Understanding the Medicare Part D Coverage Gap

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 the Affordable Care Act has closed the donut hole as of 2020, after several years of slowly shrinking it. The donut hole closed in 2019 for brand-name drugs (a year early, thanks to the Bipartisan Budget Act of 2018), and in 2020 for generic drugs. But because of the way Medicare Part D plans are designed, the donut hole concept still plays an important role in how much people have to pay for their medications.

Sequence of bites taken out of a pink donut
Robert Daly / Getty Images 

If you're enrolled in a Medicare Part D plan, you now pay a maximum of 25% of the cost of your drugs once you meet your plan's deductible (if you have one). Some plans are designed with copays that amount to less than 25% of the cost of the medication, but after the deductible is met, Part D plans cannot impose cost-sharing that exceeds 25% of the cost of the medication.

When does the donut hole for medicare part d apply?
Verywell / Brianna Gilmartin 

How the Donut Hole Worked Before 2020

Before the ACA closed the donut hole, it caused some seniors to pay significantly higher costs for their medications after they had reached a certain level of spending on drugs during the year. Those higher costs would continue until the person reached another threshold, after which the costs would decrease again.

When Part D plans first became available in 2006, beneficiaries paid 100% of their drug costs while they were in this spending window (known as the coverage gap, or more commonly, as the "donut hole"). In other words, they would pay a deductible, and then the Part D plan would pay a significant amount of their drug costs—but only until their spending got high enough to enter the donut hole. At that point, the enrollee would start paying 100% of their drug costs, and would have to continue to do so until they reached what's known as the catastrophic coverage level. The enrollee's costs would drop at that point, although they never drop to $0 since Medicare Part D does not have an upper cap on total out-of-pocket costs.

Section 3301 of the Affordable Care Act, which was enacted in 2010, began to gradually reduce the percentage of drug costs that Part D enrollees had to pay while they were in the donut hole. By 2020, it had dropped to 25%, which is the same as how a "standard" Part D plan covers drug costs during the initial coverage window (after the deductible, but before the donut hole starts). So on a standard plan, the enrollee now pays the deductible, then pays 25% of the cost of drugs all the way to the catastrophic coverage limit, with no change during the donut hole.

But most Part D plans don't use the standard plan design. Instead, they tend to utilize copays during the initial coverage period, instead of having enrollees pay 25% of the cost of their medications. These copays often amount to less than 25% of the cost of a drug, which means that a person's drug costs can still increase once they reach the spending threshold where the initial coverage level ends and the donut hole begins.

So although the donut hole is now "closed," beneficiaries still have to pay a portion of their drug costs while in the donut hole, and it might be a larger portion than they were paying during the initial coverage period (ie, after the deductible and before the donut hole).

How the Donut Hole Works in 2020

Each year, the federal government sets a maximum deductible for Part D plans, and establishes the dollar amounts for the thresholds where the donut hole starts and ends. Here's how those numbers work in 2020 (note that all of these amounts are indexed each year, so they tend to increase over time):

  • Deductible: If you're enrolled in a Medicare prescription drug plan, you may have to pay up to the first $435 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, but no Part D plan can have a deductible in excess of this amount.
  • Initial coverage level: 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 $4,020.
  • Entering the donut hole: Once you and your Part D drug plan have spent $4,020 for covered drugs, you will be in the donut hole. Prior to 2011, you would have had to pay the full cost of your prescription drugs at this point. But now that the ACA has closed the donut hole, you'll pay 25% of the cost of your drugs while in the donut hole. Again, the donut hole is "closed" because 25% of the cost is the same as what you'd pay in the initial coverage level with a standard plan design. But since most plans don't have standard designs, it's very likely that 25% of the cost of your drugs (while you're in the donut hole) is going to amount to more than you were paying before you entered the donut hole.
  • Leaving the donut hole: The donut hole continues until your total out-of-pocket cost reaches $6,350 (a significant increase from the $5,100 level that applied in 2019). 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. This means that although you only pay 25% of the cost of your medications while in the donut hole, 95% of the cost of your brand-name drugs will be counted towards getting you to the $6,350 level where you'll get out of the donut hole and enter the catastrophic coverage level. But for generic drugs, only the 25% that you pay will count towards getting your spending to that $6,350 level where you'll leave the donut hole, since there's no manufacturer discount for those drugs.
  • Catastrophic coverage level: When your drug spending reaches $6,350 in 2020, 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 ($3.60 or $8.95, depending on whether the drug is generic/preferred brand-name or non-preferred brand name) or coinsurance (5% of the cost), whichever is greater. (It's important to note that for very high-cost drugs, 5% of the cost can still be a significant amount each month.) This level, when you're only paying a very small portion of your drug costs, is known as catastrophic coverage (this term is specific to Medicare Part D, and isn't the same thing as catastrophic health insurance).

