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What is a Coverage Gap?

Medicare drug plans may have a "coverage gap," which is sometimes called the "donut hole."

Prior to 2021, the coverage gap meant that after you and your plan have spent a certain amount of money for covered drugs (the initial coverage limit), and you had to pay out-of-pocket all costs for your drugs while you are in the "gap."

Starting in the 2011 Medicare Part D plan year, a discount or co-insurance (cost-sharing) was introduced to reduce the cost of generic and brand-name prescription drugs purchased by non-LIS Medicare beneficiaries once they entered the Coverage Gap (or Donut Hole / Doughnut Hole) portion of your stand-alone Medicare Part D prescription drug plan (PDP) (or Medicare Advantage plan that included prescription drug coverage (MAPD)). Over the years, the Donut Hole discount increased providing more coverage formulary drug purchases in Donut Hole.

Although we say that the Donut Hole "closed" in 2020, because you receive a 75% discount on all formulary drugs purchased in the Donut Hole (paying the same 25% cost-sharing as the standard Medicare Part D plan coverage before the Donut Hole), the Donut Hole did not go away and the Coverage Gap remains the third phase of your Medicare Part D coverage.

Once you've reached your plan's out-of-pocket limit, you will have "catastrophic coverage." This means that you only pay a Coinsurance amount (like 5% of the drug cost) or a Copayment (like $3.95 or $9.85 for each prescription) for the rest of the calendar year.

Note: If you get extra help paying your drug costs, you won't have a coverage gap. However, you will probably have to pay a small copayment or coinsurance amount.

The example below shows calendar year costs for covered drugs in a plan that meets Medicare's standards in 2007:

Mr. Jones joins the ABC Prescription Drug Plan. His coverage begins on January 1, 2007. He pays the plan a monthly premium throughout the year, even during his coverage gap. He doesn't get "extra help."
1. Yearly
       Deductible
2. Copayment/
       Coinsurance
3. Coverage Gap
       ("donut hole")
4. Catastrophic
       Coverage
Mr. Jones pays the first $265 of his drug costs. Mr. Jones pays a copayment or coinsurance amount, and his plan pays its share for each drug until his total drug costs (including his deductible) reach $2,400. Mr. Jones pays everything until he has spent $3,850 out-of-pocket. (This includes his yearly deductible, coinsurance and copays, and $3,051.25 while in the coverage gap. This does not include the drug plan's premium.) Even though he is paying everything, he gets a discount because he belongs to a Medicare drug plan. Once Mr. Jones has spent $3,850 out-of-pocket for the year, his coverage gap ends. He only pays a small coinsurance (like 5%) or a small copayment (like $2.15 or $5.35) for each prescription until the end of the year.


(Primary Source: Centers for Medicare and Medicaid Services - Medicare and You Handbook. This content may have been enhanced by Q1Group LLC to include further examples, explanations, and links.)

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