The term “donut hole” is a metaphoric reference to the coverage gap. The coverage gap is the third stage in Medicare’s four stage yearly progression of drug costs.
If you reach the donut hole, you will pay 25% of the cost of both generic and brand-name drugs. This cost will continue until you reach the fourth stage, which is catastrophic coverage.
Understanding how Medicare drug coverage is purchased and the four stages of Medicare Prescription Drug Coverage is key to understanding the donut hole concept.
How Medicare Drug Coverage is Purchased
Medicare Part D, also called Medicare prescription drug benefit, is designed to help Medicare beneficiaries pay for self-administered prescription drugs which are on the list of Medicare covered drugs. Medicare Part D Prescription Drug Plans are available through two basic programs. Coverage is purchased through either a Medicare Advantage Plan with Drug Coverage (MAPD) or a stand alone Prescription Drug Plan (PDP). Whether you receive drug coverage through a MAPD, or a PDP, the coverage gap (donut hole) can still impact your prescription costs.
The second thing we must understand is the yearly migration through Medicare’s four stages of drug coverage.
The Four Stages of Medicare Drug Coverage
Stage 1 is the yearly deductible: While in this stage, you pay the full cost of all covered drugs that have not been excluded from the deductible. Some plans exclude preferred and non-preferred generic drugs from the yearly deductible. You stay in this stage until your yearly deductible is met, a maximum of $445 for 2021.
Stage 2 is the initial coverage: During this stage, the plan pays its share, and you pay your share of the cost through copays and coinsurance. You stay in this stage until your year-to-date “total drug costs” (your payments plus any Part D Plan’s payments) total the initial coverage limit of $4,130 for 2021. This is an increase of $120 from $4,130 in 2020.
Example: Jim takes one $100 generic drug. He pays a $10 copay, and the drug plan pays $90. The entire $100 counts toward the Stage 2 limit. Jim also takes a brand-named drug which costs $350. His copay is $45 and the drug plan pays the remaining $305. The entire $350 counts toward the Stage 2 limit. Because Jim’s total drug cost is $450, he will meet the Stage 2 limit sometime in August, at which time he will enter the Stage 3 coverage gap often referred to as the donut hole.
Stage 3 is the coverage gap or “donut hole”: You stay in this stage until your year-to-date True Out-Of-Pocket costs (TrOOP) reach a total of $6,550 for 2021 (an increase from $6,350 in 2020). You then move to Stage 4.
While in Stage 3, you pay 25% of the cost of generic drugs which is counted toward the TrOOP. Medicare pays 75% of the cost of generic drugs and this amount is not counted toward the TrOOP. You pay 25% of the cost of brand-named drugs which is counted toward the TrOOP. The remaining 75% of the cost of brand-named drugs is discounted by the drug manufacturer. This is counted toward the TrOOP.
Your out-of-pocket cost (TrOOP) is calculated by adding all of the following: yearly deductible, coinsurance, and copayments for the entire year, and what you paid for drugs in the coverage gap and the discounted amounts paid by Medicare. Your monthly plan premiums are not counted toward the TrOOP.
Stage 4 is catastrophic coverage: After your TrOOP costs reach $6,550 for 2021, you crawl out of the donut hole and enter catastrophic coverage. Because most people enter the donut hole late in the year, if at all, they never reach catastrophic coverage. In Stage 4, your insurance plan and Medicare will pay most of the cost of your drugs for the rest of the year. Your out-of-pocket costs are capped at the greater of five percent of the cost of the drug or a copay of $3.70 for generic drugs and $9.20 for brand-name drugs. Both amounts are a slight increase from 2020.
Why the Donut Hole is Dreaded
The chief reason Medicare recipients dread entering the donut hole is reflective of the change in their cost of drugs during this stage. Once in the donut hole, standard copays and coinsurance are no longer relative and Medicare beneficiaries become responsible for 25% of the retail cost of both generic and brand-named drugs. In many cases, this 25% is an increase from the costs paid while in the Stage 2 initial coverage.
For example: Jim takes one $100 generic drug and pays a $10 copay while in Stage 2. He takes one brand-named drug which costs $350 and pays a copay of $45 while in Stage 2.
Once Jim enters the Stage 3 donut hole, he will pay 25% of the cost of both drugs. He will pay $25 for his $100 genetic drug, up from his $10 copay, and $87.50 for his $350 brand-named drug, up from the $45 copay during Stage 2. Jim’s out-of-pocket drug cost will go from $55 in Stage 2 to $112 in Stage 3. And that’s just for two average-cost medications.
Avoiding the Donut Hole
Four-ways to avoid or delay entering the donut hole:
- Switch a brand-name for a generic drug: Speak to your doctors or pharmacists about getting a generic drug at a lower price.
- Ask for samples: Drug manufacturers provide doctors with a limited quantity of various drugs to promote their product. Ask to try these before purchasing a prescription.
- Use prescription assistance programs: Research these programs to see if you can get help with expensive drugs. Popular ones include:
- Use two pharmacies: Many pharmacies offer select generic drugs as low as $4 without insurance. Paying cash for these and using insurance elsewhere may keep costs low enough to avoid the donut hole.