Medicare provides health care coverage for persons aged 65 and older. If you’re enrolled in a Medicare Part D prescription drug plan, it’s possible that you could encounter a gap in coverage, depending on how much you spend. This gap also referred to as the Medicare donut hole, can potentially affect what you pay for prescription medications.
Key Takeaways
- The Medicare donut hole is a coverage gap that may arise with Medicare Part D prescription drug plans.
- While Medicare donut hole gaps have been reduced, it’s still possible that you may end up paying more out-of-pocket for medications.
- Medicare recipients can make changes to their plans and coverage during the annual fall open enrollment period.
- If you need additional help with prescription drug costs, there are a number of programs that may offer financial assistance.
What Is the Medicare Donut Hole?
Medicare Part D coverage pays for prescription drug costs for older adults who are enrolled in Medicare. The Medicare donut hole represents a coverage gap or temporary limit on what the plan covers for prescriptions. The gap begins after you and your drug plan have spent a certain amount for covered medications.
For 2022, the coverage gap begins once you and your plan have spent $4,430 on covered drugs. The spending threshold increases to $4,660 for 2023. If your annual drug spending for 2022 or 2023 exceeds those amounts, then you may find yourself in the Medicare donut hole.
Important
Medicare Part D is not the only way to get prescription drug coverage. You can also get coverage through a Medicare Advantage Plan (Part C).
What Happens When Someone Enters the Donut Hole?
If you and your drug plan reach the spending threshold and enter into the donut hole coverage gap, you’ll pay no more than 25% of the cost for any covered brand-name prescription drugs. That rate applies whether you purchase prescription drugs at a pharmacy or through a mail-order service. The discount is applied to the price your plan has set with the pharmacy for each drug you’re prescribed.
Medicare pays 75% of the cost of generic drugs while you’re in the donut hole and you’ll pay the other 25%. Almost the entire full price of brand-name drugs counts toward getting you out of the donut hole. With generic drugs, however, you only get credit for the amount that you pay. With all Medicare Part D plans, the donut hole closes once you reach $7,050 in out-of-pocket costs for covered drugs.
The $7,050 amount includes money that you pay for covered prescriptions, your deductible, amounts paid by others on your behalf and amounts paid by eligible prescription drug assistance programs. Once you reach this point, catastrophic coverage kicks in. Going forward, you’ll pay 5% of the cost for each of your drugs or $3.95 for generics and $9.85 for brand-name medications, whichever is greater.
Note
Premiums you pay for Medicare Part D do not count toward closing the coverage gap.
Medicare Donut Hole Example
Here’s an example of how the Medicare donut hole works. Assume that you’ve reached the annual spending limit for your Medicare Part D drug plan. You need to fill a prescription for a covered medication, and you opt for the generic version that costs $22. Of that $22, you will pay 25% or $5.50. That $5.50 and will count toward the amount you need to spend out of pocket to get out of the donut hole.
Now, assume that your pharmacy was out of the generic brand and only the brand-name version was available, which costs $122. You pay the $122 out-of-pocket, but since this is a brand-name drug, you’ll get credit for 95% of the full price or $115.90.
Tip
Your Part D plan should keep track of your spending for you. Still, you may want to keep copies of receipts just in case there’s a discrepancy in your monthly statement.
Medicare Donut Hole and the Inflation Reduction Act
The Inflation Reduction Act will bring some significant changes to Medicare that could affect coverage gaps for those with Medicare Part D. Specifically, the Act is set to:
- Require the federal government to negotiate prices for certain prescription drugs covered under Medicare Part B and Part D
- Require drug companies to pay rebates to Medicare when drug prices rise faster than inflation
- Cap out-of-pocket expenses for individuals who receive Medicare Part D
- Expand eligibility for full benefits under Medicare Part D’s Low-Income Subsidy Program
Additionally, Medicare Part D recipients won’t pay anything out-of-pocket during the catastrophic phase of coverage. That provision eliminates the current rule that dictates beneficiaries pay 5% coinsurance after reaching the $7,050 out-of-pocket threshold. That part of the Act will take effect in 2024.
How Does the Donut Hole Work in Medicare?
The donut hole in Medicare is a coverage gap that occurs when you and your drug plan reach a certain spending threshold. To get out of the donut hole, your out-of-pocket costs must exceed a specific dollar amount. Costs that can be applied toward closing the donut hole include deductibles, coinsurance, copayments, discounts for brand-name drugs and amounts you pay while you’re in the gap.
How Do I Get Out of the Medicare Donut Hole?
To get out of the donut hole, you’ll need to close the gap in coverage by bringing your out-of-pocket spending up to a certain level. For 2022, Medicare Part D beneficiaries are considered to have closed the gap once their spending reaches $7,050. Again, eligible expenses include amounts paid toward your deductible, generic and brand-name drugs, coinsurance and copayments. Medicare Part D premiums and pharmacy dispensing fees do not count toward closing the donut hole.
When Can I Sign Up for Medicare Part D?
Generally, you’re eligible to enroll in Medicare beginning in the year that you turn 65. If you’re already enrolled in Medicare and you’d like to join, switch or drop a drug plan you can do so during the annual Medicare Open Enrollment period. For 2022, Medicare Open Enrollment extends from Oct. 15 to Dec. 7. If you’re enrolled in a Medicare Advantage Plan, you can switch to a different plan or move to Original Medicare during a second open enrollment period that extends from Jan. 1 to March 31 each year.
What Is Medicare Part Extra Help?
Medicare Extra Help is a special program that provides financial assistance to people who need help affording their prescription medications. Extra Help can offer an estimated $5,100 in benefits each year to people who qualify. To be eligible, you must be receiving Medicare and have limited financial resources. If you can enroll in Extra Help, you won’t have any coverage gap or donut hole with Medicare Part D.
Bottom Line
Prescription drug costs can take a toll on your budget. Finding ways to minimize these costs may be important if you have a limited income in retirement. If you’re enrolling in Medicare drug coverage for the first time, it’s important to understand how the donut hole works and how it may affect your prescription drug costs. And if you already have Medicare, consider weighing your current plan benefits against other options to see if switching plans during the fall open enrollment period would benefit you.