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If I enroll in a Medicare prescription drug plan that has an Initial Deductible, will the deductible impact when I go into the Donut Hole?

Category: Entering the Donut Hole
Updated: Feb, 28 2024

No.  Your Medicare Part D plan's Initial Deductible does not affect when you go into the Donut Hole or Coverage Gap.  However, your Initial Deductible will impact how quickly you exit the Donut Hole. (Please remember that when you exit the Donut Hole or Coverage Gap when you exceed your plan's total out-of-pocket spending limit (TrOOP) and then you will enter the Catastrophic Coverage stage of your Medicare prescription drug plan.)

As a reminder, if your Medicare Part D plan has an Initial Deductible, you will pay 100% of your prescription drug costs until you meet your deductible.  For instance, if your drug plan includes the standard 2024 deductible of $545, you pay 100% of your drug costs until reaching $545 - then you enter the Initial Coverage phase and you share drug costs with your Medicare Part D plan.

Please note that some Medicare Part D prescription drug plans with an Initial Deductible exclude one or more generic drug tiers from the deductible - so you have immediate coverage for these lower-costing formulary tiers and only your more expensive medications are subject to the deductible.

Entering the Donut Hole
You enter the Donut Hole based on your Medicare Part D plan's negotiated retail drug cost - and not what you actually spend on your medications.  For example, if you purchase a medication that has a retail cost of $300 and pay a $47 copay, the $300 counts toward meeting your Initial Coverage Limit (ICL) and entering the Donut Hole.  As a reminder, your "retail drug costs" or your Medicare plan's negotiated retail prices are not necessarily your pharmacy's everyday prices (although your drug plan's retail costs should be similar to your pharmacies everyday pricing).

For example ...
Here are a few example Medicare Part D plans with different deductibles showing the effect of a Medicare Part D drug purchase on your Donut Hole entry and exit:

Example #1 Medicare Part D plan with $545 Initial Deductible.
  • You purchase a Tier 3 medication with a $100 retail cost,
  • you pay $100 while in the deductible,
  • the $100 retail cost is credited toward meeting the deductible and entering the Donut Hole (drugs retail value),
  • the $100 you paid is also credited toward exiting the Donut Hole (what you paid out-of-pocket).
  • Your initial deductible balance is now $445.

Example #2 Medicare Part D plan with $0 Initial Deductible and 25% coinsurance.
  • You purchase a $100 medication,
  • you skip the deductible phase and pay an initial coverage phase coinsurance of $25,
  • the $100 retail cost is credited toward entering the Donut Hole (drugs retail value),
  • the $25 coinsurance you paid is credited toward exiting the Donut Hole (what you paid out-of-pocket).

Example #3 Medicare Part D plan with $545 Initial Deductible and Tier 1 and Tier 2 drugs excluded from deductible.
  • You purchase a Tier 2 medication with a $100 retail cost,
  • you skip the $545 deductible and pay an initial coverage phase copay (for example $17 for Tier 2 drugs),
  • the $100 retail cost is credited toward entering the Donut Hole (drugs retail value), and
  • the $17 copay you paid is credited toward leaving the Donut Hole and entering the Catastrophic Coverage phase (what you paid out-of-pocket).
  • Your initial deductible for Tier 3 and greater drugs remains at $545.

Need a bit more?  Here are two different ways to explain how your Initial Deductible relates to the Coverage Gap or Donut Hole:

(1) “The Initial Deductible has no effect on when you enter the Donut Hole, but will affect when you enter the Catastrophic Coverage phase” – True.

Only the retail value of your drug purchases affects when you enter the Donut Hole, no matter what your Initial Deductible ($0 or $250 or $545 deductible).

(2) “Your Initial Coverage Limit is measured by the retail value of your medication purchases and the first $545 you spend toward your Initial Deductible will count toward reaching the Initial Coverage Limit.” – Also True.
If you spend $545 in the Initial Deductible, you are paying 100% of the retail price for $545 worth of medications – and the $545 will count toward reaching the Initial Coverage Limit or Donut Hole entry point.

As a more specific example:

If you fill your prescription for a Tier 1 drug Atorvastatin (generic Lipitor (r)), and Atorvastatin is covered by your Medicare prescription drug plan, the retail cost of the Atorvastatin will be added to your total retail prescription drug costs, no matter if you pay 100% during the Initial Deductible or you pay a smaller copayment (for instance, $1) since this is a Tier 1 generic drug.  In other words, the retail drug cost is counted toward reaching your Medicare Part D plan's Initial Coverage Limit - as explained in more detail below, the amount you actually paid for the drug counts toward exiting the Donut Hole.

More on exiting the Donut Hole

You exit the Donut Hole when your out-of-pocket costs (or Total Out-of-Pocket costs - TrOOP) reaches a certain level - and enter the Catastrophic Coverage phase.  TrOOP is based on what you have spent on covered prescription drugs during the year (or what someone has spent on your behalf - such as the 70% portion of your brand-name drug discount paid by the pharmaceutical industry).  So, if you have spent more money out-of-pocket because of your Initial Deductible, you will exit the Donut Hole a little earlier than someone who has no Initial Deductible - again, because you have spent more of your own money at the beginning of your Medicare Part D coverage.

Does the Initial Coverage Limit and True Out-of-Pocket Costs (TrOOP) threshold change every year?

  The Initial Coverage Limit and TrOOP values change every year, and here is a table showing a summary of these values and how they have changed over the past few years: q1medicare.com/PartD-The-MedicarePartDOutlookAllYears.php

Are you still not sure how this all works?  No problem - just click on the following link and send us your question:  q1medicare.com/Helpdesk.php

Related questions:

What are retail drug costs for purposes of calculating the Donut Hole?

What prescription related expenses do not count toward the Donut Hole?

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