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Understanding the 2020 Medicare Part D Donut Hole

Category: The Donut Hole or Coverage Gap
Published on 2019-09-04 16:21:13


The Donut Hole (or Coverage Gap) is a term used to describe a "gap" or pause in your Medicare Part D prescription drug coverage where - prior to 2011 - you were 100% responsible for the cost of your prescription drugs - unless your Medicare Part D plan provided additional coverage while in the Donut Hole.

However, starting in 2011, Medicare Part D prescription drug plans and the brand-name pharmaceutical drug manufacturers began to share a portion of your Donut Hole medication expenses giving you what is now called the Donut Hole discount.

Now if you reach the Donut Hole portion of your drug coverage, you are no longer responsible for paying 100% of the retail drug price, and instead, you pay a discounted price for formulary drugs.  The Donut Hole discount increased each year until 2020 when the Donut Hole officially "closed" and you pay a 25% co-insurance for all formulary drugs while in the Coverage Gap.

Will I enter the Donut Hole?

If your average monthly retail drug costs are over $335, you will enter the Donut Hole sometime during 2020.  The higher your monthly retail drug costs are over $335, the sooner you will enter the Donut Hole.

The Donut Hole is the third phase of your Medicare Part D prescription drug coverage and you only enter the Donut Hole when (or if) the total retail value of your purchased medications exceeds your plan's 2020 Initial Coverage Limit (ICL) of $4,020.  Remember, the ICL is not what you spend out-of-pocket, but instead it is the total retail value of the medications you purchase and includes what you pay plus what your plan pays.

You can read more in our article: Will I enter the 2020 Medicare Part D Donut Hole?

If I enter the Donut Hole, will I always pay less for my drugs now that the Donut Hole is closed?

No.  If you enter the Coverage Gap, you may pay more or less for your formulary drugs when you enter the DOnut Hole.  Your additional drug cost or savings on drugs in the Donut Hole depends on your Medicare Part D plan’s cost-sharing (what you are paying before entering the Donut Hole) and your plan's negotiated retail drug cost.

For example, if your Tier 3 brand-name medication has a negotiated retail cost of $300 and your Medicare Part D plan has a $47 co-pay for this drug during your Initial Coverage Phase, you would find that you will pay more for your medication when you enter the Donut Hole ($75) - even with the Donut Hole discount.

You can click here to see other examples of how your drug costs can change with the Donut Hole discount.

Will I exit the Donut Hole and enter Catastrophic Coverage?

If your average monthly retail drug costs are over $810 you will probably exit the Donut Hole and enter Catastrophic Coverage during 2020.

You will leave the 2020 Donut Hole after your total out-of-pocket costs (TrOOP) exceeds your plan's 2020 TrOOP limit of  $6,350 and enter the Catastrophic Coverage portion of your drug plan.  The 2020 TrOOP limit or Donut Hole exit point is significantly higher than the 2019 TrOOP limit of $5,100 and Medicare estimates you will purchase formulary drugs with a retail value of over $9,719.

The Donut Hole starts again each year.

No matter what happens during the year, the annual Donut Hole ends on December 31st and does not continue into the next plan year.  On January 1st, your drug coverage starts over again from the beginning.  You can read the next sections below for more information about entering and exiting the Donut Hole.

No Donut Hole for people eligible for Extra Help

If you are eligible for the Medicare Part DLow-Income Subsidy or Extra Help program, you will not have a Donut Hole phase in your coverage.  If you are eligible for your state's Medicaid program, you will be automatically eligible for Extra Help.

What happens if you enter the Donut Hole?

If you enter the Donut Hole, you will receive a 75% discount on all generic and brand-name formulary drugs that you purchase.  However, the credit you receive toward exiting the Donut Hole (meeting your TrOOP limit) varies between generic and brand-name drugs.

Generic drugs purchased in the Donut Hole.
When you purchase generic medications in the 2020 Coverage Gap, you pay 25% of retail cost and you get TrOOP credit for only the 25% you spend.  You do not get TrOOP credit for the 75% paid by your Medicare Part D plan. 

As an example, if you reach the 2020 Donut Hole, and your generic medication has a retail cost of $100, you will pay $25 and the $25 that you spend counts toward your out-of-pocket spending limit or TrOOP.

