The Medicare 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 Medicare Donut Hole?
The Medicare Donut hole is a gap inside of your Part D plan. It is a period of the year when your medication costs can be higher.
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. Those people then share in a greater portion of the costs for their medications when they enter the coverage gap.
Medicare designed the gap to encourage beneficiaries, whenever possible, to seek generics or drug alternatives that are lower in cost. This helps Medicare to keep the total costs for the Part D program as low as possible.
How the Coverage Gap works
The coverage gap starts after the combined spending by you and your insurance company reaches a certain annual limit. Medicare sets this limit each year. In 2017, the gap begins when your drug cost reaches $3,700. Before your reach the gap, you will normally pay copays for each medication. After you reach the gap, you will pay a percentage of the cost of each medication. If the medication has a high retail price, this may mean your costs for the medication will increase while you are in the gap.
In 2017, you pay 40% of the cost of your brand-name medications and 51% of generics once you reach the Medicare donut hole. So if a certain medication costs $100, and you were paying a Tier 3 copay of $30 before you reached the gap, the same medication will now cost you $40 when you are in the gap.
You will also have a discount on generic medications. Some plans will continue to offer you copays in the gap for generic medications as an added value for that plan.
Medicare continues to tally the spending between you and your insurance company while you are in the gap. If your total out of pocket drug expenses reach $4950 in 2017, then you exit the gap. You reach the fourth stage of Medicare Part D, 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. The insurance company picks up the rest.
Some medications fall outside of Part D altogether, and therefore do not get tallied toward the Medicare donut hole. See our list of medications not covered by Part D for more information on that.
While the coverage gap can be 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. You get the benefit of these discounts just for being a plan member.
How do I know if I will reach the Medicare Donut Hole?
Your Part D company sends out a statement, or explanation of benefits (called an EOB), each month. This statement 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. They will calculate how many dollars are left before you reach catastrophic coverage.
Exemptions from the coverage gap
Sometimes people ask us if their Medigap plan will cover the coverage gap in their drug plan. The answer is no. Medigap plans help to pay for inpatient and outpatient services only. Drugs fall separately under Part D.
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. There is no separate insurance plan that you can buy to cover you in the Medicare donut hole. Read more on why that is here.
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 Medicare will waive the gap for you. Also your ordinary copays on your prescriptions will decrease quite a bit. You can apply for the subsidy at your local Social Security office or online at their website.
Reducing costs in the coverage gap
Since Medicare tallies the total cost of your medications toward the Medicare Donut Hole, you should know the full cost of each drug you are taking. Fortunately, this is easy to do by reviewing your statements from the insurance company.
For other 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 train extensively to carefully analyze your potential drug spending in the coming year. We can help you find a plan that offers you the lowest possible annual drug spending. Worried about the coverage gap? Ask for free help from our agency with Part D when you have purchased your Medicare supplement through us.