Most Medicare Part D prescription drug plans have four different parts
of coverage: (1) the Initial Deductible
(in some plans), (2) the Initial
, (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 or the retail value of your prescription drug purchases.
Most people never leave their plan's Part 2, the Initial Coverage Limit.
In fact, only about 10% of all people enrolled in a Medicare drug plan will purchase formulary drugs with a high retail value that will push them into the Coverage Gap (Part 3) and maybe into Catastrophic Coverage (Part 4).
The Initial Coverage Limit (ICL) is a fixed dollar amount ($4,430 in 2022
) that acts as the "boundary" between the second part of your Medicare Part D plan
or the Initial Coverage Phase (where you and your drug plan share the cost of
your drug purchases) and the third part of your plan, the Coverage Gap (where you receive a 75% Donut Hole discount
on all formulary drugs).
Although the ICL has a standard or given amount, drug plans can offer a variation on the standard ICL - and the ICL changes (usually increases) every year.
The ICL is not based on what you spend, but the actual retail value of your drugs. So if you spend a $47 co-pay for a $1,000 drug, the $1,000 counts toward meeting your plan's ICL.
Therefore, the Initial Coverage Limit is the total retail value of formulary drugs you can buy before leaving your plan's Initial Coverage Phase and entering your Medicare Part D plan's Donut Hole or Coverage Gap - and is shown in the graphic below of the four phases of Medicare Part D coverage. Again, when your total retail drug costs exceed the ICL, you cross into the Coverage Gap (Donut Hole).
The Good News:
You do not need to calculate or track your ICL. Your
Medicare Part D plan will keep track of your formulary drug purchases
and show your total retail drug costs on your monthly Explanation of Benefits
letter or statement.
Question: But I thought the Donut Hole closed and no longer exists?
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 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.
So you still leave the second phase of your Medicare Part D plan or
Initial Coverage Phase once your retail drug costs exceed the Initial Coverage Limit
(ICL). And when you leave your Initial Coverage Phase, you will enter
the Coverage Gap (Donut Hole) where the cost of your formulary
medications can actually increase, decrease, or stay the same
- depending on your Medicare plan, your cost-sharing, and the drug's
retail price (see the examples below for more information).
Question: Does the ICL change each year and can Medicare Part D plans have different ICLs?
Yes. As noted above, each year the Centers for Medicare and Medicaid Services (CMS) releases a standard defined Medicare Part D Initial Coverage Limit and, in most cases, stand-alone Medicare Part D prescription drug plans adopt the CMS standard.
However, stand-alone Medicare Part D prescription drug plans (PDPs) can offer a variation to the standard ICL. For example, in 2021, the standard Initial Coverage Limit is $4,130, but the 2021 New York EmblemHealth VIP Rx Plus (PDP) has a lower ICL of $3,970. (Meaning, you will enter the Donut Hole slightly faster with this plan as compared to a Medicare plan with a standard ICL). All 2022 stand-alone Medicare Part D plans use the standard ICL of $4,430.
In addition, more Medicare Advantage plans that include prescription drug coverage (MAPDs)
provide a variation to the CMS standard ICL
In 2022, 72 MAPDs have an ICL below
the standard ICL of $4,430, while 26 MAPDs have an ICL above
the 2022 CMS defined standard ICL - with the highest ICL at $10,000
(meaning MAPD plan members can buy formulary drugs with a retail value of up to $10,000 before reaching their plan's 2022 Coverage Gap).
Question: How do formulary drug purchases affect your ICL?
If your Medicare drug plan has an Initial Coverage Limit of $4,430 in 2022
, you can purchase Medicare Part D prescriptions worth $4,430 before entering the Donut Hole portion of your Medicare Part D plan.
So, if you are in your Initial Coverage Phase (after the Initial Deductible) and buy a
formulary medication with a retail value of $100 and pay a $30 co-payment, the $100 retail cost counts toward meeting your Initial Coverage Limit or Donut Hole entry point -- and the $30 you pay will count toward your Donut Hole exit point or Total out-of-pocket costs (TrOOP)
Please note that the single purchase of an expensive medication
(for example, a drug with a retail cost of over $4,800), will push you
through the Initial Coverage Phase and into the Coverage Gap - and maybe even beyond and into Catastrophic Coverage.
Also, remember that your Medicare Part D plan's Initial Coverage Limit can (and probably will) change each year. For example, the standard Initial Coverage Limit
first started at $2,250 in 2006 and has now increased to $4,430 in 2022. You can view the
changes in the standard Initial Coverage Limits over the years here:
Question: Since the standard ICL increases almost every year, does this mean I can buy more prescriptions each year before entering the Donut Hole?
Although the Medicare standard Initial Coverage Limit has increased almost every year - and you would, therefore, expect to buy more medications each year before entering the Coverage Gap - in reality, with the regular increases in retail drug pricing, many people find that they actually can buy fewer formulary drugs each year before entering the Donut Hole (unless they switch prescriptions to lower-costing generics or more-economical brand drug alternatives).
As background, here is how the Initial Coverage Limit fits into your drug coverage
Your Medicare Part D prescription drug plan includes four different phases:
(1) The Initial Deductible
is where you pay 100% of your retail drug costs before you and your plan share the cost of your formulary drugs. Some people will enroll in a Medicare prescription drug plan with a $0 deductible and effectively skip-over this first phase. Some Medicare Part D plans will also have an initial deductible, but exclude low-costing drugs from the deductible and this means you will receive coverage for your inexpensive generics even before meeting your annual deductible.
(2) The Initial Coverage Phase
begins after you meet your deductible (if any) and you and your Medicare Part D plan will share in the cost of your medication purchases. When the retail cost of your drug purchases exceeds your Initial Coverage Limit
(or Donut Hole entry point), you will leave your Initial Coverage Phase and enter the Coverage Gap or Donut Hole.
Please note: the Initial Coverage Limit is the total retail
your prescription drug purchases. This is the amount that you pay plus
what the Part D plan is paying. As noted above, this means that if you buy a $100 medication and you pay a $30 co-pay (your Medicare Part D plan pays $70). The $100 retail cost is credited toward your Initial Coverage Limit.
Please see the related question:
What costs count toward entering the Donut Hole or Coverage Gap?
As noted, the Initial Coverage Limit can 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.
In other words, with some Medicare Part D plans you will enter the Donut Hole or Coverage Gap earlier or faster than with other Part D plans. Be sure to understand the benefits before enrolling or ask questions during the Annual Enrollment Period (October 15th through December 7th). If you wait until January to learn about your plan, you may be "locked-in" to your new Medicare Part D plan coverage for the entire year.
(3) The Coverage Gap or Donut Hole
begins once you exceed the Initial Coverage Limit you enter the Donut Hole and you will receive the 75% Donut Hole discount
for both generic and brand-name formulary drugs. This means any formulary drugs you purchase while in the Donut Hole will cost you 25% of the drug's retail price. You can read more about the current Donut Hole Discount here: https://Q1FAQ.com/470.html
(4) The Catastrophic Coverage Phase
begins once your total out-of-pocket drug costs exceed a certain point (for instance, over $7,050 in 2022
, you will exit the Donut Hole or Coverage Gap. In the Catastrophic Coverage phase
you will receive your medications at a low-fixed price, paying around 5% of the retail price for brand drugs for the remainder of the year.