Covering costs in Medicare's 'donut hole'

Shelly Gigante

By Shelly Gigante
Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Posted on Dec 4, 2018

The Medicare prescription drug coverage gap, better known as the “donut hole,” may be slowly shrinking, but medication costs may still present a financial challenge for some seniors who pay for pricey medication.

Under the Patient Protection and Affordable Care Act (Obamacare) of 2010, Medicare drug plans were charged with closing the coverage gap through a series of escalating discounts for enrollees who spend above an annual threshold, and closing the donut hole entirely by 2020. President Trump’s 2018 budget deal moved that deadline ahead to 2019. Thereafter, seniors who pay for prescription medication coverage are no longer subject to a gap in their insurance coverage, but they do still face copays and coinsurance fees, which could potentially take a bite out of their budget, depending on how much they spend on drugs, said Aaron Tidball, manager of the Allsup Medicare Advisor program, a Medicare plan selection service in Belleville, Illinois.

“When they define ‘closing the gap,’ that gets interpreted differently by some consumers,” said Tidball. “It’s true that there will no longer be a place where covered consumers have to pay 100 percent of costs, but they will still be paying up to 25 percent.”

The Donut Hole explained

Medicare is the federal insurance program for those 65 and older and younger individuals with permanent disabilities. Medicare Part A hospital insurance covers inpatient hospital care, skilled nursing facility care, hospice, lab tests, surgery and home health care, while Medicare Part B medical insurance covers doctor services, outpatient care, durable medical equipment, home health care and certain preventive services.

Neither covers prescription drugs. As such, Medicare enrollees have the option to pay monthly for prescription medication coverage, called Part D, through private insurers that are authorized by the federal government. Roughly 43 million Medicare beneficiaries are enrolled in Medicare Part D plans, according to the latest data from nonprofit Kaiser Family Foundation.

Part D coverage requires plan participants to pay 100 percent of their own drug costs until they reach an annual deductible — no more than $435 in 2020. After they hit their deductible, they pay 25 percent of their drug costs and Part D picks up the rest until the total they spend together reaches an initial limit of $4,020 in 2020.

That’s where the donut hole comes in. Once they reach their initial coverage limit, Part D enrollees pay a larger share of their drug costs than in the initial coverage zone until their total out-of-pocket spending on prescription medication (not including the drug plan’s premium) reaches $6,350 in 2020. Once that second limit is reached, sometimes called the “catastrophic threshold,” Medicare and their Part D plan kicks back in, together paying for up to 95 percent of their remaining drug costs for that year.

It bears noting that many Medicare enrollees who pay for Part D coverage will never enter the donut hole, depending on how much they spend on prescription drugs and which plan they select. Low income individuals who qualify for Extra Help, a program that offers assistance in paying Part D costs, may also never be subject to the donut hole.

“Seniors on Medicare are obviously concerned about the donut hole, but many are more worried about it than they need to be,” said Tidball. “Part of that is because it’s very confusing to people.”

The legislative push to close the coverage gap was driven, in part, by demand for better patient outcomes, said Leigh Purvis, director of health services research for the AARP Public Policy Institute, noting a large body of evidence revealed that Medicare enrollees who pay for Part D reduce their adherence to prescribed treatments when they entered the donut hole.

“It is hoped that closing the coverage gap will help reduce cost-related non-adherence when enrollees are in that portion of the Part D benefit,” said Purvis, in an email interview. “However, it’s important to note that rapidly increasing prescription drug prices have led some experts to conclude that closing the coverage gap will not necessarily prevent enrollees from experiencing high out-of-pocket costs.”

How much will you pay in the gap?

The Centers for Medicare and Medicaid Services, CMS, reports that Part D premiums vary by income and the specific plan selected. For 2020, married couples who report joint income of $174,000 or less on their joint tax return pay only their plan premium, while those making between $174,001 and $218,000 pay $12.20 plus their plan premium monthly. Joint filers with reported income of $218,001 and $272,000 pay $31.50 each month in addition to their premium, and those who report income between $272,001 and $326,000 pay $50.70 plus their premium. Those reporting joint income of between $326,000 and $750,000 on their tax return pay their plan premium plus an additional $70.00 per month, and the highest earners making $750,000 and above pay $76.40 in addition to their plan premium.1

Beyond that, the amount individual enrollees pay out-of-pocket for prescription drugs depends on the medications they use and whether those drugs are included on their insurer’s list of covered medications, called a formulary.

