The Medicare “donut hole” is the gap in prescription drug benefits that occurs when Medicare Part D policyholders reach their yearly maximum coverage amount but still have not reached the point where the catastrophic part of their coverage kicks in. Not everyone will experience this expensive lapse in coverage, but understanding how Medicare covers prescription drugs is crucial for choosing the right plan and minimizing out-of-pocket costs.
The Specifics of the Donut Hole
In 2018, no Medicare Part D Plans may have a deductible higher than $405. Deductibles vary between plans, but policyholders must pay 100 percent of the retail cost of their drugs out of pocket until this threshold is met. At that point, the Initial Coverage Phase kicks in and lasts until a Part D policyholder and their insurance plan have spent a combined total of $3,750 on covered prescription drugs. After reaching this second threshold, one is considered in the donut hole.
Once in the coverage gap, a policyholder will pay a maximum of 35 percent of the cost of any covered brand name drugs and a maximum of 44 percent of the cost of covered generic drugs. Certain plans may offer additional discounts on brand name drugs, but this varies.
To get out of the donut hole, policyholders must trigger their catastrophic coverage, which does not kick in until they have spent $5,000 out of pocket on prescription drugs. After meeting this threshold, beneficiaries must only pay small coinsurance amounts or copayments for their drugs for the rest of the year.
Getting Out of the Coverage Gap
It is expensive to fall into the donut hole and can be difficult for a Part D beneficiary to get out of it. However, with the passage of the Affordable Care Act (ACA) in 2010, a major goal for Medicare has been to close this coverage gap. Currently, beneficiaries must only pay 35 percent of the cost of brand name drugs while in the donut hole, but 85 percent of the total cost of the drug is counted toward out-of-pocket spending. This helps beneficiaries trigger their catastrophic coverage sooner without putting out as much money. With generic drugs purchased while in the donut hole, only the base 44 percent of the cost that beneficiaries pay counts toward the out-of-pocket requirement to reach catastrophic coverage.
Changes in the Donut Hole
Years ago, the costs associated with falling into Medicare’s coverage gap were much more significant. Beneficiaries in the donut hole used to be on the hook for 100 percent of their drug costs, but things have been steadily changing.
The ACA set a goal to close the coverage gap by 2020 by gradually decreasing Medicare beneficiaries’ share of drug costs while in the donut hole until they reach the traditional 25 percent copay for both brand name and generic drugs. However, the passage of a new federal spending package in March 2018 has sped up this process. The Medicare Donut hole is now set to “close” a year early in 2019. This may sound like a monumental change, but keep in mind that beneficiaries are still responsible for meeting their deductibles, paying premiums, copayments and coinsurance, covering 25 percent of their covered drug costs in the donut hole, and paying some costs if/when catastrophic coverage kicks in.
How to Minimize Drug Costs
Honest discussions about prescription drugs between doctors, patients and pharmacists are crucial. Open communication with health care providers can reduce the chances of falling into the donut hole, decrease out-of-pocket drug costs and prevent adverse side effects and drug interactions.
Furthermore, proper insurance counseling and research can help seniors decide what specific type of drug coverage is best for their unique situation. Local Area Agencies on Aging (AAAs) offer free benefits counseling through State Health Insurance Assistance Programs known as “SHIP.” These counselors can help beneficiaries navigate Medicare selections, join or leave plans and find the most cost-effective and comprehensive coverage. You can find the contact information for your local AAA here.
Medicare’s Extra Help program is also available to seniors who meet certain income and asset limits. This program significantly reduces costs for both brand name and generic drug and can help some beneficiaries lower their deductibles and Part D premiums.
Lastly, individual states sponsor State Pharmaceutical Assistance Programs that can help reduce premiums and drug costs, and many large pharmaceutical companies run their own discount programs as well. For more information on these and other ways to reduce out-of-pocket costs for prescriptions, visit the Prescription Drug Assistance Program Locator.