Understanding the Medicare “Donut Hole” and Tips for Navigating It
In a recent meeting with a client, they voiced frustration over a recent trip to the pharmacy. They had met their prescription drug coverage deductible and expected to pay a co-pay of $90 for an expensive drug they were taking. Instead, they were charged over $500. It was even more frustrating because the pharmacist could not understand his benefits and explain why he owed this amount. He called his insurance agent and was told he had reached the dreaded “donut hole” or what is officially known as the Medicare Part D coverage gap.
The “Donut Hole” is a phase in prescription drug coverage where beneficiaries experience a temporary increase in out-of-pocket expenses for their medications. This coverage gap was initially designed to control Medicare spending while providing prescription drug coverage. However, it has led to a lot of confusion in the process.
To better understand the “Donut Hole,” Kevin Chaikin of The MP Group says you need to better understand the four “stages” of most Medicare Part D drug plans –
Annual Deductible: this varies by the plan you pick but typically ranges from $0 to $545 depending on the plan you pick. The more inexpensive plans have bigger deductibles. You pay 100% of the drug cost until you meet this deductible.
Initial Coverage Phase: In this phase, you and your drug plan share the costs of your medications. You pay a co-payment or co-insurance that typically varies by the plan and what drug tier it is. Most comprehensive plans have co-payments and co-insurance that range from $0 to over $100 per prescription and sometimes the beneficiary will owe coinsurance which is a percentage of the retail cost. This continues until total year-to-date drug costs reach $5,030 (in 2024). It’s important to note that both what you pay AND what the insurance company pays count toward this $5,030 amount. For example, if you have paid $1,000 and your insurance company has paid $4,030, you have reached this limit.
Donut Hole (Coverage Gap): Once you and your plan spend $5,030 (in 2024), you enter the Donut Hole. During this phase, you're responsible for a typically higher 25% percentage of the drug costs until you reach the catastrophic coverage phase. In this phase, if you have an expensive tier medication like my client did that costs $2,000 for example, it could cost you $500 to fill the prescription. This continues until the total year-to-date drug costs paid by you reach $8,000 (for 2024). Your out-of-pocket cost is calculated by adding together your (1) yearly deductible, (2) coinsurance, (3) copayments from the entire plan year, (4) and what you paid for drugs in the coverage gap (including the discounted amounts you didn't pay in that stage).
For example, if the price for the brand name drug is $60, and there's a $2 dispensing fee that gets added to the cost, making the total price $62. The beneficiary pays 25% of the total cost ($62 x .25 = $15.50).
The amount the beneficiary pays ($15.50) plus the manufacturer discount payment of $42 ($60 x .70 = $42) counts as out-of-pocket spending. So, $57.50 counts as out-of-pocket spending. The remaining $4.50, which is 5% of the drug cost ($3) and 75% of the dispensing fee ($1.50) paid by the drug plan, doesn't count toward out-of-pocket spending.
The coverage gap doesn't necessarily increase costs in all situations. For example, someone might be paying 50% coinsurance in the initial coverage stage for their Tier 4 medication and then the coverage gap reduces that to 25%.
Catastrophic Coverage Phase: After spending a significant amount out of pocket, you move into this phase where your costs decrease significantly, and Medicare covers most or all your drug expenses for the remainder of the year.
Source: RetireMed
Most of the time the most expensive time of the year is at the beginning when they must meet the deductible and during the donut hole, where they are responsible for a significant part of the costs. Some comprehensive plans have a $0 deductible, so the donut hole is the only expensive period to navigate.
With that in mind, here are a few tips for navigating the “Donut Hole” -
Understand Your Drug Plan:
Review your Part D drug plan to know the specifics of the coverage gap, including when it starts and ends.
Check for generic or lower-cost alternatives for your medications.
Budget for Prescription Costs:
Anticipate and budget for increased out-of-pocket costs during the Donut Hole phase.
Consider spreading out medication refills to manage costs over the year.
Explore Patient Assistance Programs:
Some pharmaceutical companies offer assistance programs for eligible individuals, providing financial relief for specific medications.
Switch to Preferred Pharmacies:
Some plans offer lower copayments if you use preferred pharmacies. Explore the network options to maximize savings.
Utilize Generic Medications:
Ask your healthcare provider if generic versions of your medications are available and appropriate. Generics often cost less and can help delay reaching the coverage gap.
Consider Medicare Savings Programs:
Explore state programs that assist with Medicare costs for individuals with limited income and resources.
Lastly, review your drug plan with an independent insurance agent annually to go over your prescriptions and find the plan that is projected to result in the lowest out-of-pocket costs for you. Many of these agents have software that can be used to get a fairly accurate prediction of your costs over the coming year.
By implementing some of these strategies, you can successfully manage your finances during this coverage gap and ensure that your healthcare needs are met without breaking the bank.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.