When you purchase a formulary drug using your Medicare Part D plan, the retail price of your medication purchase may exceed your Medicare Part D plan's Initial Coverage Limit ($5,030 in 2024) and so a portion of the retail cost may be processed by the billing system in the Initial Coverage Phase and a portion will be processed in the Coverage Gap (Donut Hole) phase. The Donut Hole Discount applies only to the portion of the retail drug cost that carries over into (or straddles into) the Coverage Gap.
Step (1): Meeting your annual Initial Coverage Limit
If you are within $430 of reaching your Medicare Part D plan's Initial Coverage Limit (for example, if you have already purchased formulary drugs worth $4,600 and your Initial Coverage Limit is $5,030) - and you then purchase a Tier 3 brand-name medication that has a $47 copay and a retail cost of $500. You must first satisfy the $430 remaining before you reach your Initial Coverage Limit (ICL) and enter the Donut Hole, in other words, the first $430 portion of the $500 retail drug cost meets the Initial Coverage Limit and you have a copay of $47 on this $430 balance.
Step (2): Discounting the amount of the retail price that falls into the Coverage Gap
The remaining balance of the $500 retail cost or $70 ($500 - $430) falls into the Coverage Gap. Once in the Coverage Gap, the Donut Hole Discount (75% discount on the retail balance, you pay 25% of the balance) is applied to the $70, making your cost-sharing for the portion that falls in the Coverage gap $17.50 ($70 x 25%).
Totaling the costs from each phase: In this example, your total cost-sharing for this one $500 formulary drug purchase that straddles both the Initial Coverage phase and the Coverage Gap to be $64.50 ($47 + $17.50).
Reference:
The Centers for Medicare and Medicaid Services (CMS) provided guidance in Section 70.3 of the April 30, 2010 Memorandum "Medicare Coverage Gap Discount Program beginning in 2011":
If an applicable [Medicare Part D] beneficiary has a claim for an applicable drug that "straddles’ the coverage gap and another phase of the Part D benefit, §1860D-14A(g)(3)(C) requires that Part D sponsors only provide the discount on the portion of the negotiated price of the applicable drug that falls at or above the ICL [or Initial Coverage Limit] and below the annual out-of-pocket threshold [True out of pocket or TrOOP limit]. Because negotiated price, as defined in section 1860D-14A(g)(6), excludes the dispensing fee, we interpret the dispensing fee for any straddle claim to be included in the portion of the negotiated price that falls below the ICL or above the annual out-of-pocket threshold. This policy supports the statutory goal of alleviating the burden of the coverage gap on applicable beneficiaries. [emphasis added]
Important Update: 2024 is the last year for the Coverage Gap or Donut Hole. Starting in 2025, the Donut Hole will be eliminated from Medicare Part D coverage.
Starting in 2025, the Inflation Reduction Act (IRA) eliminates the Coverage Gap (Donut Hole). In 2025 and beyond, Medicare Part D beneficiaries will stay in the Initial Coverage phase until their out-of-pocket spending for Part D formulary drugs (TrOOP) reaches the maximum out-of-pocket spending limit for Part D formulary drugs (RxMOOP) - which is set at $2,000 for 2025. After reaching RxMOOP, Medicare Part D beneficiaries will enter Catastrophic Coverage and have a $0 copay (no additional costs) for all formulary Medicare Part D drugs through the remainder of the year.
2025 Medicare Part D coverage
