The Medicare “donut hole,” also ominously called the “coverage gap,” is a space in Medicare Part D coverage where the amount of your prescription drugs covered by your Medicare Part D provider drops, making you responsible for a larger percentage of the drug cost. While not as daunting as it was before 2020, it’s still something you should be aware of when choosing a Medicare Part D provider and when planning your medical spending.
When does the donut hole kick in
The coverage gap is the third phase of most Medicare Part D prescription drug plans. In the first phase, you will pay the full cost of your prescription drugs up to your maximum annual deductible. In 2024, the maximum annual deductible caps out at $545.
In the second phase of Part D coverage, often called the “initial coverage” stage, your insurance will start to cover the majority of the cost of your prescription drugs. You will still be liable for the copayments and coinsurance agreed to in your specific plan. For example, if your plan has a copay of $0 and coinsurance of 20%, a prescription drug costing $100 will require you to pay $20 and your insurance will pay $80.
Once the combined total spent by both you and your insurance reaches a certain dollar value — $5030 in 2024 – you will enter the coverage gap portion of your plan. It’s worth noting that while most Part D plans will include a coverage gap period, some plans may specifically be constructed to eliminate it, so be sure to check the details of your plan.
What happens once I’m in the coverage gap
Once you enter the donut hole, your insurance will pay for a much smaller amount of the prescription drugs you need. Today, the maximum they will pay is 5% of the cost of the drug. When Medicare Part D was first implemented, the customer was responsible for paying the rest of the cost of the drug straight out of pocket, the gap was quite literally a massive gap in your prescription drug coverage where your costs soared.
Today, manufacturers have universally agreed to discount the cost of drugs sold to those in the Part D donut hole by 70% of the original price. Combined with the 5% paid by your plan, that leaves you responsible for 25% of the cost of your prescription drugs.
Depending on the cost of your prescription drugs, this change in coverage may be large or small. For example, if you had a $20 copay on your $100 prescription drugs before, you would now pay $25 while in the coverage gap instead. However, if you were paying a $20 copay on $500 of prescription drugs, you will now have to spend $125 out of pocket instead.
When does the Medicare donut hole end
Once the total cost of your out-of-pocket spending on prescription drugs reaches a certain level, the donut hole stage will end, and you will enter the Catastrophic Coverage stage of your Medicare Part D plan. Catastrophic coverage is the fourth and final stage, so once you reach this you will remain there for the rest of your coverage year.
Once in catastrophic coverage, you will pay no more out of pocket for your prescription drugs. Your Medicare Part D insurance plan will cover 20% of the cost, and Medicare itself will cover the remaining 80%. (Note that this zero-cost state is new in 2024, in 2023, customers were still liable for 5% of their drug costs while in the catastrophic phase.)
In 2024, the total out-of-pocket expenditure required to enter catastrophic coverage is $8,000. The expenses that contribute to reaching this $8,000 figure include:
• Your deductible every time you purchase prescription drugs
• All of your payments during the initial coverage period
• The manufacturer discount of 70% during the coverage gap phase
• Some other qualifying payments made on your behalf, such as by charities or assistance programs
The parts of your drugs paid for by your Medicare Part D insurance plan do not contribute to reaching this $8,000 figure, nor do your monthly premiums. Your monthly statements will list how much you have paid out-of-pocket for the year (including the 70% manufacturer discount during the donut hole) so you can always be aware of when you’re approaching the coverage gap and when you’re about to leave it and enter catastrophic coverage.
The Future of the Donut Hole
Like many parts of Medicare, the exact numbers for thresholds and payment amounts change from year to year. At present, the donut hole is expected to close entirely in 2025, when all plans will streamline the amount customers pay as they transition from the initial coverage period to the donut hole. The only thing that will change is who pays the remainder of the cost of the drug behind the scenes.