Medicare Part D Donut Hole

When Medicare Part D began in 2006, the prescription drug plans under it adopted the “donut hole” nickname to describe the coverage gap within the plans. Congress included a coverage gap in Part D plans as a way to reduce the overall cost of the prescription drug program.

In the early years of Medicare Part D, once a beneficiary and their plan reached the spending limit of the initial coverage stage, the beneficiary would enter the donut hole and would then be responsible for all medication costs at that stage.

Starting in 2012, the Affordable Care Act included discounts to help close the Medicare coverage gap. Those discounts increased gradually each year until the donut hole “closed” completely in 2020.

However, this does not mean that Part D plans are free after reaching the coverage gap stage.

As of Jan. 1, 2020, you’ll pay no more than 25 percent of your plan’s cost for brand-name and generic prescriptions while in the coverage gap. You will avoid the coverage gap altogether if you qualify for Medicare’s Extra Help program.

Not everyone enrolled in a Part D plan will reach the donut hole. For 2023, you are in the coverage gap once you and your plan have spent $4,660 on covered drugs.

This is called your initial coverage limit or donut hole entry point, and it may — and probably will — change each year.

You are more likely to enter the coverage gap if you take three or four brand-name prescription drugs, according to the Kaiser Family Foundation.

Once you reach the donut hole, chances are you will do so year after year, even if the initial coverage limit increases. Spending on medications typically goes up as you age. Drug prices may increase, or you might need more prescriptions to treat health conditions.

In the past, beneficiaries were responsible for a higher percentage of drug costs when in the Medicare coverage gap. Since the donut hole closed for all drugs in 2020, you now pay 25 percent of the costs of your prescriptions after entering the coverage gap.

This may yield little change from what you paid in the initial coverage period, or it may result in significant increases for expensive brand-name drugs.

Insurance companies that offer Medicare Part D coverage use tiers in its formulary to group and price medications. Costs increase the higher the tier, with the specialty tier representing the highest copay and the most expensive prescription drugs. A plan can change the tier of a drug each calendar year, known as a formulary change.

If you primarily take Tier 1 generic medications, the amount you pay likely won’t change much in the coverage gap. But if you take even one generic or brand-name drug in the specialty tier, the 25 percent requirement could result in high out-of-pocket costs.

In 2023, you leave the Medicare Part D coverage gap once you have paid $7,400 in out-of-pocket costs for covered drugs. At this point, you enter what is known as catastrophic coverage, where you only pay a small copayment or coinsurance for medications.

This only applies to direct costs to you, not the amount your plan has paid. So, if you are in the coverage gap and paying $1,500 a month for your prescriptions, you would exit the donut hole after five months.

Once you’re in the catastrophic coverage stage, you remain there for the remainder of the year.