Brand-name formulary drugs purchased in the Donut Hole.
When you purchase brand-name drugs in the 2020 Coverage Gap, you pay 25% and you get TrOOP credit for 95% -- the 25% you spend plus the 70% discount paid by the brand-name drug manufacturer.  (You do not get TrOOP credit for the 5% of the discount paid by your Medicare Part D plan.)

As an example, if you reach the 2020 Donut Hole and purchase a brand-name medication with a retail cost of $100, you will pay $25 for the medication, and receive $95 credit toward meeting your 2020 out-of-pocket spending limit.

Here is a chart showing how the brand-name Donut Hole discount has changed over the years (using an example $100 drug) and how your cost (and TrOOP credit) has changed.

DNH_Discount_TrOOP.JPG

How the Donut Hole fits into your Medicare Part D coverage

As a reminder, your Medicare Part D plan coverage has four separate parts or phases.  However, if your Medicare Part D plan has a $0 initial deductible, you will skip the first or deductible phase and begin coverage directly in the Initial Coverage Phase.

How the Donut Hole works in 2020 - and beyond

Part 1 of your drug coverage

The Initial Deductible Phase
The standard Initial Deductible can change each year.  In 2020, the Initial Deductible is $435.  In 2019, the standard Initial Deductible was $415.  If your Medicare Part D plan has an Initial Deductible, you will usually pay 100% for your medications and the amount you pay will count toward the Donut Hole. If your plan has a $0 deductible, then you skip over the Initial Deductible phase and go directly to the Initial Coverage Phase (see below).

As an emerging trend, many Medicare Part D prescription drug plans with an Initial Deductible are now covering some lower-costing generics during the Initial Deductible.  In other words, some plans will note something like "Tier 1 and Tier 2 drugs excluded from your deductible" and you will have immediate coverage of these low-costing Tier 1 and Tier 2 drugs before meeting your deductible.  If you have a plan that excludes certain formulary drugs from the deductible then your other drug purchases will still count toward the deductible (for example, Tier 3, 4, and 5 drugs).

But, no matter whether you, or your plan, pays for your medications during the Initial Deductible, the retail value of your medications counts toward your Initial Coverage Limit (see next section) and determines when you enter into the Donut Hole or Coverage Gap.

Part 2 of your drug coverage

The Initial Coverage Phase
After the Initial Deductible (if any), you will continue into your Initial Coverage Phase where your Medicare Part D plan covers a portion of your prescription costs and you pay some cost-sharing (co-payment or co-insurance).  You will leave your Initial Coverage Phase and enter the Donut Hole or Coverage Gap when your retail medication costs reach a certain amount (not the amount of what you paid for your drugs, but the retail value of the medications you purchased).  For example, if you buy a formulary drug with a retail value of $100 for a $30 co-payment, the $100 retail value counts toward meeting your Initial Coverage Limit.

The Initial Coverage Limit can change each year.  In 2020, the Initial Coverage Limit or Donut Hole entry point is when your retail drug costs reach $4,020 - in 2019, the Initial Coverage Limit is when retail drug costs reach $3,820.

Bottom Line:  If the retail cost of your medications is over $335 per month, you will enter the 2020 Donut Hole.

A note on using high-cost medications.

If you use a single medication with a retail cost of over $4,020, you will enter the Donut Hole with your first purchase.  If you use an expensive medication on an infrequent basis, you may find that one large drug purchase (or multiple drug purchases in a single month) can actually move you from the Initial Coverage Phase (or Initial Deductible) into the Donut Hole, so the only way to know exactly when you will enter or leave the doughnut hole is by watching your monthly Medicare Part D plan's Explanation of Benefits statement carefully (you received this printed form in the mail) or you can contact your Medicare Part D plan and ask the Member Services representative where you are relative to the plan's Coverage Gap.

Part 3 of your drug coverage

The Coverage Gap or Donut Hole
You will leave the Initial Coverage Phase and enter the Donut Hole when your total retail drug cost (what you spent plus what your Medicare drug plan spent) exceeds the Initial Coverage Limit.

As mentioned, the Coverage Gap this is the portion of your Medicare Part D coverage where you traditionally paid a larger percentage of the retail drug cost.  From 2006 through 2010, you were responsible for 100% of your drug costs, unless your Medicare plan included some Donut Hole coverage.  Since 2011, you receive some discount on your Medicare Part D plan purchases while in the Donut Hole.

