see, the donut hole does end, unless you were to reach the donut hole towards the end of the year. Then, you might not pay enough to get out of it.
However, in many cases you do pay enough to exit the donut hole and reach catastrophic coverage.
Does everyone enter the “donut hole?”
Many individuals will never enter the donut hole. If you only take a couple generic drugs, it’s very unlikely that you’d ever pay enough to enter the donut hole.
Individuals who take many drugs, and especially drugs that are brand name, are much more likely to enter the donut hole.
How can you get out of the “donut hole?”
The only way to get out of the donut hole is to pay a total of $5,000 out of pocket. Alternatively, you could talk to your doctor about the drugs you’re taking. Are there generic alternatives? If you can find drugs that are cheaper, you can certainly lower your prescription drug costs, thus potentially avoiding the donut hole altogether.
You can use the Medicare.gov website to look at plans, and find out not only if you'll enter the coverage gap, but what month you'll enter it. The Medicare.gov website can be confusing, though.
We can do the work for you by running free drug comparisons so that you can see what your monthly drug costs would look like. Simply click the button below to contact one of our agents today.
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