Medicare provides coverage to 64 million Americans age 65 and older, offering affordable health care insurance for seniors.
However, just like traditional health insurance, Medicare has out-of-pocket expenses, some of which result in coverage gaps. One such gap is known as the Medicare Part D donut hole. This gap affects prescription drug costs for Medicare beneficiaries.
Here’s what you need to know about the Medicare donut hole and its impact on how much you or your loved one pays for prescriptions.
What is the Medicare donut hole?
Medicare is divided into four parts — parts A, B, C and D.
Part D is an optional benefit for people with Original Medicare, also known as Parts A and B. Part D provides prescription drug coverage.
Private companies offer Medicare Part D plans. Each of these drug plans has a formulary that lists which prescription drugs the plan covers, including brand-name and generic drugs.
Depending on your plan, you’ll have to pay a certain percentage of the prescription costs. However, these out-of-pocket expenses will vary depending on the coverage period.
Generally, Part D plans feature four coverage periods:
- First coverage phase — You pay for all your prescription drug costs out-of-pocket until you reach your annual deductible. The deductible is the amount you pay until your health insurance kicks in to begin covering a portion of your healthcare costs.
- Second coverage phase — You pay a copay or a designated percentage of these costs. Your insurer covers the rest. Typically, this split is 80-20, meaning you pay 20% of the costs.
- Third coverage phase — Known as the donut hole, this phase includes a temporary coverage gap after you and your health insurer have paid a specific amount for covered prescription drugs. Medicare has set this limit at $4,130 for 2021. If you spend above this amount over the year, you’ll enter the Medicare donut hole and face a coverage gap where you’ll temporarily have to pay more for prescriptions. Let’s say you paid $15 out-of-pocket for a particular diabetes drug during your initial coverage period. Once you enter the donut hole, the cost might jump to $20 or $25 for this drug, depending on your plan.
- Fourth coverage phase — This is the catastrophic coverage portion. In 2021, you’ll only enter this phase if you spend more than $6,550 out-of-pocket for covered prescriptions. In this phase, you no longer have to deal with the coverage gap and your out-of-pocket costs are significantly lower.
Not every Medicare beneficiary enters the Medicare donut hole. It depends on how much you spend on prescription drugs. For instance, some people who only use generic drugs or don’t need medication for a chronic condition have lower prescription drug costs than seniors with more health needs.
But either way, it’s critical to understand this coverage gap and know how to navigate it.
Until recently, Medicare beneficiaries who entered the donut hole paid more for brand-name drugs than generic drugs.
Brand-name drugs are usually more expensive than generic drugs, so Medicare beneficiaries who entered the donut hole often faced higher costs for their prescriptions for this period.
However, Medicare closed the donut hole for brand-name medications. Now, when you enter this coverage period, you pay no more than 25% of the costs for any covered medications — whether they’re brand-name or generic.
“The advantage to seniors is lower out-of-pocket costs for their prescriptions. The standard 25% coinsurance also makes it simpler to understand the benefits while in the donut hole,” says Mike Sheeran, a certified financial planner and account executive at Glenn Insurance, an independent insurance agency based in New Jersey that helps seniors find Medicare supplemental plans.
One important thing to note is that although you’ll only pay 25% of the costs of covered drugs once you enter the donut hole, 95% of the cost of brand-name drugs will count toward your out-of-pocket cost during this coverage phase. That should help you get out of the coverage gap period much faster if you ever enter it.
However, for generic drugs — which are much cheaper — only the actual amount you pay out-of-pocket (the 25% share) counts toward the $6,350 amount required to get out of the coverage gap and enter the catastrophic coverage phase.
How to manage Medicare Part D prescription drug costs
While the donut hole temporarily increases Medicare beneficiary costs, Sheeran says it’s vital for seniors to look at their healthcare costs more holistically.
“Rather than focusing on the donut hole, I suggest Medicare beneficiaries look to reduce their overall cost at least on an annual basis by using free tools available or asking their trusted [insurance] advisor for help,” he says.
Prescription drug companies often make slight changes to their formularies, copays and deductibles. It’s important that seniors compare the plans each year using the prescription drug finder tool on www.medicare.gov, he adds.
“This tool provides the option to sort the different plans based on many different metrics, but most importantly, the overall cost based on their exact prescriptions.”
The tool can estimate how much you’ll spend at your pharmacy, if and when you’ll enter the donut hole and what your covered prescriptions will cost annually, Sheeran says. Once you have this information, you can determine the best approach to reduce your costs.
“If, for example, you have two or three very expensive prescriptions, you can have a discussion with your physician to see if there are any less expensive alternatives that may work just as well,” Sheeran says. “If you have already explored that, my next suggestion is to reach out to the patient assistance programs offered by the pharmaceutical companies to try and get the prescriptions at a reduced cost.”
Many states also offer patient assistance programs. Some people may be able to reduce their out-of-pocket costs through the federal government’s Extra Help program. Several online companies also have emerged to help consumers compare prices and find the lowest price for their prescriptions.
Sheeran says that it’s important for anyone with a Medicare plan to do their due diligence annually.
“My best advice in dealing with Part D is to shop your plan each and every year,” he says. “Don’t assume you have the best plan because it has worked well or because your friend, neighbor or other family member has it.”