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Understanding the 2021 Medicare Part D Donut Hole

Category: The Donut Hole or Coverage Gap
Published on 2020-09-01 18:33:27


The Donut Hole (or Coverage Gap) is a term used to describe the third phase of your Medicare Part D prescription drug coverage.  If you reach the Donut Hole portion of your drug coverage, you receive a 75% discount on all formulary drugs.

You will enter your 2021 Medicare Part D prescription drug plan's Donut Hole or Coverage Gap if the retail value of your formulary drug purchases exceeds your plan's Initial Coverage Limit (ICL).  Your Medicare drug plan's Initial Coverage Limit can (and usually will) change every year and in 2021, the standard Initial Coverage Limit (used by most Medicare Part D plans) will increase to $4,130.

So if you are using a brand-name formulary drug with a retail cost of $300 and you are paying only a $47 co-pay for the drug, the $300 retail drug value counts toward meeting your plan's $4,130 Initial Coverage Limit and entering the 2021 Donut Hole.


Question:  But isn't the Donut Hole closed now?

Not exactlyWe say that the Donut Hole is "closed" since you receive a 75% discount on all formulary drugs - and if your Medicare Part D plan follows the standard Medicare Part D prescription drug plan, you will pay a fixed 25% cost-sharing in the Initial Coverage phase for all drugs and then, if you enter the Donut Hole, you will continue to pay the same 25% co-insurance for all formulary drugs - and since there is no change in coverage between being your Initial Coverage phase and Coverage Gap - the Donut Hole appears to be closed (see the diagram below).

But note: No 2020 stand-alone Medicare Part D plans follows the standard plan design with a fixed 25% cost-sharing for all formulary tiers (and we expect no 2021 to follow the standard defined plan).  Instead, Medicare Part D plans usually have fixed co-pays ($47 for a Tier 3 drug) mixed with co-insurance (35% for Tier 5 specialty drugs) - and is noted in more detail below, if you enter the Donut Hole - it is possible that the cost of your formulary medications can increase, decrease, or stay the same.

You can click on our FAQ "Did the Coverage Gap or Donut Hole just close up and go away?" to read more about the Donut Hole did not.


QuestionWill I enter the 2021 Donut Hole?

If the retail value of your formulary drug purchases is over $345.  The Donut Hole is the third phase of your Medicare Part D prescription drug coverage and you only enter the Donut Hole when (if) the total retail value of your purchased medications exceeds your plan's 2021 Initial Coverage Limit (ICL) of $4,130.  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.

So, if your average monthly retail drug costs are over $345, you will enter the Donut Hole sometime during 2021.  The higher your monthly retail drug costs are above $345, the sooner you will enter the Donut Hole.

You can read more in our article: When will I enter the 2021 Medicare Part D Donut Hole?

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

No.  As noted above, if you enter the Coverage Gap, you may pay the same, more, or less for your formulary drugs.  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, even with the Donut Hole discount -- you pay $75 in the Donut Hole ($300 x 25%)  vs. $47 in the Initial Coverage phase.

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

QuestionWill I exit the Donut Hole and enter Catastrophic Coverage?

If your average monthly retail drug costs are over $838 you will probably exit the Donut Hole and enter Catastrophic Coverage during 2021.

You leave the 2021 Donut Hole after your total out-of-pocket costs (TrOOP) exceeds your plan's 2021 TrOOP limit of  $6,550 and enter the Catastrophic Coverage portion of your drug plan.  Medicare estimates you will purchase formulary drugs with a retail value of over $10,048 before exiting the Donut Hole.

Important Fact:  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 Medicare Part D 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.

Important FactThere is no Donut Hole for people eligible for Extra Help

If you are eligible for the Medicare Part D Low-Income Subsidy (LIS) 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.

Question:  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 2021 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 2021 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 2021 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 2021 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 2021 out-of-pocket spending limit.


Question:  How did the Donut Hole discount change over time?

From 2006 through 2010 (back in the early days of Medicare Part D), you were 100% responsible for the cost of your prescription drugs if you reached your Medicare Part D plan's Coverage Gap - unless your Medicare Part D plan provided additional coverage while in the Donut Hole  a "gap" or pause in coverage.  Then in 2011, the Donut Hole discount.was started with Medicare Part D prescription drug plans and the brand-name pharmaceutical drug manufacturers sharing e a portion of your Donut Hole medication expenses.

Here is a chart showing how the brand-name Donut Hole discount changed over the years (using an example of a brand drug with a $100 retail price) 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.

Phases of your Medicare Part D coverage


Part 1 of your drug coverage

The Initial Deductible Phase
The standard Initial Deductible can change each year.  In 2021, the Initial Deductible is $445.  In 2020, the standard Initial Deductible was $435.  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).

Keep in mind, many Medicare Part D prescription drug plans with an Initial Deductible cover 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 your Initial Coverage Limit.

The Initial Coverage Limit (ICL) can change each year.  In 2021, the Initial Coverage Limit or Donut Hole entry point is when your retail drug costs reach $4,130 - in 2020, the was $4,020.

Bottom Line:  If the retail cost of your medications is over $345 per month, you will enter the 2021 Donut Hole.

A note on using high-cost medications.
If you use a single medication with a retail cost of over $4,130, 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 document 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 ($4,130).

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 received some discount on your Medicare Part D plan purchases while in the Donut Hole.

In 2020, the Donut Hole “closed” and you now 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 2021 is $6,550.  So if you have spent $6,550 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 2021 Catastrophic Coverage portion of your Medicare Part D plan, you pay the greater of 5% or $3.70 for generic drugs (and preferred drugs that are multi-source drugs) or the greater of 5% or $9.20 for all other drugs (such as brand-name medications).

For example, if you purchase a brand-name medication in the 2021 Catastrophic Coverage phase that has a retail cost of $100, you will pay $9.20 (since this fixed cost of $9.20 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 2021 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 2020 was $6,350.

A note on TrOOP vs. Retail Drug Cost
Without considering your Donut Hole discount, your 2021 TrOOP (true or total out-of-pocket costs) should equate to about $9,314 in retail drug costs.  But with the Donut Hole discount, Medicare estimates that your retail drug cost should be around $10,048.39 before exiting the 2021 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 $838, you probably will spend your way through the 2021 Donut Hole and enter your Medicare Part D plan’s 2021 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 2021 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 2021
  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 $9.20 for brand drugs whatever is higher or 5% of retail or $3.70 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 2021 Donut Hole

To help you visualize the phases of your Medicare Part D prescription drug plan coverage, we have a Donut Hole Calculator or 2021 PDP-Planner online illustrating the changes in your monthly estimated costs based on the established 2021 standard Medicare Part D plan limits mentioned above.

We also have several examples online to help you get started with our 2021 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 $2,731 - you can then change the monthly drug cost to whatever you wish to estimate your 2021 out-of-pocket cost.

Details of Medicare Part D Donut Hole Calculator Example 1







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Tips & Disclaimers
  • The Medicare Advantage and Medicare Part D prescription drug plan data on our site comes directly from Medicare and is subject to change.
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