Medicare

Understanding the Medicare Donut Hole

For Medicare recipients taking prescription drugs, the donut hole can significantly impact your healthcare expenses. Understanding how the donut hole works and what to expect during each coverage phase can help you budget for out-of-pocket costs. This guide explains the Part D coverage gap basics and provides tips for staying out of the donut hole.

Medicare Donut Hole

The Medicare donut hole can significantly impact healthcare expenses for beneficiaries taking prescription drugs. This term refers to a gap in coverage that increases your annual out-of-pocket costs. Learn about how the donut hole works, the benefits you can expect to receive during each phase of coverage, and some tips to help you avoid falling into the donut hole.

What Is the Medicare Donut Hole?

The Medicare Part D donut hole is a gap in prescription drug coverage that occurs once you’ve paid a specified amount towards your covered drugs for the year. To better understand this, consider the phases of drug coverage within a Part D plan.

The primary phase begins on your Part D plan’s effective date, typically January 1. Until you’ve reached your annual deductible, you’re responsible for paying 100% of your prescription drug costs during this phase. In 2022, the maximum deductible for Part D plans is $480, and will increase to $505 in 2023.

The initial coverage phase begins once you have paid your full deductible. Your Part D plan will cover your medication costs in this phase, while you are only responsible for copayments. This phase lasts until the cost of your drugs reaches $4,430, or $4,660 in 2023. When you hit this threshold, you fall into the donut hole.

While in the donut hole phase, you pay a maximum of 25% of the cost of your prescription drugs until your total out-of-pocket costs have reached $7,050, or $7,400 in 2023. Once you reach this out-of-pocket (OOP) threshold, the donut hole phase ends and you move into the final phase: catastrophic coverage.

Does Medicare Cover the Part D Donut Hole?

While your coverage changes during the donut hole, Medicare Part D still provides some prescription drug benefits for both generic and brand-name drugs.  

Covering Generic Drugs in the Donut Hole

Once you’ve reached the donut hole, Medicare pays 75% of the price of your generic drugs while you are in the coverage gap. You pay the remaining 25% of the cost. The amount you pay is credited towards the OOP threshold, which helps to get you out of the coverage gap.

Covering Brand-name Drugs in the Donut Hole

You’re responsible for paying no more than 25% of the brand-name drug costs. However, your drug’s manufacturer contributes to the out-of-pocket (OOP) threshold, allowing you to meet it faster and exit the donut hole. This happens “behind the scenes,” and breaks down to this:

  • 25% of drug cost: Paid by you
  • 70% of drug cost: Paid by drug manufacturer
  • 5% of drug cost: Paid by Part D

In addition, there is often a dispensing fee added to the cost of the drug. Your plan pays 75% of this fee while you pay the remaining 25%.

What your plan pays — the 5% towards the drugs and 75% of the dispensing fee — does not apply to your out-of-pocket costs. However, the 25% you and the drug manufacturer pay counts towards your OOP costs, helping you get out of the coverage gap.

When Does the Donut Hole End?

The donut hole, or coverage gap, begins when you spend enough on prescription drugs to reach the Part D coverage maximum. It ends when you reach your Part D out-of-pocket maximum. Once the donut hole ends, catastrophic coverage automatically begins. During this period, you pay a smaller amount for your coverage until the end of your plan year. After this, everything resets, and the cycle begins again with a new deductible.

How Medicare Part D Works

In 2021, 48 million Medicare beneficiaries were enrolled in Medicare Part D plans. Part D is optional drug coverage offered through private insurance companies as a stand-alone plan for those on Original Medicare or as part of a Medicare Advantage plan. You pay a monthly premium for your Part D plan (or Medicare Advantage plan), and the plan helps lower the cost of your prescription drugs.

Every Part D plan has a list of covered drugs, called a formulary, which includes generic and brand-name drugs. The formularies also organize the drugs into different price tiers. While private companies issue Part D plans, they must follow federal guidelines regarding the types of drugs that must be covered. 

