The Part D donut hole, also known as the Medicare coverage gap, might just be one of the most difficult things to understand about Medicare. But if you’re taking expensive prescriptions, you’ll probably find yourself in the donut hole at some point during the year. Understanding your coverage will help you budget for your prescriptions, so you don’t end up with surprise bills later.
Today, we’re going to break down the donut hole so you can have a better understanding of what it is and how your coverage is affected by it.
What Is the Medicare Donut Hole?
The donut hole is part of every Part D prescription drug plan - whether you have a stand-alone plan or if you have prescription coverage included in your Medicare Advantage (Part C) plan. It is the third phase of coverage.
● Phase 1: Deductible
● Phase 2: Initial Coverage
● Phase 3: Coverage Gap / Donut Hole
● Phase 4: Catastrophic Coverage
Not everyone will enter the donut hole. It depends on the retail cost of your prescriptions. Those who take more medications or expensive medications are more likely to fall into the coverage gap.
So, when will you find yourself in the donut hole? Simply put, when you and your plan have spent a certain amount (combined) on prescriptions. In 2022, that threshold is $4,430. Both the amount you pay and the amount your plan pays goes towards that threshold. For example, if you pay $20 and your plan pays $80 for a prescription, $100 goes towards the $4,430.
You might have heard someone tell you the donut hole doesn’t exist anymore. That’s not true, although it’s certainly better than it was just a few years ago. Prior to 2020, if you were in the coverage gap, you were responsible for 100% of the cost of your prescriptions. Fortunately, the gap has at least partially closed. But make no mistake, it’s still there! Let’s talk about the current out-of-pocket costs in the donut hole.
Your Costs Inside the Coverage Gap
Once you find yourself in the coverage gap, you’ll pay more for your prescriptions. There are limits on your out-of-pocket costs. You’ll be expected to pay no more than 25% of the retail cost for both name-brand and generic medications. (Some plans set lower amounts.) If the full cost of your prescription is $100, you’ll pay $25. Your pharmacy may also add a dispensing fee for the medication. If so, you’ll also pay 25% of the dispensing fee.
Getting Out of the Donut Hole
As we mentioned earlier, there is another side to the donut hole: catastrophic coverage. Once you’ve reached catastrophic coverage, you’ll have small copayments or coinsurance amounts for the remainder of the calendar year. There is also a threshold to enter catastrophic coverage, just like there was for the coverage gap. In 2022, this threshold is $7,050.
However, it’s not just you and your plan’s costs that are factored into reaching that limit. Let’s take a look at how the costs for generic and name-brand medications are included in reaching catastrophic coverage.
Name-Brand Prescriptions
For name-brand medications, nearly the full cost of the drug counts towards your catastrophic limit. The drug’s manufacturer picks up 70% of the cost (a “discount”); your plan pays 5% of the cost; you pay the remaining 25%. Your plan will also pay 75% of the dispensing fee, and you’ll be responsible for the other 25%.
All of those amounts count towards the threshold except what your plan pays (5% of the cost and 75% of the dispensing fee). Let’s go over an example.
Your prescription costs $100, and there is a $4 dispensing fee, which makes the total cost $104. The manufacturer’s discount is $70. You pay 25% of the total cost, or $26. Together, these amounts add up to $96, which counts towards the catastrophic threshold. The amount the plan pays, $8 (5% of the drug cost and 75% of the dispensing fee), does not count towards that limit.
Generic Prescriptions
For generic medications, only your coinsurance cost is counted towards getting out of the donut hole. Medicare pays 75% of the cost, and you pay the remaining 25%. This is much more straightforward than how it works with name-brand drugs.
For example, if your prescription costs $20 plus a $2 dispensing fee, your drug plan pays $16.50, and you pay $5.50. Only the amount you paid ($5.50) counts towards the out-of-pocket threshold for catastrophic coverage.
One more thing to know: prescriptions that are not included in your drug plan’s coverage are not included in your out-of-pocket total.
Your Costs Inside Catastrophic Coverage
Once you reach catastrophic coverage, your cost-sharing responsibility is much lower. You’ll pay one of two amounts. Either 5% of the cost or $3.95 for generic drugs and $9.85 for name-brand, whichever amount is greater.
If you are someone who receives Extra Help, the coverage gap does not apply to you. In addition, you may pay different amounts if you’re enrolled in a State Pharmaceutical Assistance Program (SPAP).
We hope this has given you a better understanding of how Medicare’s donut hole works. You can keep track of your coverage phases by reviewing each of the monthly statements you receive. And, if you have questions throughout the year, the advisors at Jackson Insurance Brokers are here to answer all your questions.