Some 782 Part D Prescription Drug Plans were offered to Medicare beneficiaries nationally across all regions in 2018; most states or regions have 20 or more, according to the Kaiser Family Foundation.2

Not all Part D plans include a coverage gap. Some enhanced alternative plans, which typically come with higher premiums, offer reduced or eliminated deductibles with reduced cost-sharing in the donut hole and/or the initial coverage period. But they do not necessarily pay full fare, or cover all drugs, said Tidball. Seniors are advised to research the plans they are considering carefully to determine whether the higher premium is worth the price.

Those with limited income and resources may also get help with Medicare Part A or B coverage, or qualify for Extra Help to pay for Medicare prescription drug coverage.

Keeping costs low

As the donut hole slowly shrinks, seniors with significant medication expenses should take every step to keep their out-of-pocket costs to a minimum.

That begins with a thorough review of the plans available in their area. During open enrollment from October 15 to December 7 in 2020, enrollees should be sure the drugs they use will continue to be covered by their current plan next year and that any new drugs their doctor has discussed prescribing are also within the drug plan’s formulary.

Many plans categorize drugs into different price groups, or tiers. They may add or subtract drugs from their formulary in any given year so just because a plan worked for an enrollee last year does not necessarily mean it will next year. If the drug(s) they are prescribed are not included in their plan’s formulary, or they can’t find coverage for their medication in any available Part D plan, Tidball said seniors may be able to request an exception. “The process of making a formulary exception varies from plan to plan and it does take time,” he said. “It also needs a doctor’s support.”

Look, too, at your premium and deductible. If your plan’s premium has increased, comparison shop for a comparable plan that costs less. Remember: the plan with the lowest premium is not necessarily the better bargain. You may incur lower costs overall by choosing a plan with a higher deductible and a lower premium, or vice versa.

“Choosing prescription drug coverage is highly individualized,” said Purvis. “AARP strongly recommends that all Part D enrollees evaluate their plan options from year to year and make the best choice for their current health needs.”

As you review the plans available, don’t forget to look at each plan’s pharmacy network. Most have in-network pharmacies, where enrollees get drugs at a lower cost, but some also use a “preferred pharmacy,” where they have negotiated the lowest available rate. Make sure the preferred pharmacy is close to home.

Other ways to save: Request generic drugs where possible. “We always recommend that enrollees talk with their health care provider or pharmacist to see if less expensive, but equally effective, treatment alternatives are available,” said Purvis. “Enrollees may also want to ask their health care provider to take a look at all of the prescription drugs that they’re taking to see whether some of them can be tapered down or even dropped entirely.”

Medicare suggests beneficiaries who are having trouble covering the cost of medication also contact the Pharmaceutical Assistance Program to determine whether any financial assistance exists for the drugs they need. Many states and the U.S. Virgin Islands also offer help to low income residents who are struggling to pay for prescription drugs.

Where lower prescription drug costs are concerned, it’s all about being a smart consumer.

“I don’t want people to be worried about the donut hole when they don’t need to be,” said Tidball. “Picking the right plan in the first place may prevent them from falling into the donut hole at all.”

Seniors who purchase prescription drugs should also review their monthly “explanation of benefits,” or EOB notice from their insurance plan, which tells them how much they have spent year-to-date. If they think they have reached the coverage gap and they do not get the discount to which they are entitled on covered brand-name prescriptions, they should work with their drug plan to ensure their records are correct. If their drug plan disagrees they are owed a discount, they can appeal. Help is available from their State Health Insurance Assistance Program (SHIP) or by calling 1-800-MEDICARE.

This article was originally published in July 2018. It has been updated.

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1 Centers for Medicare and Medicaid Services, “Monthly premium for drug plans,” 2020.

2 Kaiser Family Foundation, “The Medicare Part D Prescription Drug Benefit,” October 2, 2017.

The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.