Most Medicare Part D prescription drug plans have four different parts
of coverage: (1) the Initial Deductible
(in some plans), (2) the Initial
Coverage Phase, (3) the Coverage Gap
(Donut Hole), and (4) Catastrophic
You move through these four parts of your Medicare
drug coverage based on the amount of money you spend on formulary drugs or the retail value
of your prescription drug purchases. Only about 10% of all
people enrolled in a Medicare drug plan will ever leave the Initial Coverage Phase and enter the third part of coverage (the Coverage Gap) or the forth part of coverage, Catastrophic Coverage.
Most people will instead remain in the second part of their drug coverage phase: the Initial Coverage Phase.
When you are in Initial Coverage Phase, you and your
Medicare Part D plan share in the cost of your medication purchases based on your plan's cost-sharing
(such as a $30 co-payment or 25% co-insurance for a $100 drug). For example, if you purchase a mediation with a $100 retail cost,
you may pay a $30 co-pay (and the plan pays $70) or you pay $25 co-insurance (and the plan pays $75).
Entering the Initial Coverage Phase
If your Medicare Part D plan has an Initial Deductible (the first phase of drug coverage), you will pay the Initial Deductible before entering the
Initial Coverage Phase.
Some Medicare Part D plans will have an Initial Deductible, but exclude the lower-costing (Tiers 1 and Tier 2) drugs from the deductible, so you will skip the deductible
for any of these low-costing formulary drugs and start in at your Initial Coverage Phase for these drugs.
If your Medicare plan has a $0 deductible, you will enter the Initial Coverage phase immediately, skipping over the first phase.
As noted, most people will remain in their Medicare Part D plan's Initial Coverage Phase and pay the same price for formulary drugs (or relatively the same price as retail drug prices increase) throughout the whole year.
Exiting the Initial Coverage Phase and entering the Donut Hole
When the retail value of your drug purchases exceeds your Initial Coverage Limit
(ICL or Donut Hole entry point), you will leave your Initial Coverage Phase and enter the Coverage Gap or Donut Hole.
Please note that the Initial Coverage Limit (ICL) is not measured by what you have spent on medications. Instead, the ICL is the total retail value of
your prescription drug purchases. So this is the amount that you pay for your prescriptions plus what your Medicare Part D plan is paying.
For example, if you purchase a $1,000 formulary drug and you pay a $47 co-pay (the Medicare Part D plan pays the other $953), the total $1,000 retail cost is
credited toward your ICL (the 2022 standard Initial Coverage Limit is $4,430
In this example, after the $1,000 drug purchase, you have $3,430 remaining in drug purchases before entering the 2022 Donut Hole ($4,430 - $1,000).
You may find that your Medicare drug plan's retail drug prices are not the same as other Medicare Part D plan's. In other words, you might buy a medication like
ADVAIR DISKUS MIS (250/50)
and your plan will have a retail price of $630, although you may only pay a $42 copay. However, a friend with a different Part D plan may use
the same medication and have a $46 copay, but the retail price for their plan is around $415.
So, the same medication can have similar cost-sharing,
but different negotiated retail prices depending on the Medicare plan - and the different retail costs have different impacts on the Initial Coverage Limit - and when you enter the Coverage Gap or Donut Hole.
Reminder about expensive drug purchases:
As you can imagine, if your purchase of an expensive medication (for example, with a retail cost of over $4,130), your coverage costs may be $702 or less,
but the retail cost may exceed the Initial Coverage Limit and push you through the Initial Coverage Phase and into the Coverage Gap - with just one single purchase.
The standard Initial Coverage Limit (entry point to the Coverage Gap or Donut Hole) can vary each year. For instance,
the Initial Coverage Limit is $4,430 in 2022 as compared to the Initial Coverage Limit of $2,250 in 2006.
You can view the standard
Initial Coverage Limits for the past several years here: https://q1medicare.com/2022
At times, the Initial Coverage Limit can also vary between Medicare Part D plan providers. With the approval of Medicare (or CMS) Medicare Part D plans
are allowed to deviate from the annual standard Initial Coverage Limit value and a few companies may offer Part D plans with lower
Initial Coverage Limits - although this is rare in today's market.
A Summary of your Medicare Part D plan's four phases of coverage
(1) The Initial Deductible
is where you pay 100% of your retail drug costs
until you reach your deductible amount ($480 in 2022). Many people will enroll in a Medicare prescription drug plan with a $0 deductible and
effectively skip-over this first phase.
(2) The Initial Coverage Phase is where you and your Medicare Part D plan share the cost of your medication either as a fixed co-pay or a
percentage of retail cost (standard cost-sharing in the Initial Coverage Phase is 25%).
(3) The Coverage Gap or Donut Hole
is the plan phase you enter
once you exceed the Initial Coverage Limit and where you receive the
Donut Hole discount
on any formulary drug purchases.
(4) The Catastrophic Coverage Phase
is the last phase of your Medicare Part D plan
and you enter once your total out-of-pocket drug costs (TrOOP) exceed a certain point (over $7,050 in 2022).
During this phase you will exit the Donut Hole or Coverage Gap and will receive your medications at a low-fixed price,
paying around 5% of the retail price for the remainder of the year.