Medicare Part D and the donut hole
By Karen Lewis-Smith
Regional Director, Government Programs, Kaiser Foundation Health Plan of Washington
“Donut hole” brings to mind a sweet morning treat, which couldn’t be further from its meaning in the Medicare world. As a Medicare term, it refers to a stage in the standard Part D prescription drug coverage that has significantly more in out-of-pocket expenses than the other stages of coverage. But let’s start at the beginning.
What is standard Part D prescription drug coverage?
Medicare Parts A and B don’t cover the cost of most prescription drugs. Medicare Part D is optional prescription drug coverage that’s available through private companies and has a monthly premium.
You can get Part D as a stand-alone drug plan or as part of a Medicare Advantage plan that includes both medical and prescription drug coverage. However, you may not enroll in both. If you do enroll in both a Medicare Advantage Part D prescription drug plan and a stand-alone drug plan, you will be disenrolled from the plan you enrolled in last.
How Part D works
Part D is divided into 4 stages. How much you pay for prescriptions and how much your plan pays changes from one stage to the next as your drug costs add up over the calendar year.
STAGE 1 – Deductible stage: You pay all your drug costs until you meet your plan’s deductible, if applicable (not all plans have deductibles). A deductible is the amount you pay each year before your plan starts paying a portion of the cost shares.
For example, if your prescription drug deductible is $300, you’ll pay the full cost of your prescription drugs until those costs reach $300.
STAGE 2 – Initial coverage stage: In this stage, your Part D benefit begins and your health plan starts to cover your prescriptions. You pay a fixed amount — either a copay or coinsurance—for your drugs until you reach a certain amount in covered drug costs. That amount may change annually, so be sure to check your plan each year.
“Drug cost” is the full price that the pharmacy would charge if you paid for your medications entirely out of pocket. It includes what you’ve paid and what your health plan has paid added together.
For example, you have paid $300 for prescriptions to meet your plan’s $300 deductible. Your next prescription costs $200, and you have a coinsurance of 20%. So for this prescription, you will pay $40 in coinsurance and your plan will pay $160. Your plan will continue to pay for your prescription cost minus your coinsurance until you reach the coverage gap (see Stage 3).
STAGE 3 – Coverage gap stage: This is what’s known as the donut hole, or coverage gap, because you have less coverage during this stage. The coverage gap has a beginning amount and an end amount, although the amounts may change from year to year. Many people don’t fill enough prescriptions in a year to reach the coverage gap. But if you do, you’ll pay quite a bit more for your prescription drugs until you reach the end of the coverage gap.
For example, in 2022 the coverage gap — or donut hole — begins once you reach your plans Part D initial coverage limit of $4,430 in prescription costs. While you’re in the coverage gap, you’ll pay 25% coinsurance for covered generic drugs and 25% coinsurance for covered brand-name drugs.
Costs that count toward reaching the end of the coverage gap include everything you’ve spent on covered prescription drugs since the beginning of the calendar year: your deductible, copays, and coinsurance, and what you’ve paid for your drugs in the coverage gap.
Also added to your total is the discount you get on covered brand-name drugs in the coverage gap.
For example, in 2022 you pay 25% of the price for covered brand-name drugs, but 95% of the price — what you pay plus a 70% manufacturer discount payment — counts as out-of-pocket cost and helps you get out of the coverage gap. The remaining 5% of the discount is paid by your Medicare Advantage or Part D plan and does not count toward your out-of-pocket costs.
Costs that don’t count include your drug plan premium, the pharmacy dispensing fee, and the cost of medications you purchased that aren’t covered by your plan.
STAGE 4 – Catastrophic coverage stage: Once your out-of-pocket drug expenses reach the coverage gap’s designated total for the year, the coverage gap ends, your coverage increases, and you pay a low coinsurance or fixed fee for the rest of the calendar year. On January 1 of the next year, the whole process starts over again.
In 2022, the coverage gap ends once you have spent $7,050 in total out-of-pocket drug costs. Once you’ve reached that amount, you’ll pay the greater of $3.95 or 5% coinsurance for generic drugs, and the greater of $9.85 or 5% coinsurance for all other drugs. There is no upper limit in this stage.
Luckily, you don’t have to keep track of how you’re progressing through each of these stages. Your health plan sends you a monthly statement that details where you are in the process and how close you are to moving into the next stage of coverage.
The coverage gap has been slowly closing since 2011, meaning you pay less and less in the donut hole for your Part D prescription drugs.