The Medicare “donut hole” refers to a coverage gap found in most Medicare prescription drug plans. When you pay your yearly deductible of $360 and monthly premiums, you are covered for up to $3,310 (as of 2016) in approved drugs before hitting that coverage gap. After that, you must start paying out-of-pocket for prescription drugs until “catastrophic coverage” starts. The donut hole coverage gap ends once you have paid $4,850 out-of-pocket for prescription drugs, the point that catastrophic coverage begins. Then you will only need to spend up to 5% of the drug’s cost in copays or coinsurance.
It is important to remember that there are many drugs that Medicare Part D never covers. Spending money on drugs like cold medicine, hair growth medicine, and fertility drugs won’t land you in the coverage gap. Similarly, your monthly drug plan premiums and the pharmacy dispensing fee are costs that don’t add into the $3,310 threshold before the donut hole. Some costs that do contribute are your $360 yearly deductible and the coinsurance and copayments you make on Medicare-covered drugs.
Select Medicare drug plans help you avoid the donut hole, though their monthly premiums are relatively high. And some people with low income and small savings will never enter the coverage gap as they get supplemental coverage from Medicare called “Extra Help” (link to extra help article). Even for those who don’t qualify for Extra Help, state programs like Medicaid can help pay for prescription drug costs in the coverage gap.
When you enter the Donut Hole
You should know quickly whether you’ve entered the donut hole. Your monthly mailed “Explanation of Benefits” (EOB) notice will tell you how much you paid for Medicare-covered drugs and whether you’ve landed in the coverage gap. The EOB notice may conflict with your own records, however. If you believe you’re in the coverage gap and should get the associated discount on your prescription medication, you can appeal (link to appeal article) to Medicare.
Once you’re in the donut hole, the cost of your Medicare-covered prescription medications will vary based on whether you buy brand name or generic. For brand name prescription medication, you personally pay at most 45% of your plan’s price for the drug, plus the dispensing fee. Some plans will allow you to pay even less. However, both the 45% of the cost you pay and the 50% manufacturer discount you automatically qualify for in the donut hole will count as “out of pocket” costs. Even though you need $4,850 out-of-pocket costs to be covered with catastrophic coverage, the amount that will come out of your bank account is roughly half that.
For generic drugs, you begin by paying 58% of the price of the drug. Over a four year period, the percentage of the cost you pay will gradually decrease until it reaches 25%. Unlike with brand name drugs, only the amount you pay for the drug contributes to the $4,850 you need to escape the donut hole. You can remain ineligible for catastrophic drug coverage for much longer than if you used brand name drugs. But considering generic drugs are often cheaper than brand name, and your discount gets larger over time, this is the cheaper option for many people.