Why the Medicare Donut Hole No Longer Starts
Understand the Medicare Part D coverage gap. Learn its current phases, how it works, and its impact on your prescription drug expenses.
Medicare Part D includes various stages of prescription drug coverage. Among these is the coverage gap, commonly referred to as the “donut hole.” This phase represents a temporary limit on the amount a Medicare Part D drug plan contributes toward covered prescription drugs. While in this gap, beneficiaries are generally responsible for a larger share of their medication costs compared to earlier coverage phases.
Understanding the Donut Hole
Before reaching the coverage gap, beneficiaries typically navigate through earlier phases of their Medicare Part D prescription drug coverage. The first phase is often a deductible, where the beneficiary pays the full cost of their covered medications up to a certain amount, which for 2024 is capped at $545. Some plans may have a lower deductible or no deductible at all.
Once any applicable deductible is met, beneficiaries enter the initial coverage phase. In this stage, the prescription drug plan begins to share the cost of covered medications. Beneficiaries typically pay a copayment or coinsurance for their drugs, while the plan covers the remaining portion. This cost-sharing arrangement continues until the total cost of drugs, including both the amount paid by the beneficiary and the plan, reaches a specific limit.
How the Donut Hole Begins
Entry into the coverage gap occurs when the total cost of covered prescription drugs, including amounts paid by both the beneficiary and the drug plan, reaches a predetermined initial coverage limit. For 2024, this limit is set at $5,030. This threshold is not based solely on the beneficiary’s out-of-pocket spending, but rather on the overall retail cost of the medications that have been dispensed.
All spending that contributes to meeting the deductible and the initial coverage phase counts toward this initial coverage limit. This includes the beneficiary’s copayments and coinsurance amounts paid for covered drugs, as well as the portion of the drug cost paid by the plan. Importantly, monthly premiums paid for the Part D plan do not count towards reaching this limit.
The initial coverage limit is subject to annual adjustments, reflecting changes in drug costs and program parameters. For instance, the 2024 limit of $5,030 represents the cumulative spending from both the individual and their plan that triggers entry into the coverage gap. Understanding this combined spending threshold helps beneficiaries anticipate when their cost-sharing responsibilities will shift.
What Happens in the Donut Hole
Once a beneficiary enters the coverage gap, their cost-sharing responsibilities change significantly. During this phase in 2024, beneficiaries are responsible for 25% of the cost of both brand-name and generic prescription drugs.
For brand-name drugs, the financial structure within the coverage gap involves multiple parties. While the beneficiary pays 25% of the drug’s cost, the drug manufacturer typically provides a 70% discount. The Part D plan covers the remaining 5% of the cost. Nearly the full cost of the brand-name drug, including the beneficiary’s 25% payment and the manufacturer’s 70% discount, counts toward the out-of-pocket spending limit needed to exit the coverage gap. For generic drugs, the beneficiary also pays 25% of the cost, with the plan covering the remaining 75%. However, only the beneficiary’s 25% payment for generic drugs counts toward the out-of-pocket spending limit.
Reaching Catastrophic Coverage
The coverage gap eventually ends when a beneficiary’s out-of-pocket spending reaches a specific threshold, known as the True Out-of-Pocket (TrOOP) cost. For 2024, this TrOOP limit is set at $8,000. Once this amount is accumulated, beneficiaries exit the coverage gap and enter the catastrophic coverage phase.
The types of spending that count toward this TrOOP limit include the beneficiary’s deductible payments, their copayments and coinsurance during the initial coverage phase, and their payments made within the coverage gap. Crucially, for brand-name drugs in the coverage gap, the manufacturer’s discount also contributes to the TrOOP calculation. Upon reaching the catastrophic coverage phase in 2024, beneficiaries pay nothing for their covered Part D drugs for the remainder of the calendar year.
Looking ahead, significant changes are set to occur in 2025. The Medicare Part D coverage gap will be eliminated entirely starting January 1, 2025. From this point forward, once a beneficiary’s out-of-pocket costs for covered prescription drugs reach $2,000, they will enter the catastrophic coverage phase and pay nothing further for the rest of the year. This change aims to simplify the benefit structure and provide more predictable drug costs for beneficiaries.