Understanding the Medicare Part D Coverage Gap

Sequence of bites taken from pink donut
Robert Daly/Getty Images

The donut hole, or coverage gap, has long been one of the most controversial parts of the Medicare Part D prescription drug benefit and of concern to many people who have joined a Part D drug plan. The good news is that it's steadily shrinking as a result of the Affordable Care Act. It was scheduled to close by 2020, but closed a year early (in 2019) for brand-name drugs, thanks to the Bipartisan Budget Act of 2018.

As of 2020, there will no longer be a donut hole for generics either; you'll pay a maximum of 25 percent of the cost of your drugs once you meet your deductible (if you have one), or a smaller cost-sharing amount if your plan uses a different benefit design.

Hitting the Donut Hole

Although all prescription drug plans must explain the coverage gap in their literature and advertising, it comes as a shock to many enrollees when they go abruptly from making copayments or paying 25 percent of the drug costs to paying a much larger percentage once they enter the donut hole. However, not everyone on Medicare will enter the coverage gap and if you qualify for extra help in paying your Medicare Part D costs, you won't fall into the donut hole either.

As of 2019, there's only a donut hole for generic drugs, and the increase in out-of-pocket spending while in the donut hole is much milder than it was several years ago.

How the Donut Hole Works

This is the standard Part D drug prescription plan required by Medicare in 2019 (Part D plans can offer more generous benefits, but these are the minimum coverage requirements):

  • If you join a Medicare prescription drug plan, you may have to pay up to the first $415 of your drug costs, depending on your plan. This is known as the deductible. Some plans don't have a deductible, or have a smaller deductible.
  • During the initial coverage phase (after the deductible is met, assuming the plan has a deductible), you pay a copayment or coinsurance, and your Part D drug plan pays its share for each covered drug until your combined amount (including your deductible) reaches $3,820.
  • Once you and your Part D drug plan have spent $3,820 for covered drugs, you will be in the donut hole for generic drugs (since the amount that your plan pays is counted too, you won't personally have spent this much in out-of-pocket drug costs by the time you reach the donut hole). Prior to 2011, you had to pay the full cost of your prescription drugs while in the donut hole. However, starting in 2011, a discount began to apply to the cost of drugs while enrollees were in the donut hole. In 2019, you pay no more than 37 percent of the cost of covered generic drugs (as originally scheduled, you would have paid no more than 30 percent of the cost of brand-name drugs while in the donut hole in 2019, but the Bipartisan Budget Act of 2018 lowered this to 25 percent, which is the same as the limit that applies before total spending reaches $3,820—thus there is no longer a donut hole for brand-name drugs).
  • The donut hole continues until your total out-of-pocket cost reaches $5,100. This annual out-of-pocket spending amount includes your yearly deductible, copayment, and coinsurance amounts, and it also includes the manufacturer's discount on the drugs that you get while in the coverage gap (so although you pay only 25 percent of the cost of brand-name drugs while in the donut hole in 2019, 95 percent of the cost of the drug is counted towards your out-of-pocket costs, helping you get out of the donut hole sooner).
  • When your drug spending reaches $5,100 in 2019, the coverage gap ends and your drug plan pays most of the costs of your covered drugs for the remainder of the year. You will then be responsible for a small copayment ($3.40 or $8.50, depending on whether the drug is generic/preferred brand-name or non-preferred brand name) or coinsurance (5 percent of the cost), whichever is great. This level, when you're only paying a very small portion of your drug costs, is known as catastrophic coverage.

    The expenses outlined above only include the cost of prescription medications. They do not include the monthly premium that you pay for the prescription drug plan.

    Coverage Can Differ Depending on Your Plan

    It's important to understand that your Part D prescription drug plan may differ from the standard Medicare plan only if the plan offers you a better benefit. For example, your plan can eliminate or lower the amount of the deductible. And your plan can pay for generic or preferred brand name medications in the coverage gap.

