Here’s how it can take a bite out of your healthcare budget.
A donut hole can be appealing. Except when it’s the Medicare Part D variety.
That’s because the Medicare donut hole is when Part D’s portion of prescription costs decreases . . . and your portion increases. Medicare sets the standards for Part D plans, but Medicare does not administer them. Part D is covered by private insurance companies approved by Medicare.
Under Part D, four stages determine how much you’ll pay for prescription drugs.
Confused? No worries. Here’s a quick overview to help you easily digest the key points about the donut hole. And if you need more details, you can find them at medicare.gov.
FOUR STAGES OF MEDICARE PART D
No explanation of the Medicare donut hole can be complete without a quick overview of the four stages of drug coverage under Medicare Part D.
Stage 1: The Deductible
This first stage begins every year on January 1st. Starting in 2023, the highest deductible you will pay for your prescriptions before any coverage begins is $505. This amount can vary by plan and sometimes the deductible is only for certain tiers.
Once you’ve paid your deductible on prescriptions, you move on to the next stage—initial coverage.
Stage 2: Initial Coverage
When you enter this second stage, you begin to share the cost of your prescriptions. Your drug plan will kick in the majority of the cost and you will typically pay a coinsurance or copay amount.
As soon as your out-of-pocket amount reaches $4,660 (in 2023), you will find yourself on the threshold of stage three—the Medicare donut hole.
Stage 3: The Donut Hole
At this point, even though you’ve met your out-of-pocket costs, there will still be a gap of $2,720 (in 2023) until the next stage of Medicare Part D coverage begins. That means while you’re in the donut hole you’ll pay:
- up to 25 percent of the cost for covered brand-name prescriptions whether you buy them at your local pharmacy, order them online, or get them by mail; and
- potentially lower costs if your plan offers additional discounts with certain pharmacies for specific drugs.
To help boost you out of the donut hole, nearly the full price of the brand-name drugs you buy at this point will count toward your out-of-pocket cost . . . even though you will only pay a 25 percent maximum for them. Together, the amount you pay and the amount the insurance provider contributes will count toward your required spending amount.
For generic drugs, however, coverage works a little differently while you are in the donut hole. Yes, your Part D coverage pays 75 percent of the price, and you pay 25 percent. But unlike brand-name meds, only the amount you pay counts toward the amount you need to move on to the next stage of Medicare Part D: catastrophic coverage.
“You are more likely to enter the donut hole if you take three or four brand-name prescription drugs.” Source: Kaiser Family Foundation
Stage 4: Catastrophic Coverage
At this final stage of coverage you will pay either five percent of the cost or a small copay (whichever is greater) for your meds for the rest of the year. Your drug plan picks up the rest.
Nearly 1.5 million Medicare Part D enrollees had out-of-pocket spending above the catastrophic coverage threshold. (Source: Kaiser family Foundation)
Summary of General Cost-Sharing for Medicare Part D
|Stage||What You Pay|
2023 Out-of Pocket
2023 Drug Plan Pays
|Initial Coverage Stage|| Your co-pay amount or coinsurance|
(until you and your drug plan reach a total of $4,660)
|The majority of the cost|
|Donut Hole Stage||25% of the cost of your drugs; $7,400 total|
|75% of the drug cost|
|Catastrophic Stage|| The greater of: 5% of the cost per Rx|
or $4.15 for generics$10.85 for brand-names
|The bulk of the cost for the rest of the year|
More to chew on. . . At press time, federal legislation is awaiting approval by the House of Representatives and President Biden to, among other things, cut prescription drug costs for those on Medicare. Provisions included in the Inflation Reduction Act of 2022 propose to:
- allow Medicare to negotiate prices on certain drugs;
- cap out-of-pocket drug costs for individuals at $2,000 per year (starting in 2025); and
- eliminate the five percent coinsurance for Medicare Part D catastrophic stage in 2024.
The bill is not yet finalized so watch for updates on how it may impact the details in this article.
Need more information about how to navigate your way through the Medicare donut hole? Our Guided Medicare team can offer insights that can help you understand your coverage and your options.
Contact us today.