When Medicare Part D prescription drug plans first became available, there was a built-in gap in coverage. This coverage gap opened after initial plan coverage limits had been reached and before catastrophic coverage kicked in. While in this gap, plan members had to pay the full cost of their covered drugs until their total costs qualified them for catastrophic coverage. The phrase “donut hole” was commonly used to describe this gap.1
The good news? Over the years, the Affordable Care Act has been shrinking the donut hole bit by bit each year. Where members once paid 100% of their costs in the gap, now their share of costs in the donut hole is limited to 25% for both brand-name and generic drugs. The donut hole has essentially closed.2
Understanding the coverage phases of your prescription drug plan may help you manage your costs over the course of your plan year.
Phase 1 – annual deductible
Some plans require you to pay a deductible, or 100% of the cost of prescription drugs, up to a certain limit before your plan starts to pay. The deductibles vary between plans and some Part D plans have no deductible. In 2021, the deductible can’t be more than $445. Once you hit your deductible, your initial coverage kicks in.
Phase 2 – initial coverage
During this phase, your copayments and coinsurance come into play. You pay just your share of prescription costs and your plan pays the rest for covered drugs. For example, if your plan has a 25% copayment for a $200 prescription, you would pay $50 and your plan would cover the $150 balance.
If the combined amount you and your drug plan pay for prescription drugs reaches a certain level during the year—that limit is $4,130 in 2021—you enter the Part D coverage gap or “donut hole.”
Phase 3 – coverage gap
Most Medicare drug plans have a coverage gap (also called the "donut hole"). This means there's a temporary limit on what the drug plan will cover for drugs. Not everyone will enter the coverage gap, and it doesn’t apply to members who get Extra Help to pay for their Part D costs.
Once in the gap, you’ll pay no more than 25% of the cost for brand-name and generic prescription drugs covered by your plan, although the full cost of those drugs will be used to move you closer to the catastrophic coverage phase.
For 2021, once you've spent $6,550 out of pocket, you're out of the coverage gap and move into phase 4—catastrophic coverage.
What counts toward the coverage gap:
- Your yearly deductible, coinsurance and copayments
- The discount you get on brand-name drugs in the coverage gap
- What you pay in the coverage gap
What doesn’t count toward the coverage gap:
- Your drug plan premium
- Pharmacy dispensing fees
- What you pay for drugs that aren’t covered by your particular plan
Phase 4 – catastrophic coverage
In this last phase of Part D plan coverage, you’ll only pay a small coinsurance amount or copayment for covered drugs for the rest of the year.
When your new plan year begins, you start over at phase 1.