What is the Medicare donut hole (coverage gap)?
Medicare’s “donut hole” refers to the coverage gap in your Medicare Part D prescription drug benefit – the point where your prescription drug expenses exceed the initial coverage limit of your plan, but have not yet reached the catastrophic coverage level.
When Medicare Part D was first introduced, patients paid 100% of their drug costs while in the donut hole (as opposed to 25% before the donut hole – for standard plan designs – and 5% after the donut hole). The Affordable Care Act (ACA) included a provision to gradually close the donut hole by 2020. (The donut hole closed a year early, in 2019, for brand-name drugs, as a result of the Bipartisan Budget Act of 2018.)
Now that the donut hole is “closed,” enrollees in standard Part D plans pay 25% of the cost of their medications both before the donut hole (during the initial coverage phase, after the deductible is met) and during the donut hole. But most enrollees do not have standard plans, which means they generally have copays during the initial coverage phase, and then transition to the 25% coinsurance during the donut hole. So even though the donut hole has been closed by the ACA, enrollees generally find that their out-of-pocket costs at the pharmacy do change when they move from the initial coverage phase to the donut hole phase.
When does the Medicare Part D donut hole start?
In 2024, you enter the donut hole when the total cost of your drugs (including the part you pay and the part your plan pays) reaches $5,030. Note that you will have paid much less than this amount out-of-pocket, because your drug plan will have picked up the majority of the cost.
When does the Medicare Part D catastrophic level start?
You reach the catastrophic coverage level (i.e., get out of the donut hole) after your drug costs reach $8,000 in 2024, including your deductible (which can be no more than $545 in 2024), copays/coinsurance, and the manufacturer discount for brand-name drugs that you receive while in the donut hole. The manufacturer’s discount is 70% of the cost of the drugs. So while you’re in the donut hole, 95% of the cost of your drugs is counting towards the spending cap for getting out of the donut hole, even though you’re only paying 25% out of your own pocket.
For 2025, the maximum Part D deductible is $590, and out-of-pocket costs are capped at $2,000, as a result of the Inflation Reduction Act. There will no longer be an initial coverage limit or coverage gap. That compares with roughly $3,333 in actual maximum out-of-pocket costs that an enrollee would incur in 2024 if their drug costs were high enough to get out of the coverage gap (as of 2024, there are no longer any costs once an enrollee reaches that point).
How much are drugs once you're in the Medicare Part D catastrophic level?
Before 2024, enrollees paid the greater of a 5% coinsurance or small copays for drugs after they got out of the coverage gap and reached the catastrophic coverage level. But as of 2024, due to the Inflation Reduction Act, there are no longer any out-of-pocket costs during the catastrophic coverage phase. And also under the Inflation Reduction Act, there will be a $2,000 cap on Part D out-of-pocket costs as of 2025 (indexed for inflation in future years).
Footnotes
Tags: catastrophic coverage, donut hole, prescription drug coverage
