Part D plans have four payment stages with a limit you must reach before moving on to the next phase: Annual Deductible, Initial Coverage, Coverage Gap (or “donut hole”) and Catastrophic Coverage.
The “donut hole” is the third payment stage of Part D. After you hit your initial coverage limit, you pay up to 25% of your medications’ retail cost.
The “donut hole” stage has changed significantly in recent years. Before 2006, Part D enrollees were required to pay 100% of their drug costs after reaching the initial coverage limit. Now, enrollees only pay 25%.
The “donut hole” is an unofficial term for the Part D coverage gap. Before 2006, Part D was known for a gap in coverage that resembled a “donut hole.” Before 2006, Medicare beneficiaries were responsible for 100% of their drug coverage costs after reaching their initial coverage limit. Responsibility continued until the beneficiary reached an out-of-pocket amount, and then their insurance started paying again.
Now, the gap has slowly closed. Instead of paying 100% of the cost of the drug, you’re responsible for paying no more than 25% in 2022. If your prescriptions are inexpensive, you may not even reach the coverage gap. You and your insurance provider have to spend $4,430 on prescription drugs before entering the coverage gap.
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To fully understand the coverage gap, it’s essential to know the four payment stages of Medicare Part D:
- Annual deductible
- Initial coverage
- Coverage gap or “donut hole”
- Catastrophic coverage
After you’ve reached specific dollar amounts determined by Medicare in each phase, you move to the next payment stage. Keep in mind, some plans don’t have a deductible, and you will start with initial coverage. You are responsible for copays or coinsurance for your prescription drug costs in the initial coverage stage.
There are different drug “tiers” within Part D plans that determine your copay costs, ranging from least expensive to most expensive. After you spend a specific dollar amount from copays, you move into the coverage gap or “donut hole.” The coverage gap applies until your out-of-pocket costs reach a particular dollar amount.
Here’s a more detailed look at the payment stages of Medicare Part D:
Stage 1: Medicare Part D Annual Deductible
- What does it mean? You pay 100% of prescription drug costs until you reach a certain amount set by your plan. The maximum deductible for 2022 is $480. However, some plans don’t have a deductible. If that’s the case, you will skip the first phase and start in initial coverage.
- When’s the next stage? This phase continues until you reach your deductible. Then, you move into the initial coverage stage.
- Example: Let’s say your annual deductible is $400 and your retail medication costs $250. You pay $250. You need to spend $150 more to reach your deductible.
Stage 2: Medicare Part D Initial Coverage
- What does it mean? You pay a portion of the costs through coinsurance or copays, while your Part D plan pays the rest. The tier usually determines the price of your prescription drug.
- When’s the next stage? Initial coverage continues until you and your insurance carrier reach $4,430 in 2022. Then, you move into the coverage gap stage.
- Example: Let’s say your retail medication costs $100 and your plan pays $70. Your copay is $30.
Stage 3: Medicare Part D Coverage Gap (Donut Hole)
- What does it mean? You can’t be charged more than 25% of your medications’ retail cost, which is likely more than you paid in the initial coverage stage. Before 2006, Medicare beneficiaries were responsible for 100% of their drug costs after reaching their initial coverage limit.
- When’s the next stage? The coverage gap continues until you’ve spent $7,050 out-of-pocket in 2022. Then, you move into the catastrophic coverage stage.
- Example: Let’s say your retail medication costs $400 and your plan pays $300. You pay 25% or $100.
Stage 4: Medicare Part D Catastrophic Coverage
- What does it mean? You pay whichever is higher: 5% of costs for your covered drugs, or $3.95 for generic drugs/$9.85 for brand-name drugs (2022).
- When’s the next stage? Catastrophic coverage continues until the end of the year. Then, you will return to the deductible stage on January 1.
- Example: Let’s say your retail medication costs $500 and your plan pays 95% or $475. You pay the remaining 5% or $25.
The coverage gap has changed considerably, closing smaller and smaller. In 2016, beneficiaries paid 58% of costs for generic drugs and 45% for brand-name. There was a slight decrease in 2018 when beneficiaries had to pay 44% for generic drugs and 35% for brand-name medications. In 2022, enrollees only have to pay 25% for both generic and brand-name drugs.
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The retail cost of formulary drugs purchased within your Part D Plan is the only cost that counts toward your plan’s coverage gap or “donut hole.” Once you’re in the coverage gap, out-of-pocket drug costs are all that count toward moving into catastrophic coverage.
Yes. If you switch plans during the year through a Special Enrollment Period, you will most likely stay in the “donut hole.” Your drug spending history will carry over with you. However, it could vary if your new Medicare plan has a different initial coverage limit.