    Health Reform and Medicare Part D

    Section 3301 of the Affordable Care Act, signed into law on March 23, 2010, makes changes to Medicare Part D to reduce your out-of-pocket costs when you reach the donut hole, including:

    • In 2010, if you had expenses in the coverage gap, you should have received a $250 rebate from Medicare.
    • Beginning in 2011, if you reached the donut hole, you were given a 50 percent discount on the total cost of brand-name drugs while in the gap.
    • Medicare began phasing in additional discounts on the cost of both brand-name and generic drugs, from 2012 onward. As of 2019, you pay 25 percent of the cost of brand-name drugs while in the donut hole (which is the same as the amount you pay after meeting the deductible but before entering the donut hole), and 37 percent of the cost of generic drugs.

    By 2020, rather than paying 100 percent of the costs of your prescription drugs while in the donut hole, your responsibility will be a maximum of 25 percent for both brand-name and generic drugs.

    Medicare Part D Examples

    In order to better understand how much prescription drugs might cost you on Medicare D, here are some examples:

    Charley Smith
    Charley Smith takes three medications to treat his high blood pressure and high cholesterol. These medications will cost him about $1,200 in 2019. Charley enrolled in a Medicare prescription drug plan that has a low premium and offers the standard Medicare drug benefit, including a deductible and standard drug coverage in the donut hole.

    This is what his prescription medications will cost in the plan he has selected:

    • Charley will pay a deductible of $415.
    • He will then pay 25 percent (coinsurance) of the remaining $795 cost of his medications ($1200 - $415 = $785). His additional out-of-pocket cost during this initial coverage period will be $196. ($785 x 25 percent = $196).
    • Since Charley did not reach the $3,820 initial coverage limit, he will not enter the donut hole.

    Charley’s total estimated annual out-of-pocket prescription drug cost with his Medicare Part D plan will be $415 (deductible) + $196 (his 25 percent share of his drug coverage) = $611 (plus his monthly premiums for the Medicare Part D plan).

    Mary Jones
    Mary Jones takes three medications to treat her type 2 diabetes, high blood pressure, and high cholesterol—all brand-name drugs. These medications will cost her about $4,500 in 2019. Mary joined a Medicare prescription drug plan that offers the standard Medicare drug benefit, including a deductible and standard coverage while in the donut hole.

    This is what her prescription medications will cost in the plan she has selected:

    • Mary will pay a deductible of $415.
    • She will then pay 25 percent of the cost of her medications for the next $3,405 worth of drugs (that's the $3,820 cap minus the $415 deductible) until she reaches the coverage gap. Her additional out-of-pocket cost during this initial coverage period will be about $851 (since $3,405 times 25 percent = $851.25).
    • Since Mary did reach $3,820 in drug spending ($415 + $3,405 = $3,820), she will enter the donut hole. Prior to 2011, Mary would have been responsible for 100 percent of her costs at this point. However, since all of Mary’s medications are brand names, she will only have to pay 25 percent of the drug costs while in the donut hole (if she were to start taking any generic medications, she'd owe 37 percent of the cost of those drugs while in the donut hole). She needs to accumulate another $1,280 in drug costs before she gets out of the donut hole, but both her own costs (25 percent of the cost of the drugs) and the 70 percent discount that the drug manufacturer provides will count towards reaching that $1,280. So while that will take about $1,347 in total drug costs ($1,280 divided by 95 percent), Mary will only have to pay about $337 out of her own pocket while in the donut hole (25 percent of that $1,347).
    • Although the donut hole has closed for brand-name drugs (meaning that the enrollee pays just 25 percent of the cost while in the donut hole), the concept of the donut hole is still important in terms of getting out of the donut hole and shifting to catastrophic coverage. If Mary were to be prescribed additional expensive medications during the year and her drug spending increased drastically, the upper threshold of the donut hole would provide financial protection, ensuring that she'd pay only modest copays or 5 percent of the cost of her medications after reaching the catastrophic coverage level.

    Mary’s total estimated annual out-of-pocket prescription drug cost for the year with her Medicare Part D plan will be $415 (deductible) + $851 (her 25 percent share of her drug coverage before the donut hole) + $337 (what she has to pay while in the donut hole) = $1,603 (plus her monthly premiums for the Medicare Part D plan).

    Was this page helpful?