In 2019, approximately 1.5 million Medicare Part D enrollees had accumulated enough out-of-pocket spending to put them into the catastrophic coverage threshold. This indicates just how common the Medicare donut hole remains.

What Is a Part D Deductible?

The Medicare Part D deductible is the amount you’re responsible for paying before your plan begins covering your prescription drugs. It is what you pay towards during your plan’s primary phase. While the maximum amount for 2022 is $480 and will be $505 in 2023, your plan’s deductible may be less. Some plans charge the full deductible, while others charge a reduced deductible or have no deductible at all.

What Are Part D Copayments

The copayment is the amount you pay for your prescription drugs after you’ve met your deductible. It comes into play during your plan’s initial coverage phase. You pay a set amount for the drug, and your plan pays the balance. This amount varies depending on your plan and the price tier of your drug.

What Is the Part D Maximum Coverage?

The Medicare Part D maximum coverage, also known as the coverage limit, is the maximum amount the plan pays before you move into the coverage gap — or the donut hole. The coverage maximum for 2022 is $4,430, and will be $4,660 in 2023.

Once you and your plan spend the maximum amount on drugs, including your deductible, you’re responsible for up to 25% of the cost of your prescription drugs until you move into the catastrophic coverage phase.

What Is Your Part D Out-of-Pocket Maximum?

The out-of-pocket maximum is the highest amount you have to pay before catastrophic coverage kicks in. Under the standard drug benefit, this amount is $7,050 in 2022 and will be $7,400 in 2023.

Expenses that contribute to your out-of-pocket maximum include:

  • Your Part D deductible
  • The amount you paid during the initial coverage period (your copayments)
  • Your out-of-pocket costs for generic drugs purchased during the coverage gap
  • The cost of brand-name drugs (including the drug manufacturer’s contribution) purchased during the coverage gap
  • Amounts covered by State Pharmaceutical Assistance Programs (SPAPs), AIDS Drug Assistance Programs, and Indian Health Service

What Is Part D Catastrophic Coverage?

Catastrophic coverage automatically applies once you’ve reached your out-of-pocket maximum. During this phase of coverage, you pay 5% of the drug’s cost or a set amount of $3.95 for generic drugs and $9.85 for brand-name drugs. This is different from your standard Part D coverage, as the copay is replaced by this lower payment amount.

You do not need to manually track your out-of-pocket spending to move into the catastrophic coverage phase. Instead, your plan keeps track of how much you’ve spent and how you’re progressing to the end of the coverage gap. This information can be found on your monthly statements.

Staying Out of the Donut Hole

To avoid falling into the Medicare donut hole, it’s important to look for ways to keep your prescription drug costs as low as possible. This may include using generic drugs, comparing pharmacies, and asking about drug manufacturers’ coupons. You may also be able to price-check drugs online, save money by using a mail-order pharmacy, or look into pharmaceutical assistance programs.

In some cases, you may be able to make lifestyle changes that could help you reduce or even eliminate your need for certain prescription drugs. Comparing your drug plan options each year can also help you optimize your coverage. In addition, if you meet specific low-income requirements, you may be able to apply for one or more of the following assistance programs:

Extra Help

Extra Help is a Medicare program that assists beneficiaries with covering the costs of prescription medications and other aspects of their medical care. It can offset a portion of your Medicare Part D premiums, coinsurance, deductibles, and other costs. While some people are automatically eligible for Extra Help, others may need to apply.

Medicaid

Medicaid is a joint state and federal program that provides health coverage to low-income Americans, eligible pregnant women and children, and others. When an individual has both Medicare and Medicaid coverage, Medicaid may cover the cost of prescriptions while you are in the donut hole. 

State Health Insurance Assistance Program (SHIP)

Some Medicare recipients may be able to get additional assistance from state-specific programs that help with healthcare expenses, including the cost of medications.