Medicare Prescription Drug Plans (Part D) have a coverage gap, also known as the “donut hole.” Once you have received a certain level of benefits from your plan, you enter a coverage reduction period, where you will face higher out-of-pocket costs until you qualify for catastrophic coverage.
To better understand the donut hole, consider this illustration of how your Prescription Drug Plan (PDP) coverage changes as your drug spending increases.
Phase 1: Meeting your deductible
Many PDPs have a deductible. You'll pay 100% of the costs of your drugs until you hit yours. The maximum PDP deductible in 2018 is $405, but yours could be lower.
Phase 2: Initial coverage
Once you meet your deductible, you are only responsible for copayments until your total drug costs reach $3,750 for 2018. Total drug costs include what you pay out-of-pocket and the amount your PDP covers.
Phase 3: Coverage gap (the donut hole)
During this period of reduced coverage, you're responsible for a significant portion of your drug expenses. You're stuck in the donut hole until your total out-of-pocket drug costs for the year reach $5,000 (see below for what counts toward that threshold).
While you're in the coverage gap, you qualify for discounts, which are funded by drug companies and the federal government. In 2018, you'll pay no more than 35% of the cost of covered brand-name drugs (drug companies cover 50%), and no more than 44% of the cost of generics.
Starting in 2019, there will no longer be a coverage gap for brand-name drugs, but the gap will remain for generics until 2020.
Most people avoid reaching the coverage gap, since their annual drug costs are less than $3,750. You can also avoid it if:
- You qualify for Extra Help, a federal program that helps cover out-of-pocket prescription drug costs; eligibility is based on income and assets.
- Your plan offers enhanced coverage during the donut hole. In exchange, though, you may face higher premiums.
Phase 4: Catastrophic Coverage
You're responsible for 5% of your drug costs for the rest of the year, with no maximum out of pocket.
The prescription drug expenses that count towards the $5,000 threshold that ends the coverage gap include:
- Your deductible, coinsurance, and copayments
- Your out-of-pocket costs during the coverage gap (35% of the cost of brand-name drugs and 44% of generic drugs)
- The manufacturer-funded 50% discount you get on covered brand-name drugs during the coverage gap
The expenses that don’t count include:
- Your Prescription Drug Plan premiums
- What you pay for drugs that aren’t covered by your plan
- Pharmacy dispensing fee
- Drugs purchased outside the U.S.