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donut hole

What is the Medicare donut hole?

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.

In 2022, you enter the donut hole when the total cost of your drugs (including the part you pay and the part your plan pays) reaches $4,430. 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.

You reach the catastrophic coverage level (i.e., get out of the donut hole) after your costs reach $7,050 in 2022, including your deductible (which can be no more than $480 in 2022), 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 2023, the maximum Part D deductible is $505, and the catastrophic coverage level will start once your drug costs reach $7,400. (Again, that includes the 70% manufacturer discount for brand-name drugs while you’re in the donut hole.)

Once you come out the other side of the donut hole and reach the catastrophic coverage level, your plan pays most of your prescription drug expenses through the end of the year, leaving you with minimal copays or coinsurance. At this coverage level, your prescription costs for the rest of 2022 are limited to the greater of 5%t coinsurance, or copays that amount to $3.95 for generics and preferred multi-source drugs, and $9.85 for other brand-name drugs.

For 2023, those copays increase slightly – to $4.15 and $10.35 – respectively (or 5% of the cost of the drug, whichever is greater).

As of 2024, as a result of the Inflation Reduction Act, there will no longer be any out-of-pocket costs during the catastrophic coverage phase.

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