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Big changes are coming to Medicare Part D prescription drug coverage following the passage of the Inflation Reduction Act of 2022, which gives Medicare the power to negotiate for lower prescription drug prices. The act also includes caps on out-of-pocket spending, limits on increases in Medicare Part D premiums and drug prices, and more.
Certain changes will take effect in 2023, while others start as late as 2026.
If you have a Medicare Part D prescription drug plan, there’s a gap in coverage after you’ve spent a certain amount on covered drugs — the Medicare "donut hole." While potential costs associated with the donut hole went down substantially in 2020, there’s still a coverage gap that may affect what you pay for prescription drugs.
Here’s what you should know about the Medicare Part D donut hole.
What is the Medicare 'donut hole'?
There are four phases of Medicare Part D coverage that correspond to how much you’ve spent out-of-pocket on covered prescription drugs for the year. The donut hole is the third of those four phases, and it’s the one that’s likely to be the most expensive for you.
You might see these divisions of Medicare Part D coverage described as either “phases” or “stages” in documents from Medicare or your insurance company.
Here are the four phases, in order:
Phase 1: Deductible
Your plan doesn’t start to pay for prescription drugs until you meet your annual Part D deductible.
When it starts: The beginning of each year.
What you pay: Full price for prescription drugs.
When it ends: You hit the deductible (varies by plan, but can’t be more than $480 in 2022 ($505 in 2023)).
Phase 2: Initial coverage
Once you hit your deductible, your plan’s coverage kicks in.
When it starts: After you've hit your annual Part D deductible.
What you pay: Your plan’s copays (a flat dollar amount) or coinsurance (a percentage of the price), depending on the drug’s formulary tier.
When it ends: Once you and your plan have spent a combined total of $4,430 in 2022 ($4,660 in 2023), including your deductible.
Phase 3: The donut hole
In the coverage gap, or donut hole, you stop paying the coinsurance or copays you paid before. Instead, you’re responsible for up to 25% of the price for all of your medications.
When it starts: After you and your plan have spent a combined total of $4,430 in 2022 ($4,660 in 2023), including your deductible.
What you pay: Up to 25% of the cost of your covered prescriptions drugs, including any dispensing fees.
When it ends: Your qualifying out-of-pocket costs for covered prescription drugs reach $7,050 in 2022 ($7,400 in 2023) (see below for what counts toward that total).
Some plans offer “gap coverage” to reduce your out-of-pocket costs in the donut hole. However, gap coverage might apply only to certain drugs, and a plan with gap coverage might have higher monthly premiums.
Phase 4: Catastrophic coverage
When you’ve reached the out-of-pocket limit, catastrophic coverage kicks in and you pay new copays or coinsurance amounts, which are generally lower than you paid before.
When it starts: After your qualifying out-of-pocket costs for covered prescription drugs have reached $7,050 in 2022 ($7,400 in 2023) (see below for what counts toward that total).
What you pay: 5% of the cost of your covered prescription drugs, with a minimum of $3.95 for generic drugs or $9.85 for brand-name drugs in 2022 ($4.15 for generic drugs or $10.35 for brand-name drugs in 2023).
When it ends: The end of the year.
Note: If you're part of a Medicare program called Extra Help, your drug costs will be different, and there's no coverage gap.
What costs count toward the catastrophic coverage threshold?
You enter catastrophic coverage when your out-of-pocket costs for covered drugs hit $7,050 in 2022 ($7,400 in 2023). Figuring out when you’ll hit that threshold can be a little complicated, though — what counts as “out-of-pocket spending” most likely isn’t equal to what you actually spend.
The good news: Your Medicare Part D statements should show you what phase you're in, a running total of your drug costs and what it will take to move into the next phase.
Here’s what costs do and don’t count toward the out-of-pocket totals that appear on those statements:
What counts toward your out-of-pocket total:
Your annual deductible, coinsurance and copayments.
95% of the cost of covered drugs you get during the coverage gap (even though you’re only responsible for up to 25% out of pocket), except for dispensing fees.
25% of the cost of pharmacy dispensing fees for covered drugs you get in the coverage gap (you’re responsible for the same 25% out of pocket for these fees).
What doesn’t count toward your total:
Part D drug plan monthly premiums.
The portion of the costs and pharmacy dispensing fees that your Part D insurance company pays for when you’re in the coverage gap.
Anything you pay for drugs that aren’t covered by your plan, including the cost of covered drugs from pharmacies that aren’t in your plan’s network.
Is the Medicare donut hole closed?
It depends what you mean by “closed.” There’s still a coverage gap, but it’s less costly than it used to be.
When Medicare Part D was created, the coverage gap was just like the deductible phase: You were responsible for 100% of drug costs until your out-of-pocket costs hit the catastrophic coverage threshold.
The Affordable Care Act, or ACA, reduced Medicare beneficiaries’ cost-sharing requirements in the coverage gap starting in 2011. The ACA’s full set of mandatory manufacturer discounts and government subsidies took effect in 2020, so now Medicare beneficiaries are responsible for 25% of the cost of covered drugs in the donut hole.
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Although the donut hole was considered officially “closed” in 2020, you may still spend more for drugs in the coverage gap, depending on your plan’s pricing. If a drug costs $120, for instance, and your copay in the initial coverage period is $20, your 25% share in the coverage gap would be higher at $30.