Medicare provides health care for people over the age of 65. If you are enrolled in a Medicare Part D prescription drug plan, there may be gaps in your coverage depending on how much you spend. Known as the Medicare donut hole, this gap can affect how much you pay for prescription drugs.
What is the Medicare donut hole?
Medicare Part D coverage covers the cost of prescription drugs for older adults enrolled in Medicare. A Medicare donut hole represents a coverage gap, or a temporary limit a plan places on prescription drug coverage. The gap starts after you and your drug plan spend a certain amount on covered drugs.
For 2022, the coverage gap begins to count once you and your plan have spent $4,430 on covered drugs. In 2023, the spending threshold will increase to $4,660. If your annual drug spending exceeds these amounts in 2022 or 2023, you could find yourself in the Medicare donut hole.
How does the Medicare Donut Hole Coverage Gap work?
“Once you, as a Medicare Part D beneficiary, spend certain out-of-pocket costs [beyond your plan’s coverage] on your prescription drugs, you exit what’s called the initial coverage phase and enter the coverage gap phase, or sweet Hole in the circle. At this point, you’re responsible for [up to] 25 percent of the cost of the drug, totaling up to $7,050 a year,” says Amanda Reese, director of health insurance at Hafetz and Associates in Lynnwood, New Jersey.
While the spending threshold that leads to the coverage gap varies from year to year, the plan and its beneficiaries would need to spend a total of $4,430 in 2022 to hit the donut hole.
“Depending on your drug costs, you may or may not hit the donut hole stage within a month,” says Scott Mabel, executive director of Senior Benefits Boston, a Massachusetts-based health insurance advisory group.
How to Get Out of the Donut Hole
Unfortunately, once you’re stuck in the Medicare donut hole, the main way out is through.
However, you can link your coverage with a Medicare Advantage plan, which includes coverage for some prescription drugs. “However, be very careful if you go down this route, because there are so many plans, and they can be a minefield if you have serious health conditions that require expensive prescription drugs,” Parker said.
“Another option is to determine if you qualify for the Part D Low Income Supplement,” says Todd Ackerman, an independent insurance agent with World Insurance in Burlington, Iowa. The benefits can help pay for some of the costs of your Part D prescription drug plan, including premiums, deductibles, and copays. Your income and assets determine whether you are entitled to full or partial funding.
Medicare Donut Hole Example
Here’s an example of how the Medicare donut hole works. Let’s say you’ve reached your annual spending limit for your Medicare Part D drug plan. You must fill a prescription for the covered drug and choose a generic, which costs $22. Of that $22, you pay 25%, or $5.50. That $5.50 counts toward the amount you’ll have to pay out of pocket to get out of the donut hole.
Now suppose your pharmacy no longer has the generic brand and only the branded version is available for $122. You’ll pay $122 out of pocket, but since it’s a brand-name drug, you’ll get 95% of the full price, which is $115.90.
The Medicare Donut Hole and the Inflation Reduction Act
The Inflation Relief Act will bring some major changes to Medicare that could impact the Medicare Part D coverage gap. The specific provisions of the law are as follows:
- Requires the federal government to negotiate the price of certain prescription drugs that fall under Medicare Parts B and D
- Require drug companies to pay Medicare rebates when drug prices rise faster than inflation
- Limit out-of-pocket costs for people who receive Medicare Part D
- Expand the right to full benefits under the Medicare Part D Low Income Supplement program
In addition, Medicare Part D insureds have no out-of-pocket expenses during catastrophic coverage periods. The rule replaces the current rule requiring beneficiaries to pay a 5% deductible after they meet the $7,050 deductible threshold. This part of the anti-inflation bill comes into force in 2024.6