In 2020, the Donut Hole will “close” and you will receive a 75% discount on all formulary drugs purchased while in the donut hole. You can click here to see how the Donut Hole discount has increased over the years.

Part 4 of your drug coverage

The Catastrophic Coverage Phase
You will stay in the Coverage Gap or Donut Hole phase until your out-of-pocket costs (called TrOOP or total drug spend) reaches a certain level. The TrOOP level in 2020 is $6,350.  So if you have spent $6,350 on Medicare Part D drugs (not including monthly Medicare plan premiums), you will exit the Donut Hole and enter the Catastrophic Coverage phase.

Once you enter the 2020 Catastrophic Coverage portion of your Medicare Part D plan, you pay the greater of 5% or $3.60 for generic drugs (and preferred drugs that are multi-source drugs) or the greater of 5% or $8.95 for all other drugs (such as brand-name medications).

For example, if you purchase a brand-name medication in the 2020 Catastrophic Coverage phase that has a retail cost of $100, you will pay $8.95 (since this fixed cost of $8.95 is higher than $5.00 ($100 * 5%).

TrOOP is the total of what you pay out-of-pocket:
  • during the Initial Deductible (if you have one) plus
  • what you personally pay in the Initial Coverage Phase, before the Donut Hole, plus
  • what you pay in the Donut Hole (plus you get credit for the 70% brand-name discount paid by the drug manufacturer in the Donut Hole - for instance, if in the 2020 Donut Hole you buy a brand-name drug with a $100 retail value, you pay the $25 discounted price, but actually get credit for $95 toward meeting your TrOOP limit).
Your TrOOP limit changes every year: the TrOOP threshold in 2019 was $5,100.

A note on TrOOP vs. Retail Drug Cost

Without considering your Donut Hole discount, your 2020 TrOOP (true or total out-of-pocket costs) should equate to about $9,039 in retail drug costs.  But with the Donut Hole discount, Medicare estimates that your retail drug cost should be around $9,719.38 before exiting the 2020 Donut Hole.  The estimate is based on historic brand-name and generic drug purchases while in the Donut Hole.

Bottom Line:  If your monthly retail drug costs are somewhere around $810, you probably will spend your way through the 2020 Donut Hole and enter your Medicare Part D plan’s 2020 Catastrophic Coverage phase.

Reminder:  No matter where you are at the end of the plan year, your Medicare Part D plan coverage ends on December 31st and the whole process begins again on January 1st of the next year.

Summary of what you pay for drugs during your Medicare Part D plan coverage

Here is how example formulary drug purchases are calculated throughout your 2020 Medicare Part D plan (using the CMS defined standard benefit Medicare Part D plan as a guide).

When you purchase a formulary medication
with a $100 ($200) retail cost in 2020
  Retail Cost You Pay Medicare Plan Pays Pharma Mfgr Pays Gov. Pays Amount toward your TrOOP
Initial Deductible $100 $100 $0 $0 $0 $100
Initial Coverage Phase * $100 $25 $75 $0 $0 $25
Coverage Gap - brand-name ** $100 $25 $5 $70 $0 $95
Coverage Gap - generic *** $100 $25 $75 $0 $0 $25
Catastrophic Coverage (brand drug) **** $200 $10 $30 $0 $160 n/a
Catastrophic Coverage (generic drug) **** $100 $5 $15 $0 $80 n/a


* 25% co-pay or cost-sharing
** 75% Brand-name Discount
*** 75% Generic Discount
**** you pay 5% of retail or $8.95 for brand drugs whatever is higher or 5% of retail or $3.60 for generic or multi-source drugs whatever is higher (80% paid by Medicare, 15% paid by Medicare plan, and around 5% by plan member)
 
Help with planning your 2020 Donut Hole

To help you visualize the phases of your Medicare Part D prescription drug plan coverage, we have a Donut Hole Calculator or 2020 PDP-Planner online illustrating the changes in your monthly estimated costs based on the established 2020 standard Medicare Part D plan limits mentioned above.

We also have several examples online to help you get started with our 2020 PDP-Planner tool. You can click here for an example of a Medicare beneficiary with relatively high monthly prescription drug costs of $800 per month that result in annual out-of-pocket costs estimated at $2,667 - you can then change the monthly drug cost to whatever you wish to estimate your 2020 out-of-pocket cost.

Details of Medicare Part D Donut Hole Calculator Example 1







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