Understanding Medicare Part D and the Donut Hole

Medicare Part D began to offer prescription drug coverage in 2006. Before this, seniors had to fend for themselves. The burden for drug costs is high with Americans 65 years and older filling an average of 22.9 prescriptions per year. Depending on whether they fill their medications monthly or every 90 days through a mail order service, that can represent as many as 7 to 23 different medications each year.

Today seniors can pick a Part D plan, pay a monthly premium and make relatively inexpensive copayments or coinsurance payments towards their prescription drug costs if they take generic medications. They will, not surprisingly, pay more if they take brand-name medications.

The problem is that Part D has a donut hole and it is not so tasty.

Plain and simple, the donut hole is a coverage gap in your Part D coverage. You have coverage for a while (imagine eating from one side of a donut). Then you lose it for a while (imagine getting to the empty area in the middle). Then you get it back again (imagine getting to the other side of the donut). More specifically, Part D offers coverage up to a certain dollar amount, then drops coverage and then resumes coverage after a certain amount of dollars have been spent.

The donut hole is not based on your medical need. It is based solely on how much money you spend on your prescription medications. That could be many generic medications or maybe even a single expensive one.

That first tasty bite of donut is the Initial Coverage Limit or the amount you spend before you reach the donut hole. What you pay and what Medicare pays for your drugs will count towards this cost limit. Your monthly premiums do not count towards these costs nor do medications that are not covered on your Part D formulary.

Even if a medication is listed on your formulary, Part D will not pay for it if you purchase it from another country. Similarly, any out-of-pocket costs you incur from foreign medications will not count toward your Initial Coverage Limit. Keep in mind that medical marijuana is not covered by Part D either, unless you happen to be prescribed one of the three medications approved by the FDA. Even then, those prescriptions are only allowable for very specific conditions.

After you have spent the Initial Coverage Limit amount, you enter the donut hole.

Before Part D started, you would have been responsible for paying for 100 percent of your drug costs. Now Medicare will pay a certain percentage of the costs and that amount is growing in your favor every year thanks to the Affordable Care Act, aka Obamacare. As long as the law remains intact, the donut hole will "close" by 2020. At that point, you will not pay more than 25 percent for any covered medication, whether it is a generic or a brand-name drug.

You are stuck in the donut hole until you spend a certain dollar amount that is set every year by Medicare. In 2019, that amount is $1,280.

Pharmaceutical companies will give you a 70 percent discount on brand-name medications during the donut hole in 2019 while your Part D plan pays 5 percent. Any money spent by your Part D plan does not count towards the donut hole amount but the value of the manufacturer discount does. For example, if your medication costs $100, the manufacturer will pay $70, your Part D plan will pay $5, and you will pay $25. $95 will count towards your donut hole spending.

Again, your monthly premiums, uncovered medications, or drugs purchased from foreign countries do not count towards the donut hole requirement.

Once you spend $1,280 in the donut hole, you will be able to move on to the next tasty bite of donut, catastrophic coverage.

After you have spent the required donut hole amount, you enter a period of catastrophic coverage where you pay flat-rate copays for your medications until the end of the year. On January 1, the process starts all over again with your new Initial Coverage Limit.

The donut hole can be a tricky concept to understand. It will be a moot point when the donut hole closes in 2020.