Medicare Part D Coverage Gap

Everyone loves donut holes, right? If you’ve ever experienced the Medicare Part D donut hole your answer would be a resounding “NO”! 

The Medicare Part D coverage gap, often referred to as the “donut hole,” is a period within the Medicare prescription drug benefit plan where there is a temporary limit on what the drug plan will cover for prescription drugs. Here’s a detailed breakdown of how it works:

1. Initial Coverage Phase

In the beginning, you pay a copayment or coinsurance for your prescriptions until your total drug costs (what you and the plan pay) reach a certain amount ($5,030 in 2024). With this in mind, if your Rx list consists of low cost generic medications then you will likely never move from the initial coverage phase. You can ignore this column and continue to enjoy the plump, sugary, doughy goodness that donut holes were always meant to be.

For the rest, let’s move forward. Again, It’s important to understand that this ($5,030) threshold is not just what you pay at the pharmacy. It more closely resembles the total retail cost of your medications (what you pay at the pharmacy plus what your insurance plan pays to the pharmacy). This means if you have an expensive medication that retails at $1,000 for a one month supply you can expect to leave phase one and enter the Part D coverage gap within about five or six months. 

2. Coverage Gap (Donut Hole)

After reaching the initial coverage limit ($5,030 in 2024), you enter the coverage gap. During this phase, you may pay higher costs out-of-pocket for your prescriptions, although recent federal changes have aimed to reduce the burden.

• • Brand-name Drugs: In the coverage gap, you’ll generally pay up to 25% of the cost for brand-name drugs. This includes a manufacturer discount (70% in 2024) and a small contribution from your plan (5% in 2024).

• • Generic Drugs: For generic drugs, you’ll pay up to 25% of the cost.

3. Out-of-Pocket Threshold

The out-of-pocket threshold represents the amount ($8,000 in 2024) you have to reach in order to exit the coverage gap and enter the catastrophic coverage phase. The out-of-pocket threshold is not calculated in the same way as the initial coverage threshold and can be nearly impossible for most Medicare beneficiaries to determine without taking a moment to crunch some numbers with a calculator. For this reason we typically don’t spend a lot of time explaining this phase. If you find yourself facing the “donut hole” we recommend you simply plug in your medication list into the plan finder tool at Medicare.gov and the results will show you if/when you can plan to enter the catastrophic coverage phase. 

For you retired math coaches (shout out to my father-in-law) that are ready to sit down and put pencil to paper here’s how the out-of-pocket threshold ($8,000 in 2024) is determined. Your out-of-pocket costs include:

• • What you paid during the initial phase. This only takes into account the amount YOU paid toward the initial coverage phase threshold ($5,030 in 2024) NOT the amount the insurance company paid. So in order to even begin this calculation you’d need to know the total amount you have paid at the pharmacy thus far, including your deductible and any copayments and coinsurance. 

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• • What you pay in the coverage gap phase (25% in 2024). 

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• • The discount that you get on brand-name drugs while in the coverage gap (70% in 2024)

4. Catastrophic Coverage Phase

After exiting the coverage gap, you enter the catastrophic coverage phase. During this phase, you pay a small copayment or coinsurance for the rest of the year.

Key Points to Consider:

• • Annual Adjustments: The amounts defining the initial coverage limit, out-of-pocket threshold, and catastrophic coverage are adjusted annually.

• • Annual Reset: The entire process resets each year in January where you will begin at the initial coverage phase.

• • Cost Reductions: Legislative changes have aimed to gradually reduce the cost burden on beneficiaries in the coverage gap, leading to the 25% coinsurance rate for both brand-name and generic drugs.

• • Tracking Costs: You would need to keep track of your drug expenses throughout the year to understand when you might enter and exit the coverage gap.

The rules surrounding the Part D Coverage Gap apply regardless of what prescription drug plan you choose – including Medicare Advantage plans that include prescription drug coverage. Understanding the coverage gap can help you plan for your prescription drug costs and explore options to manage your expenses effectively.