What is the Medicare donut hole?

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There are 4 stages to Medicare Part D:

Stage 1) Annual Deductible

Stage 2) Initial Coverage

Stage 3) Coverage Gap

Stage 4) Catastrophic Coverage

 

Medicare’s “donut hole” refers to the coverage gap in your Medicare Part D prescription drug benefit — the point where your prescription drug expenses exceed the initial coverage limit of your plan, but have not yet reached the catastrophic coverage level.

When Medicare Part D was first introduced, patients paid 100% of their drug costs while in the donut hole (as opposed to 25% before the donut hole — for standard plan designs — and 5% after the donut hole). The Affordable Care Act included a provision to close the donut hole by 2020, and the percentage of costs that enrollees pay while in the donut hole has been steadily shrinking since 2011.

And although the donut hole was scheduled to close in 2020, the Bipartisan Budget Act of 2018 closed it a year early, in 2019, for brand-name drugs. So in 2019, while in the donut hole, enrollees pay 25% of the cost of brand-name drugs and generic drugs (previously, it was slated to be 30 percent of the cost of brand-name drugs). 

Before 2019 (and before 2020 for generic drugs), when you reached the donut hole, you no longer had a 25% coinsurance payment (or similar copay, if that’s how your plan is designed) and would instead begin paying more of your costs. Now that the donut hole has closed for brand-name drugs, enrollees in standard plans pay the same 25% coinsurance (after the deductible) until they reach the catastrophic coverage threshold; there’s no longer a higher coinsurance for brand-name drugs once total spending hits the initial coverage level.

But for generic drugs, coinsurance is still higher while in the donut hole  25% before the donut hole). In 2022, you enter the donut hole when the total cost of your drugs (including the part you pay and the part your plan pays) reaches $4,430. Note that you will have paid much less than this amount out-of-pocket, because your drug plan will have picked up the majority of the cost.

You reach the catastrophic coverage level (ie, get out of the donut hole) after your costs reach $7,050 in 2022, including your deductible (which can be no more than $480 in 2022), copays/coinsurance, and the manufacturer discount for brand-name drugs that you receive while in the donut hole.

In 2022, the manufacturer’s discount is 70% on brand-name drugs while you’re in the donut hole. You’re paying 25%, the drug plan is paying 5%, and the manufacturer’s discount is 70 percent. The portion you pay and the portion covered by the manufacturer’s discount (a total of 95% in 2022) counts towards getting you to that $7,050 mark. For generic drugs, only the 25% that you pay counts towards reaching the $7,050 upper limit of the donut hole.

Once you come out the other side of the donut hole and reach the catastrophic coverage level, your plan pays most of your prescription drug expenses through the end of the year, leaving you with minimal copays or coinsurance. At this coverage level, your prescription costs for the rest of 2019 are limited to the greater of 5% coinsurance, or copays that amount to $3.40 for generics and preferred multi-source drugs, and $8.50 for other brand-name drugs.