Since 2006, when the Part D prescription drug program was introduced, people have feared the donut hole. As of 2020, the donut hole has officially closed, but probably not in the way most people think.
There are still four stages of Part D coverage, and contrary to popular myths, prescription drugs aren’t free now that the donut hole is closed. But the news isn’t all bad, and the 2020 changes mean that you’ll pay less for prescription medications once you pass out of the initial coverage stage.
You might still face some sticker-shock, however.
The 4 stages of Part D coverage
Part D was designed with four stages of coverage: The deductible, initial coverage, the coverage gap, and catastrophic coverage. Those four stages still exist, but what you pay during each stage has shifted and stabilized.
In 2020, the Part D deductible is $435, although plans can set their own deductible for any amount up to that limit. According to the Kaiser Family Foundation, there are two plans in 2020 with a $0 deductible.
When you’re in the deductible stage, you pay 100% of your prescription drug costs until you reach your deductible. At that point, you advance to the initial coverage stage.
By design, the cost-sharing structure in the initial coverage stage means you pay 25% of your medication costs and your plan pays 75%. Most insurers actually choose to structure the cost-sharing with a tiered copayment system in the initial coverage stage.
You may or may not have a copayment for tier 1 generic drugs; copayments for tier 2 and tier 3 may range between $3 and $25. Tiers 4 and 5 are reserved for specialty drugs and expensive generic medications, and you may pay the full 25% cost-sharing for drugs in these tiers.
In 2020, you’ll stay in the initial coverage phase until you and your insurance company have spent $4,020 on prescription drugs. In 2018, 90% of Part D enrollees never exceeded their initial coverage stage.
The other 10% advanced to the coverage gap.
The coverage gap (aka the “donut hole”)
The coverage gap still exists, the difference for 2020 is how much you pay while you’re in it.
When Part D was first introduced, you paid 100% of your prescription drug costs while you were in the coverage gap. The Affordable Care Act began the 10-year process to close the donut hole.
The Act negotiated a 50% discount for brand-name medications and a 14% discount for generics, split between the insurance company and the drug manufacturer. The insured paid the remaining medication costs out-of-pocket.
In 2020, those special discounts in the donut hole disappeared, and the standard 25%/75% cost-sharing structure of the initial stage replaced it.
In other words, the cost-sharing structure remains the same for both the initial stage and the coverage gap stage. The big difference is how the cost-sharing burden is assessed.
Instead of a flat copayment for tiered medications in the initial stage, you’ll pay a straight 25% of the retail cost of the medication. That’s where the sticker-shock comes in.
Liz takes three medications, two generic medications for hypertension, and atorvastatin, a tier 3 cholesterol medication. During the initial coverage stage, she pays $3 each for her generic medications and $20 for her atorvastatin.
Once she hits the coverage gap, her two generics cost $0.65 and $0.80, but her 25% cost-sharing for the atorvastatin jumps to $54.
You’ll stay in the 25% coverage gap until your total out-of-pocket spending on prescription drugs reaches $6,350 in 2020. Once you exceed that amount, you’re in the catastrophic coverage stage.
Most people never hit catastrophic coverage; the Centers for Medicare and Medicaid Services estimate the number at about 3.5 million, or about 5% of Part D enrollees.
If you’re one of the unlucky few, you’ll pay the greater of 5% of the actual cost or $3.60 for generic medications and $8.95 for brand-name drugs. There’s no cap on out-of-pocket costs with Part D, and you never move into a more heavily discounted level of coverage than the catastrophic stage.
So is there or isn’t there a donut hole?
As you can see, at this point, the closing of the donut hole is both more and less than meets the eye. The coverage gap still exists—and how you pay for medications will change once you enter it.
However, the cost-sharing is more consistent and equitable, in that you’ll pay the same 25% of your medication costs as you did in the initial coverage stage. You’ll just pay it as an actual percentage of costs as opposed to a tiered copayment, and that may mean higher copays for certain drugs.
Your costs will definitely go down in the coverage gap compared to costs in the old donut hole, however, and you’ll stay in the initial stage longer compared to 2019. On the other hand, the threshold for catastrophic coverage is also higher, so you’ll stay in the gap longer, too.
What the donut hole closure means for you
Changes to the coverage gap won’t matter for the vast majority of Part B enrollees. Only about 10% of the Medicare population will ever leave initial coverage. So chances are, not much will change for you.
If you’re worried about prescription drug costs, your best option is to comparison shop plans every year prior to the annual enrollment period. There are at least 18 stand-alone Part D plans in each state, and the average person has access to 28 different Medicare Advantage plans, the highest number in a decade. Since most Medicare Advantage plans include Part D coverage for prescription drugs, it’s important to consider all your options.
Make a list of all the medications you take on a regular basis and check the copayments with several different plans. Remember to compare premiums and deductibles, too, so you choose the most cost-effective plan for your situation.
Keep in mind, if you choose Original Medicare and a Medigap supplement, you’re still responsible for all your out-of-pocket Part D costs. Medigap only covers your costs under Part A and Part B.
Need help choosing the best Medicare plan for your needs? Get in touch with a licensed Medicare broker and compare your options today.