No, the infamous donut hole — when Medicare beneficiaries with Part D prescription drug coverage reached a certain level and then had to dig out by paying 100 percent of their drug costs out of pocket until they reached a certain threshold — has closed.
No donut hole, but now a coverage gap. Part D plans, federally regulated but sold by private insurers, may require you to pay a larger share of the cost for covered drugs after your drug costs reach a certain limit. The donut hole, some spell it “doughnut,” was a part of Medicare’s prescription drug benefit from its beginning in 2006, three years after Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act.
Before Part D was introduced, Medicare beneficiaries typically had to pay all costs for their prescriptions not included in Medicare Part B unless they had coverage from another source, such as retiree insurance or a Medigap plan. But some people had significant out-of-pocket costs even after they bought Part D coverage.
In 2007, the first full year of the Part D program, you hit the donut hole after you and your insurance company paid $2,400 in drug costs. You then had to pay 100 percent of the cost of covered drugs until you spent a total of $3,850 out of your pocket for the year.
Catastrophic coverage phase still exists. After spending $3,850 of your own money in 2007, you reached the catastrophic coverage level and then paid a small portion of your prescription costs.
A Kaiser Family Foundation study found that 32 percent of Part D enrollees reached the donut hole in 2007. Those who didn't get coverage from the Extra Help financial assistance program paid an average of $1,701 in out-of-pocket drug costs for the year.
The average out-of-pocket costs continued to rise, reaching $1,858 in 2010 until the donut hole started to close the following year.
The donut hole finally closed for good in 2020, having been phased out in 2019 for brand-name drugs and then in 2020 for generic drugs.
The Affordable Care Act enacted in March 2010 gradually reduced the share of costs people had to pay in the donut hole starting in 2011. Discounts from drug manufacturers and government payments helped to cover more costs over several years.
However, after you and your Medicare Part D prescription drug plan have spent a certain amount for your medications each year, you still must pay up to 25 percent of the cost of covered drugs. That's called the coverage gap.
In 2023, you’ll hit the coverage gap when you and your insurance company have paid $4,660 in total for your medications during a year. That number includes any deductible you must pay before a plan will cover your prescriptions. In 2023, Part D plans can have a deductible of up to $505 although many plans don’t have any deductible.
You’ll stay in the gap until you’ve spent $7,400 out of your own pocket during the year. Then you’ll enter the catastrophic coverage phase. Both the threshold and the ceiling in the coverage gap can change each year.
Part D plans have up to four coverage phases throughout a year, each with different out-of-pocket costs: deductible, initial coverage phase, coverage gap and catastrophic coverage phase. You may not reach all the coverage phases during a year, depending on the cost of your medications.
And you start over again when a new plan year begins each Jan. 1.
When your out-of-pocket spending hits $7,400 in 2023 — the amount you personally have paid, not the insurer’s share — you move from the coverage gap to the catastrophic coverage phase where you pay just a small portion of your drug costs for the rest of the year.
Your spending likely won’t equal the difference between the $4,660 you and your insurance company already paid when you entered the coverage gap, and the $7,400 out-of-pocket spending you need to get out of the gap, because both numbers represent different calculations. The expenses that count to get you out of the coverage gap include the following.
A manufacturer’s discount on brand-name drugs in the coverage gap also counts in the calculation. Drug manufacturers pay 70 percent of the insurer’s negotiated cost of brand-name drugs to discount what you pay in the coverage gap.
For generic drugs, Medicare pays 75 percent of the cost while you’re in the coverage gap; you pay the remaining 25 percent. Only the 25 percent you pay for generic drugs counts toward getting you out of the coverage gap.
But your monthly Part D premiums, any portion of the costs your drug plan pays and what you pay for drugs not covered won’t count to help you exit the coverage gap. Once you reach the catastrophic phase, you'll pay up to 5 percent of the price for each of your drugs or $4.15 for generics and $10.35 for brand-name drugs, whichever is greater.
Your Part D plan keeps track of how much you’ve spent for covered drugs and where you are in the coverage phases. The plan must send you a monthly statement, called an explanation of benefits, every month you fill a prescription. You may also be able to access this statement online.
When choosing a Part D plan, the Medicare Plan Finder can show you when you’re likely to enter and leave the coverage gap based on the costs each plan in your area charges for your medications. It also estimates your out-of-pocket costs by month and shows how much you would pay in each of the coverage phases for each plan.
If you qualify for the Part D Extra Help financial assistance program, you won’t have a coverage gap. People with income and assets below a certain level can qualify for Extra Help for assistance in paying your Part D premiums, deductibles, copayments and coinsurance.
With full Extra Help, you’ll pay no more than $4.15 for each covered generic drug and $10.35 for each brand-name drug in 2023 until you reach the catastrophic coverage level, when the copayments drop to zero.
More people will be eligible for full Extra Help starting in 2024, when the Inflation Reduction Act increases the income limits to qualify.
Updated January 19, 2023
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