What is the Medicare donut hole?

You may have heard of the “donut hole” in reference to Medicare Part D, Medicare’s prescription drug coverage.

The donut hole is a gap in prescription drug coverage during which you may pay more for prescription drugs. You enter the donut hole once Medicare has paid a certain amount toward your prescription drugs in one coverage year.

Once you fall into the donut hole, you’ll pay more out of pocket (OOP) for the cost of your prescriptions until you reach the yearly limit. Depending on the type of coverage you choose, when you hit this limit, your plan may help pay for your prescriptions again.

Big changes are coming for the Medicare donut hole in 2020 as the U.S. Congress attempts to close this coverage gap. What are these changes and how may they affect you? Continue reading as we discuss more about the donut hole, what’s new in 2020, and much more.

How does the Medicare donut hole work and when does it end?

So when exactly does the donut hole begin and end for 2020? The short answer is, that varies depending on the Part D plan you choose and how much you spend on prescription medications. Here are more facts about the Medicare donut hole.

Initial coverage limit

You enter the donut hole after you surpass the initial coverage limit of your Part D plan. The initial coverage limit includes the total (retail) cost of drugs — what both you and your plan pay for your prescriptions.

After surpassing this limit, you’ll need to pay a certain percentage yourself until you’ve reached what’s called the out of pocket (OOP) threshold.

For 2020, the initial coverage limit has increased to $4,020. This is up from $3,820 in 2019. Generally speaking, this means that you’ll be able to get more medications before you fall into the donut hole when must pay more yourself.

OOP threshold

This is the amount of OOP money that you have to spend before you exit the donut hole.

For 2020, the OOP threshold has increased to $6,350. This is up from 2019, meaning that you’ll have to pay more OOP than before in order to get out of the donut hole.

When you’re in the donut hole, certain things count toward your total OOP cost to exit it. These include:

  • OOP costs for generic and brand-name drugs while in the donut hole
  • discounts on brand-name drugs while you’re in the donut hole, which includes a coverage gap discount plus a manufacturer discount
  • your yearly deductible: $435 in 2020, which is up from $415 in 2019
  • any copayments or coinsurance

What are the new rules about the Medicare donut hole for 2020?

Originally, being in the donut hole meant that you had to pay completely OOP until you reached the threshold for more drug coverage. However, since the introduction of the Affordable Care Act, the donut hole has been closing.

The donut hole closed for brand-name drugs in 2019 and will close for generic drugs in 2020. However, although the donut hole is being phased out, in 2020 you’ll still have to pay a certain percentage OOP once Medicare reaches its coverage limit.

In 2020, you must pay 25 percent of the cost for both generic and brand-name drugs while you’re in the donut hole. For both generic and brand-name drugs, only a certain amount of the cost counts towards your OOP threshold.

Let’s see how this works in some examples below.

Generic drugs

For generic drugs, only the amount you actually pay counts toward your OOP threshold. For example:

  1. You’re currently in the donut hole and a covered generic drug costs $40.
  2. You’ll pay 25 percent of this cost OOP, which is $10.
  3. Only this $10 will count toward your OOP costs for exiting the donut hole. The remaining $30 won’t count.

Brand-name drugs

For brand-name drugs, 95 percent of the total medication price will count towards reaching the OOP threshold. This includes the 25 percent that you pay OOP plus a manufacturer discount.

So, as a simple example:

  1. You’re in the donut hole and a covered brand-name drug costs $40.
  2. You’ll pay 25 percent of this cost OOP, which is $10. The manufacturer discount will be 70 percent, or $28.
  3. This totals to $38. This amount of money will count toward your OOP costs for getting out of the donut hole. The remaining $2 won’t count.

What happens after I exit the donut hole?

After you exit the donut hole, you’ll receive what’s called catastrophic coverage. This means that you’ll have to pay whatever is greater for the rest of the year: 5 percent of a drug’s cost or a small copay.

