The donut hole is just a term coined by ordinary people for the stage of Medicare Part D that is officially called the coverage gap.
What is the Donut Hole?
The Part D coverage gap, or donut hole, is the stage of your Medicare Part D coverage when you have reached the initial limit on what the insurance company will pay for your covered medications. Congress designed Part D so that it would provide coverage for the majority of your prescription drugs. However, a small percentage of people have medication costs that go well beyond average spending, and those people then share in a greater portion of the costs for their medications when they enter the coverage gap.
How the coverage gap works
The coverage gap starts after the combined spending by you and your insurance company reaches a certain annual limit which is set by Medicare each year. In 2016, the gap begins when spending reaches $3,310. Before the gap is reached, you will normally pay ordinary copays for each medication. Once the gap is reached, though, you will pay a percentage of the cost of each medication.
In the gap, your brand-name medications will be discounted by 55%,so that you pay only 45% of the cost of the medication. So if a certain medication costs $100, and you were paying a Tier 3 copay of $40 before you reached the gap, the same medication will now cost you $45 when you are in the gap.
Generic medications will also be significantly discounted, and some plans will continue to offer you copays in the gap for generic medications.
The spending between you and your insurance company continues to be tallied while you are in the gap, and if your total out of pocket drug expenses reach $4850 in 2016, then the gap ends and you reach the fourth stage of Medicare Part D, which is called catastrophic coverage. At this stage, you will pay no more than 5% of the cost of your medications for the rest of the year, with the insurance company picking up the rest.
Some medications fall outside of Part D altogether, and therefore do not get tallied toward the gap. See our list of medications not covered by Part D for more information on that.
While the coverage gap can be financially painful, it’s important to remember that, just a few years ago, there was no prescription drug program for Medicare beneficiaries. Medicare Part D has greatly helped to reduce drug spending for millions of Medicare recipients.
Most Part D carriers negotiate discounted drug rates with pharmaceutical manufacturers, too, so the cost of the drug before you even pay your percentage is already discounted for you just because you are enrolled in a drug plan.
How do I know if I will reach the Medicare Donut Hole?
Your Part D drug plan carrier sends out a statement, or explanation of benefits (called an EOB), which tells you exactly how much you have already spent on covered medications and how many dollars are left before you reach the coverage gap. Likewise, after you reach the gap, your insurance company will continue to send you notices that track your gap spending and calculate how many dollars are left to be spent before you will reach catastrophic coverage.
Exemptions from the coverage gap
Will a Medigap plan cover the coverage gap in your drug plan? The answer is no, but this is a common question because Medicare supplements are also called Medigap plan, and the “gap” in that word confused people.
Every year we have clients ask us to help them find a Part D drug plan with no coverage gap. Such a plan does not currently exist in most states, and there is no separate insurance plan that you can buy to cover you in the gap.
However, certain people with low incomes and limited assets may qualify for the low-income subsidy, called Extra Help for Part D. If you qualify, then the gap will be waived for you, and your ordinary copays on your prescriptions will also be greatly reduced. You can apply for the subsidy at your local Social Security office or online at their website.
Reducing costs in the coverage gap
Since the total cost of your medication is what gets tallied toward the Medicare Part D gap, saving money on Part D often means working toward savings all year long, and not just while you are actually in the gap.
For tips on how to lower your out of pocket expenses on Part D, see our blog post about that topic: How to Reduce Costs in the Part D Coverage Gap.
All insurance agents at Boomer Benefits are specifically trained to carefully analyze your potential drug spending in the coming year and help you find a plan that offers you the lowest possible annual drug spending. If you are worried about the coverage gap, you can ask for free help from our agency with Part D when you have purchased your Medicare supplement through us.