Prescription drug coverage gaps explained: the Medicare Part D "donut hole"

An older man sits on a park bench reading from a tablet.

When you hear the term “donut hole” you might think powdered or glazed, chocolate or cinnamon.

But the phrase “donut hole” is also used to describe the coverage gap found in most Medicare Part D prescription drug plans (PDP). The gap opens after initial plan coverage limits have been reached and before catastrophic coverage kicks in—and it’s not so sweet.

While in the gap, PDP members with high prescription drug costs may have to pay a larger share of the cost for their medicine.

The good news? The Affordable Care Act (ACA) has been decreasing the donut hole each year since 2011. Even better, new legislation passed in early 2018 will effectively close the gap for brand name drugs in 2019.

So, what does this mean for you?

If your Medicare plan has a deductible, you might have to spend some money out of pocket before you take your first bite out of the Part D “donut.” That's because some plans require you to pay a deductible, or 100% of the cost of prescription drugs, up to a certain limit.

When you reach the deductible, you can begin nibbling away at the Part D donut, at which point your drug plan begins paying most of the cost of prescriptions. For example, if your plan requires a 25% copayment for a $200 prescription, your plan would cover $150 and you would pay $50.

If the combined amount you and your drug plan pay for prescription drugs reaches a certain level during the year—that limit is $3,750 in 2018—you enter the Part D donut hole, the space in which you must pay a greater share of the cost.1

Different Part D plans offer different levels of coverage-gap savings. In 2018, the most you'll have to pay when you're in the donut hole is 35% of prescription drugs and 44% of generics.2

In 2020, when the donut hole closes, the most you'll have to pay for both brand-name and generic drugs is 25%.3

Mind the gap

So how do you get out of the hole and into the remaining part of the donut, which is known as “catastrophic coverage”?

You become eligible for Part D catastrophic coverage once the amount you pay out of pocket for the year reaches a certain limit. In 2018, that limit is $5,000.4 At that point, your catastrophic coverage kicks in and your plan will pay up to 95%.

Your yearly deductible, coinsurance and copayments, the discount you get on brand-name drugs (Medicare negotiates these with drug makers for beneficiaries in the donut hole), and what you pay for prescriptions while in the donut hole all count toward the amount you need to get Part D catastrophic coverage.

However, the premiums you pay for your drug plan, pharmacy dispensing fees, and what you pay for drugs that Medicare doesn't cover don’t count toward what you have to spend to exit the donut hole.

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