The worst effects of the prescription drug coverage gap have been addressed, but it could still be costly.
If you have a Medicare prescription drug plan, there’s a gap in coverage after you’ve spent a certain amount on covered drugs — the so-called Medicare “donut hole.” Although the potential cost of the donut hole has decreased significantly in 2020, there is still a gap in coverage that could affect how much you pay for prescription medications.
In 2020, 46 million people covered by Medicare were enrolled in Part D drug plans.
What is the Medicare “donut hole”?
After you have paid a certain amount for the drugs that your plan covers and before catastrophic coverage kicks into effect, the donut hole in Medicare Part D coverage is still available. Medicare Part D prescription drug coverage has four stages:
- Period of the deductible: You will pay the full price agreed upon for prescription drugs covered by your plan. While deductibles can vary among plans, the maximum deductible is $445 for 2021. Not all plans include a deductible.
- Initial coverage period: After you reach your deductible, your coverage begins. You will be responsible for any copayments or coinsurance that you pay for drugs covered by your plan. The amount of coinsurance you pay will depend on the drug’s price and the tier level at which it is assigned.
- The coverage gap (or the donut hole) is when your total drug cost exceeds a threshold ($4,130 in 2021 plans), then you are considered to be in the coverage gap. Until you reach catastrophic coverage, 25% of your drug costs will be yours once you are in the coverage gap.
- Catastrophic coverage is when you have paid a certain amount out-of-pocket ($6,550 in 2021). This triggers catastrophic coverage. This stage allows you to pay lower copays and coinsurance for drugs up until the end.
Note: If you’re part of a Medicare program called Extra Help, your drug costs will be different, and there’s no coverage gap.
What has changed in 2020?
After Medicare Part D was introduced in 2007, Medicare Part D users were responsible for 100% of their drug costs until they could qualify for catastrophic coverage.
Affordable Care Act contained provisions that required drug manufacturers to offer a discount of 50% on brand-name drugs within the coverage gap. Plans also had to pay a steadily increasing portion of drug costs. In 2020, the final phase was completed. Users are responsible for 25% of both generic and brand-name drugs.
Over the years, the threshold for out-of pocket spending before a Medicare user has catastrophic coverage has increased, rising from $3,600 to $6,750 by 2021. The manufacturer drug discount does not count towards your total out-of-pocket expenditure.
The donut hole was officially closed in 2020. However, your plan may have a pricing policy that allows you to spend more on drugs within the coverage gap. For example, if a drug costs $120 and you have a $20 copay during the initial coverage period, your 25% share of the coverage gap would be $30.
How Medicare Part D Drug Pricing Works
The price of drugs and the amount you pay out-of-pocket will vary depending on your plan. You’ll be responsible for 25% of brand-name and generic drug prices, plus 25% of any dispensing fees, once you are in the coverage gap.
While some of your costs, such as manufacturer discounts, count towards your out-of pocket totals (other payments do not). This is how it works.
What is included in your out-of pocket total?
- Your annual deductible, coinsurance, and copayments.
- You get a discount from the manufacturer for brand-name drugs within the coverage gap.
- You pay the coverage gap (toward drugs, dispensing fees).
You don’t have to include this in your total.
- Monthly premiums for Part D drug plans
- Your drug plan’s contribution to the cost of brand-name drugs (5%) and the pharmacy dispensing fee (75%), in the coverage gap.
- You pay any amount you have to for drugs not covered by your plan. This includes covered drugs purchased from pharmacies outside your plan’s network.
You’ll be responsible for the greater of 5% or $3.70 (for generics) and $9.20 (for brand-name drugs) once you reach catastrophic coverage. If you have catastrophic coverage, there is no limit on your annual out-of pocket spending. This means that if you need to deal with costly specialty medications, you may still be required to pay significant copays.
For example, one analysis found that expected out-of-pocket costs in 2019 averaged $8,109 across 28 specialty tier drugs covered by more than two dozen prescription drug plans. For conditions such as multiple sclerosis, cancer, and rheumatoidarthritis, a specialty drug may be required.
Medicare Part D statements will show you a running summary of the amount you have spent out of pocket for covered drugs and the coverage period.
