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 among Americans 65 years and older. This is especially true when you consider that 87% of seniors take at least one prescription drug and as many as 36% take at least five prescription medications.

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, decreases 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 or if you use manufacturer drug coupons. 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.

The Initial Coverage Limit in 2020 is $4,020. After you spend that 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% for any covered medication, whether it is a generic or a brand-name drug. This is the amount to "close" the donut hole because Part D plans cannot charge you more than 25% during the Initial Coverage Limit.

You are stuck in the donut hole until you spend a certain dollar amount that is set every year by Medicare. In 2020, that amount is $2,330, an increase from $1,280 in 2019.

Pharmaceutical companies will give you a 70 percent discount on brand-name medications during the donut hole in 2020 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 $2,330 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 either 5% of the cost of your medications or flat-rate copays, whichever is greater, 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. Although the donut hole is "closed" in 2020, that does not mean you will not pay more after you reach your Initial Coverage Limit. That is because Part D plans will continue to provide coverage in three phases. Insurance companies that run Part D plans cannot charge you more than 25% of the retail cost of any given medication during the Initial Coverage Limit but, depending on the medication, they may charge you less. When you reach the donut hole, you will be billed 25% regardless of any discounts you received during the Initial Coverage Limit. You could end up paying more than you did previously, although it is far less than you would have been required to pay years ago.