Prescription drug coverage is an essential part of any healthcare plan. Whether you need one of the more common prescription drugs (like atorvastatin) or a rarer drug, we expect our healthcare plans to cover most, if not all, of our prescription drug costs.
That being said, there are situations where your health care plan may not cover all of your costs—even if you have Medicare. One of those situations is the so-called Medicare Part D donut hole. The Medicare Part D donut hole may cause some unexpected surprises as you go to pay for your prescription drugs.
Because of this, it’s helpful to understand what the donut hole is and what it means for your wallet. Doing this, you can better set expectations as you budget your medical expenses.
Exploring Medicare Part D’s Donut Hole
Medicare Part D’s donut hole is also known as a “coverage gap.” Essentially, it is the phase of Medicare Part D coverage that occurs after your initial coverage period. When you enter the coverage gap, you will notice that there is a temporary limit on what drugs will be covered under your drug plan.
Ultimately, you or your family will enter Medicare Part D’s donut hole when your drug costs reach a certain limit. For instance, in 2020, that limit was $4,020 spent on your prescription drugs. When you reach this limit (or the applicable limit in your current year), you are responsible for no more than 25% of the costs of your prescription drugs. In 2020, you would exit the donut hole when your total out-of-pocket costs reach $6,350. Premiums do not count for the costs that let you escape the donut hole and take advantage of catastrophic coverage.
The $4,020 limit is for the cost incurred to the system by your medication needs. For instance, if you are filling a generic drug like Simvastatin that costs $3, but your cost for generic preferred brand drugs is a $0 copay, while you physically paid $0 out of your own pocket, the insurance company paid $3. That is the number that is used to determine if you pass the limit. For more expensive drugs, Vyvanse for instance, the monthly cost is near $300 but your copay might be $47 as a preferred brand name drug. That "real cost" of $300 makes it much easier to get to the donut hole and quicker to get there too. The donut hole is designed to encourage you to choose lower-cost generics, when possible, to keep you away from the limit and keep insurance company costs down as well.
Notably, there are exceptions for entering Medicare Part D’s donut hole. For example, if you obtain Medicare with Extra Help, you will not enter the donut hole. That being said, unless you are aware of an explicit exemption, you will most likely appear in the donut hole after reaching the applicable threshold on your prescription drug purchases.
When you are in Medicare Part D’s donut hole, you will pay no more than 25% of the cost for your brand-name prescription drugs and your generic drugs. For your brand-name drugs, your healthcare plan may offer you even lower costs when you enter the donut hole. Along with this, when purchasing prescription drugs, nearly the full price of the drug purchased will count as an out-of-pocket cost. These expenditures—from both your own pocket and the drug manufacturer’s pocket—will help you reach the next threshold to get out of the donut hole. A small amount of the drug cost (around 5% of the cost) and around 75% of the drug dispensing fee does not count toward out-of-pocket spending, which helps you escape from the donut hole.
As for generic drugs, you will still need to pay 25% of the price when in the donut hole. That said, there is a key difference here. Only the amount paid by you counts toward your out-of-pocket spending. Put another way, you don’t get to leverage the manufacturer’s contribution to get out of the coverage gap. Therefore, if you spend more on generic drugs when you’re in the donut hole, you will likely spend more time in the donut hole. On the other hand, if you are purchasing brand-name prescription drugs, the manufacturer’s subsidy will help you leave the donut hole more quickly.
For both brand-name and generic drugs, you may be eligible for a discount once your plan’s coverage is applied to the prices of your drugs. The discount will likely apply if you have a Medicare drug plan that specifically includes coverage in the donut hole. You will want to read the fine print in your Medicare drug plan to see if you can access this additional help.
As you can see, the Medicare Part D donut hole can be an unexpected surprise when you visit your local pharmacy. However, with this knowledge about the donut hole in mind, you can adjust your expectations and prepare for some additional costs while in the donut hole. Ideally, you won’t spend too much time in the donut hole and will advance to more cost-effective prescription drug coverage.