Did you know some Medicare prescription drug plans (PDPs) or Medicare Advantage plans with prescription drug coverage (MA-PDs) have annual coverage limits? If you reach the annual coverage limit, you enter a temporary coverage gap, called “the donut hole.” During this period, you begin to pay a higher percentage for prescription drug costs out-of-pocket – up to a certain amount. When you’ve paid that amount, you’ll automatically leave the donut hole and your catastrophic drug coverage will kick in, leaving you with significantly lower copays or coinsurance for the rest of the year.
Medicare beneficiaries taking several expensive brand name medications every month are more likely to find themselves in the donut hole for Medicare prescription drug coverage; therefore, it’s recommended to plan ahead and use lower-cost drugs when possible. Let’s break down the four stages of entering and getting out of the Medicare donut hole.
Stage 1 – Deductible
Some prescription drug plans have a yearly deductible, which is the amount you must pay out-of-pocket for your medications before your plan begins to pay its share. Deductibles vary between Medicare drug plans, and not all plans have one, but if your drug plan has a deductible, it cannot be greater than $405 in 2018.
Stage 2 – Initial Coverage
Once you reach the yearly deductible amount, your insurance plan will begin to pay some of the prescription drug costs. Typically, you’re responsible for copays and coinsurance costs during this stage, but how much you pay depends on your prescription drug plan and whether you qualify for Extra Help (a government program that helps people with limited income cover the costs of prescription drug plans). Once you and your plan have paid up to the coverage limit —a total spend of $3,750 in 2018— for covered drugs, including the deductible amount, you will enter the donut hole.
Stage 3 – Coverage Gap (Donut Hole)
How will you know when you reach the donut hole? Your drug plan’s monthly “Explanation of Benefits” (EOB) notice will lay out how much you’ve spent on covered drugs and if you’ve reached the coverage gap. If you reach this stage, you’ll typically pay a percentage – for 2018, it’s 35% of the plan’s cost for brand-name drugs and 44% of the plan’s cost for generic drugs – until you reach your yearly out-of-pocket drug costs ($5,000 in 2018).
This is what counts towards your out-of-pocket spending:
- The annual deductible
- Copays and coinsurance costs spent by you and your plan during the initial coverage stage
- Copays and coinsurance costs spent by you in the donut hole
- The 50% manufacturer discount for brand-name drugs during the donut hole
Stage 4 – Catastrophic Coverage
Once you have reached the coverage gap limit – $5,000 in 2018 – your catastrophic coverage automatically begins. Your plan will begin to contribute more, and you will only pay a small coinsurance or copayment amount for covered drugs for the rest of the year. These costs will depend on whether you are using generic or brand name drugs, but some plans pay as much as 95% of the costs during the catastrophic coverage stage. Check with your health insurance provider to learn the details of your plan’s catastrophic coverage.