There are plenty of things to be confused about when it comes to Medicare, but the “donut hole” ranks right up near the top of the list. Not only are people frustrated by the calculations but then the formulas change every year. No wonder many folks just throw up their hands in disgust.
The donut hole refers to what is more formally called the “Coverage Gap” and is found in stand-alone Part D Drug plans and in Medicare Advantage plans that include drug coverage. Many people will never encounter the Coverage Gap but it is important to understand how it works so you won’t be surprised. It will be shocking if you pay $35 copay for your prescription one month and the very next month the pharmacist tells you the same drug is now $250! Welcome to the Donut Hole!
There are 4 stages in the Part D Drug coverage:
- Yearly Deductible Stage
- Initial Coverage Stage
- Coverage Gap Stage (Donut Hole)
- Catastrophic Coverage Stage
Not all plans have Deductible Stage and some have deductibles that only apply to higher-priced drugs. In any case, if you have a deductible then you pay the entire retail price for your drugs until your costs have equaled the deductible limit.
The Initial Coverage Stage is where you will pay either a fixed dollar “copay” or a percentage “coinsurance” for each of your drugs. You might, for instance, pay $5 for Tier 1 Preferred Generics and 35% for Tier 3 Preferred Brand Name Drugs. You can find what Tier each of your drugs belongs to by looking at your insurance plan’s “Formulary”. Once the total amount of your deductible (if any), your copays and coinsurance plus the amount your insurance company has paid equals $3,750 (for 2018), you have entered the Donut Hole or Coverage Gap.
For 2018, while in the Coverage Gap you will pay 35% of the retail price for brand-name drugs. The drug manufacturer must absorb a 50% discount and your insurance plan pays the remaining 15%. A Tier 3 drug with a retail price of $500, for which you may have been paying a $35 copay, will suddenly be $175 (35% of retail). For generic drugs you will pay 44% of the retail cost while in the Donut Hole.
Calculating how long you stay in the Donut Hole is where the math gets weird. You move from the Donut Hole Stage to the Catastrophic Coverage Stage when your True Out Of Pocket (TrOOP) costs equal $5,000. TrOOP is the total of the money you have paid for deductibles, copays and coinsurance plus the amount of the manufacturers’ discounts while in the Donut Hole. It does not include the amount your insurance plan paid.
Once into the Catastrophic Coverage Stage, you only have to pay the greater of 5% or $3.35 for generic drugs and the greater of 5% or $8.35 for all other drugs for the remainder of the calendar year.
Your insurance plan will keep track of these stages for you and send an Explanation of Benefits on your drug plan each month so that you will know exactly when you are approaching the Donut Hole. Pay attention to those notices so you won’t be surprised the month it happens.