The Medicare Donut Hole Explained

Joseph Arroyo Joseph Arroyo is a writer, author, and Medicare Insurance specialist. He lives in Hilton Head Island, SC with his wife and two children.
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Does The Medicare Donut Hole Still Exist?

The Medicare Donut Hole refers to a gap in Medicare’s drug program. The gap leaves a hole in your coverage, hence the name. Medicare Part D is designed to reduce the cost of medications for those on Medicare. For some, though, the donut hole is a painful financial blow.

While the Medicare Donut Hole has been closed, a prescription drug coverage gap can still leave a sour taste in your mouth. This gap in your coverage can also hit your wallet hard. In this article, we will discuss:

  1. How Medicare Prescription Drug Coverage (Part D) Works
  2. The Coverage Stages of Medicare Part D
  3. The Donut Hole in Detail
  4. For Whom Does the Donut Hole Apply?
  5. How to Avoid the Part D Late Fee Penalty

How Does Medicare Prescription Drug Coverage Work?

Original Medicare, Parts A and B, do not cover prescription drugs. As the cost of medications rose over time, people struggled to afford their prescriptions. In response to these pressures, Congress and the President created Part D of Medicare.

Beginning in 2006, Part D offers Medicare enrollees a choice for drug coverage. All enrollees can get coverage from:

  • a stand alone prescription drug plan (PDP), or
  • a Medicare Advantage plan that offers drug coverage (MAPD)

Both are issued by private insurance companies. To join, you must be eligible for Medicare. Anyone who is either entitled to Part A, or actively enrolled in Part B, may enroll in a Part D Drug plan. You must be enrolled in both Part A and B to enroll in Medicare Advantage.

MAPD and Prescription Drug plans have a formal list of all the drugs they will cover. This list is known as a formulary. plans are not required to cover every drug available. Instead, they must cover at least two drugs in every therapeutic category.

Therapeutic categories are groups of medicines that treat specific conditions. For instance, blood pressure drugs are in one category, and thyroid medicines are in another. Every plan must offer at least two drug choices in each category. Often many more than two are available.

Within the formulary, medications are grouped into tiers based on cost:

  • Tier 1 – preferred generic drugs
  • Tier 2 – non-preferred generic drugs, and preferred brand name drugs
  • Tier 3 – non-preferred brand name drugs
  • Tier 4 – specialty drugs

You pay a co-pay or co-insurance at each Tier. Where Part D gets tricky, though, is the fact that pricing changes during the year. Your costs are based on how much the plan has already paid for your medications during the calendar year. These changes in pricing are known as coverage stages.

What Are the Coverage Stages of Medicare Drug Plans?

Throughout the calendar year you may pass into and through four coverage stages in your drug plan:

  • Deductible Stage (Not more than $435 for 2020)—during this stage you pay full price for prescriptions until you’ve spent $435. Some plans don’t have a deductible at all, and others waive it for lower Tier medications.
  • Initial Coverage Stage—after you’ve met the deductible, the plan begins paying for the majority of your drug costs. You pay a small co-pay or co-insurance. For example, you might pay $10 for a 30 day supply of a Tier 1 medication.
  • Coverage Gap Stage (Medicare Donut hole)—once total drug costs have reached $4,020, you enter the coverage gap. During this stage, you will pay 25% of the drug cost for your medication, whether name brand or generic.
  • Catastrophic Stage—when your total out of pocket costs from each stage exceed $6,349, you enter the catastrophic stage, and you can expect to pay very small co-pays or co-insurance for the rest of the calendar year.

Medicare Donut Hole In Detail

If you end up in the coverage gap, it’s important to remember a few facts. In the donut hole stage, 95% of the full price of brand name drugs counts towards your out of pocket amount. Even though you only pay 25% of the cost. Your drug plan pays 5% of your drug cost.

For generic drugs, only the 25% you actually pay counts towards your out of pocket costs. Also, if you pay out of pocket for medications that your plan doesn’t cover, or if you purchase drugs from Canada or overseas, those amounts don’t count towards your maximum out of pocket total.

The Affordable Care Act required drug companies to close the Medicare donut hole in stages beginning in 2010. The donut hole was officially closed in 2019. For 2020, drug companies provide brand name drugs at a 70% discount for Medicare drug plan enrollees.

There are no manufacturer discounts on generic medications. Instead, Medicare now pays 75% of the cost for generic drugs; your 25% co-insurance makes up the difference.

You pay less in 2020 than in years past. The donut hole was more punitive in years prior to 2019. Back then you might have paid 44% of name brand drug cost – and the drug company discount was only 50%.

Does The Donut Hole Apply To Everyone On Medicare?

Not every everyone on Medicare will enter the donut hole. People who take few, or infrequent, medications will not reach the coverage gap stage. Unfortunately, those who take many medications, or drugs that are in high tiers, are likely to enter the coverage gap stage.

Also, Beneficiaries who are on Medicaid, or qualify for a program called Extra Help, available to those with low incomes and few assets, will not enter the Part D donut hole.

Use Part D To Save On Prescription Drugs

Even with the possibility of hitting the donut hole, Part D will save you money on drug costs. This is especially true if you have a higher income, and are not eligible for Extra Help from your State.

Avoid The Part D Late Enrollment Penalty

Every Medicare enrollee must have drug coverage; Part D Prescription Drug plans, and Medicare Advantage plans with a drug benefit, meet this requirement. Your enrollment window for Part D is just like for Original Medicare. You can enroll:

  • 3 months before you turn 65
  • the month you turn 65
  • 3 months after you turn 65

If you don’t signup during this seven month window, you’ll pay a penalty when you do enroll. The penalty increases for each month that you fail to enroll. To avoid the penalty, make sure you signup when you first become eligible.

It pays to compare plans to see which one offers the best mix of premium cost and expected yearly drug expense. Since benefits change each year, it’s a good idea to connect with a professional to review the plan options in your area.

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