The minimum copay for 2020 has increased a little from 2019:

  • Generic drugs: minimum copay is $3.60, which is up from $3.40 in 2019
  • Brand-name drugs: minimum copay is $8.95, which is up from $8.50 in 2019

Choosing Medicare prescription drug coverage

Are you planning on enrolling in a Medicare prescription drug plan? Below are some things to consider before choosing a plan.

  • Use the Medicare website to search for a plan that’s right for you.
  • Compare a Medicare Part D with a Medicare Advantage Plan (Part C). Medicare Advantage plans include health care and drug coverage on one plan and sometimes other benefits like dental and vision.
  • Check to make sure that the plan you’re looking at includes the medications that you take on their formulary.
  • If you take a number of generic drugs, look for a plan that charges a low copayment for these medications.
  • If you’re concerned about expenses while in the donut hole, try to find a plan that provides additional coverage during this time.
  • Make sure that additional coverage includes medications you take.

Understanding Medicare Part D

Medicare Part D is an optional plan under Medicare for coverage of prescription drugs. Insurance providers approved by Medicare provide this coverage.

Prior to Part D, many people received prescription drug coverage through their employer or a private plan. Some had no coverage. After Part D began, about 60 to 70 percent of eligible people without prescription drug coverage enrolled.

Both brand-name and generic drugs are covered in Medicare Part D plans. At least two drugs in commonly prescribed drug categories are included on the list of covered medications, which is called a formulary.

However, the specific drugs covered in your Part D plan can vary from year to year. Your provider can make changes to its formulary throughout the year, provided it follows the proper guidelines. This can include things like changing brand-name drugs to generic ones.

Tips for helping a loved one enroll in Medicare

Maybe you’re too young for Medicare, but are helping a loved one enroll. Here are some things to consider.

  • Know if they’re collecting Social Security benefits. If they are, they’ll be automatically enrolled in parts A and B when eligible. If not, they can sign up for Medicare starting 3 months before their 65th birthday.
  • Be aware of their individual needs. Do they visit the doctor more, take several medications, or need additional vision or dental care? Knowing these things can help select an appropriate plan.
  • Be prepared to provide personal information about yourself. Social Security may ask you about you and your relationship to the person you’re helping. Your loved one will need to sign the Medicare application when it’s complete.

6 ways to reduce Medicare prescription costs

Is there anything else that you can do to help with the cost of prescription medications? Here are six suggestions:

1. Consider switching to generic drugs

These are often less expensive than brand-name drugs. If you’re taking a brand-name drug, ask your doctor about generic drugs that can work just as well.

2. Think about ordering medications online

In some cases, this may be more cost-effective than filling at a pharmacy. The FDA has a list of tips for safely buying medications online.

3. Choose a plan with additional coverage during the donut hole

Some Medicare plans may provide additional coverage while you’re in the donut hole. However, you may be subject to higher premiums.

4. Look into state pharmaceutical assistance programs

Many states offer programs that can help with the cost of your prescriptions. Medicare has a helpful search tool to find programs in your state.

5. Check for pharmaceutical assistance programs

Many pharmaceutical companies offer assistance programs for people that need help with the cost of their medication.

6. Apply for Medicare Extra Help

Individuals that have Medicare drug coverage and have limited income and resources may qualify for Extra Help. This helps to pay for premiums, deductibles, and copayments associated with a Medicare drug plan.

The bottom line

The Medicare donut hole is a coverage gap in Plan D prescription coverage. You enter it after you’ve passed an initial coverage limit.

Starting in 2020, you’ll have to pay 25 percent OOP from when you enter the donut hole until you reach the OOP threshold.

There are a variety of things that you can do to help bring the cost of prescriptions down. This includes switching to generics, having extra coverage for the donut hole, or using an assistance program.

When selecting a Medicare prescription drug plan, verify that a plan covers the medications that you use. It’s always a good idea to compare multiple plans to find the one that’s right for your individual needs.