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As has been the case in previous years, the thresholds where a person enters and exits the “donut hole” increased in 2023. We’ll explain this in more detail below, but the short story is that the initial coverage limit increased to $4,660, and the threshold for exiting the donut hole and entering the catastrophic coverage level increased to $7,400.
The Medicare Part D program was designed with a gap in coverage: prior to the ACA, beneficiaries’ drug expenses (after the deductible) were covered up to a certain dollar amount (on standard plan designs, the beneficiary pays 25% of the cost during this phase), then not covered at all up to another amount, and then more robust coverage would kick in (the beneficiary would pay 5% of the cost, or a nominal copay, at this point). The gap in the middle is called the donut hole.
Over the course of several years, the ACA gradually closed the donut hole. Instead of having to pay the full cost of medications while in the donut hole, beneficiaries began paying a percentage of the cost, and the donut hole was fully closed as of 2020. But a “closed” donut hole just means you’ll pay 25% of the cost of your drugs while in the donut hole. Depending on how your plan is designed, you may still have different costs before and during the donut hole. And the donut hole is still relevant due to the way costs are covered and how they count towards your out-of-pocket total and reaching the catastrophic coverage limit.
Standard plans have a deductible, then you pay 25% of the cost of drugs until you reach the donut hole. (In 2023, this happens once you and your health plan have spent $4,660 on your medications.) Now that it’s closed, you’ll also pay 25% of the cost of drugs while in the donut hole. But for example, if your plan is designed with a copay (instead of a 25% coinsurance) after the deductible and before the donut hole, your costs will change once you reach the donut hole.
What also changes during the donut hole is how the cost of the drugs is actually being covered. The Kaiser Family Foundation has a helpful chart (Figure 6) that makes it easy to visualize: Before you reach the donut hole, your Part D plan is paying the portion of the cost above your copay or coinsurance. But once you enter the donut hole, the bulk of the cost of your brand-name drugs is being covered by a discount provided by the drug manufacturer (generic drugs are still covered by the enrollee’s coinsurance and Part D plan, rather than a drug manufacturer discount).
In order to get out of the donut hole and move into the catastrophic coverage level, your out-of-pocket spending will have to reach $7,400 in 2023 (up from $7,050 in 2022, and up considerably from 2019, when it was $5,100). The amount that your plan pays doesn’t count towards reaching this amount. But the amount that’s provided as a discount by the drug manufacturer (for brand-name drugs) does count towards reaching the catastrophic coverage threshold. (Once you enter the catastrophic coverage level, your drug costs will be much lower but not necessarily low, depending on your medications. But note that starting in 2024, there will no longer be any out-of-pocket costs during the catastrophic coverage level.)
So even if your out-of-pocket costs remain the same when you enter the donut hole, a larger amount is being credited towards your out-of-pocket spending each time you fill the prescription (95% of the cost, instead of 25% of the cost), helping you to hit the catastrophic coverage threshold sooner. Because of the manufacturer discount, the actual amount you’ll have paid out of your own pocket will be around $3,100 by the time you reach the catastrophic coverage threshold in 2023.
But don’t confuse this with getting into the donut hole in the first place. To reach that limit ($4,660 in 2023) the total cost of your drugs is counted, including the part you pay and the part your plan pays. So for getting into the donut hole, the amount your plan pays is counted. But for getting out of the donut hole, the amount your plan pays is not counted.
In 2023, you’ll enter the donut hole when your spending + your plan’s spending reaches $4,660. And you leave the donut hole — and enter the catastrophic coverage level – when your spending + manufacturer discounts reach $7,400. Both of these amounts are higher than they were in 2022, and generally increase each year.
So let’s say your plan has a $30 copay for brand-name drugs before you reach the initial coverage limit (ie, before you enter the donut hole), and you buy a drug that costs $100. You’ll pay $30 and your Part D plan will pay $70.
Now let’s say you’ve entered the donut hole and you need to buy that same medication again. It still costs $100, but your plan will only pay $5. The bulk of the cost – $70 – will be covered by the manufacturer discount, and your portion will be $25.
Your Part D plan will keep track of all of this for you, but this is why there’s still an initial coverage limit, even though the donut hole is closed. It’s really only “closed” in terms of the amount that you’re paying at the pharmacy when you pick up medications – and even that is likely to change once you cross over the initial coverage limit amount, since it will depend on the way your plan structures its coverage.
The underlying calculations are still based on the donut hole being there, and that’s still relevant for people who have very high-cost medications.
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.