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, or can set your costs in the initial coverage level at something less than 25% of the total cost of the drug.

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 cost about $1,200 in 2020. 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 $435.
  • He will then pay 25% (coinsurance) of the remaining $765 cost of his medications ($1200 - $435 = $765). His additional out-of-pocket cost during this initial coverage period will be $191. ($785 x 25% = $191).
  • Since Charley did not reach the $4,020 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 $435 (deductible) + $191 (his 25% share of his drug costs) = $626 (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 cost about $5,500 in 2020. 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 $435.
  • She will then pay 25% of the cost of her medications for the next $3,585 worth of drugs (that's the $4,020 cap minus the $435 deductible) until she reaches the coverage gap. Her additional out-of-pocket cost during this initial coverage period will be about $896 (since 25% of $3,585 is $851.25).
  • Since Mary did reach $4,020 in drug spending ($435 + $3,585 = $4,020), she will enter the donut hole. Prior to 2011, Mary would have been responsible for 100 percent of her costs at this point. But in 2020, she'll only be responsible for 25% of her drug costs while in the donut hole. She'll remain in the donut hole until her total drug costs reach $6,350. This amount includes her $435 deductible, the $896 that she paid during the initial coverage level, plus 95% of the cost of her brand name drugs while in the donut hole (even though she's only paying 25% of the cost). So she'll need to accumulate $5,019 in additional drug costs—while in the donut hole— in order to reach the catastrophic coverage level, but the majority of that will be covered by the 70% manufacturer discount that applies to brand-name drugs while the person is in the donut hole. Because the total cost of Mary's medications is only about $5,500 in 2020, she won't reach the catastrophic coverage level. Instead, she'll remain in the donut hole for the rest of the year, paying 25% of her drug costs. That will amount to about $370, which is 25% of the remaining cost of her medications (total cost of $5,500, minus the $4,020 in drug costs that accumulated before Mary reached the donut hole).
  • Although the donut hole has closed for brand-name drugs (meaning that the enrollee pays just 25% 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% of the cost of her medications after reaching the catastrophic coverage level. In other words, she would not have to continue paying 25% of her medication costs indefinitely. But again, it's important to note that even 5% of a very expensive drug can still be a substantial amount of money that some people have to pay once they're in 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 $435 (deductible) + $896 (her 25% share of her drug coverage before the donut hole) + $370 (what she has to pay while in the donut hole) = $1,701 (plus her monthly premiums for the Medicare Part D plan).

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Article Sources
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  1. Barnhart, Adam; Dieguez, Gabriela; Mike, David. Milliman. How will the Bipartisan Budget Act of 2018 impact Part D in 2019 and beyond? February 16, 2018.

  2. U .S. House of Representatives. Patient Protection and Affordable Care Act, Section 3301. Enacted March 23, 2010.

  3. Q1 Medicare. Medicare Part D 2020: CMS releases the finalized 2020 Medicare Part D standard drug plan coverage parameters. April 2, 2019.

  4. 65 Incorporated. The Medicare Donut Hole Is Closed: What Does That Mean?

  5. Medicare.gov. Yearly Deductible for Drug Plans.