Should I Consider the Donut Hole When Comparing Drug Plans?

If you’re comparing Original Medicare and Medicare Advantage prescription drug plans, you may have encountered the term donut hole. This refers to a temporary limit on covered medications, which starts once both you and your drug plan have spent a certain amount during a calendar year ($4,430 in 2022).¹

According to some, the donut hole no longer exists, but we believe this is misleading. A coverage gap is still possible, and you should be mindful of how the coverage stages will affect your costs when shopping for Part D Prescription Drug Plans or Medicare Advantage Plans that include Part D coverage.

What You’ll Learn:

The Four Stages of Prescription Drug Coverage	Jump to
How the Donut Hole Works	Jump to
What is Part D Catastrophic Coverage?	Jump to
How do I Figure Out a Plan’s Cost?	Jump to

The Four Stages of Prescription Drug Coverage

The first stage is your annual deductible, or the amount you must pay yearly for your prescriptions before Medicare kicks in. In 2022, no Medicare drug plan can charge more than $480 for this.

Once this is met, you enter the second stage: your initial coverage period. Here you’re responsible for paying coinsurance or copays as set forth by your plan. Your amount of time in this period depends on your particular plan’s structure as well as your drug costs. With most plans, initial coverage concludes after you accrue $4,430 in total drug costs.

The third stage is the donut hole, followed by the fourth stage: catastrophic coverage.

How the Donut Hole Works

When Medicare Part D was first introduced it included a gap in coverage. This gap was referred to as the donut hole. In the donut hole, a beneficiary was responsible for paying 100% of their drug costs until they met catastrophic coverage.

When the Affordable Care Act (Obamacare) was passed, it included a 10-year plan to gradually reduce that amount each year starting in 2011. That plan ended in 2020 officially “closing” the donut hole.
Now, beneficiaries are responsible for paying only 25% of their costs in this stage.

Unfortunately, closing the donut hole doesn’t mean your prescriptions will be free once you reach this stage.
It does mean you’ll pay a smaller share compared to previous years. However, in some cases, you may pay more for a prescription in the donut hole than you did during initial coverage.

For example, let’s say your plan charges you a $20 copay for a $100 prescription drug. You’ll have to pay $100 until you meet your plan’s annual deductible. At this point, you’re only required to pay $20 for that drug for the remainder of the year or until you reach the $4,430 initial coverage limit.

And that’s where the donut hole lies. Once you meet your $4,430 initial coverage limit, your $20 copay is replaced by a 25% coinsurance, upping your costs for that $100 prescription drug to $25.

Not everyone will reach their initial coverage limit. The more expensive your prescriptions or higher your copays, the more likely you are to encounter the donut hole.

NOTE: If you participate in the Extra Help program from Medicare, you won’t enter the donut hole.

How to get out of the donut hole?

While you will pay no more than 25% of the price for your brand-name medications, nearly all the full price of the drug will count as an out-of-pocket costs can contribute to getting you out of the donut hole and into catastrophic coverage:

• Deductible
• Amount you paid during the initial coverage period
• Nearly the full cost of brand-name drugs bought while in the donut hole
• Funds paid by others on your behalf
• Funds paid by State Pharmaceutical Assistance Programs, AIDS Drug Assistance Programs and the Indian Health Service

Costs that will not help you reach catastrophic coverage include:

• Monthly premiums
• Your plan’s payment toward drug costs
• Fees for drugs that are not covered
• Costs for covered drugs from out-of-network pharmacies
• The 75% discount for generics

What is Pard D Catastrophic Coverage?

You leave the donut hole coverage gap once you hit $7,050 out-of-pocket costs.² Here’s where you enter the Catastrophic Coverage stage, which means you’ll just pay a small copayment or coinsurance percentage (usually less than 5%) for the remainder of the year.

How Do I Figure Out a Prescription Drug Plan’s Costs?

If you’re calculating potential costs of a Part D plan or Medicare Advantage plan that offers drug coverage, you’ll want to pay particular attention to certain elements. These include:

• Monthly premiums, or how much you’ll pay for coverage
• Drug formulary, or how much you’ll pay for each prescription

When you join a Medicare drug plan, you might consider automatic premium deduction from your Social Security payment.³ Benefits include:

• Eliminating the worry of remembering to pay premiums
• Premiums will be paid on time
• The environment will benefit since you won’t be getting a paper bill

Your first deduction typically takes three months to initiate, so three months’ worth of premiums will probably be deducted simultaneously. If you switch plans, you may also experience a delay in premiums being withheld.

The Bottom Line

While the donut hole is technically “closed”, you can still potentially reach a coverage gap resulting in higher drug costs. Whether you reach that coverage gap will depend on your prescribed medications and whether they’re covered by your chosen plan.

Trying to figure out the right path when it comes to prescription drugs? Still confused about the donut hole and potential coverage gaps? Call a licensed Ensurem agent at the number on this page. We can help.