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If I join a Medicare plan that follows the Part D Senior Savings Model, what cost is applied to entering the Donut Hole, the $35 we pay for insulin or the actual drug cost?

The retail drug cost is counted toward the Donut Hole.    If your Medicare Part D prescription drug plan (PDP or MAPD) follows the Senior Savings Model, your insulin will cost you $35 or less during the plan's initial deductible, Initial Coverage Phase, and Coverage Gap.  After the Coverage Gap, you will enter the Catastrophic Coverage phase and pay 5% of retail.

So, as in the example graphic below, if your insulin has a $35 co-pay and has a retail cost of $957 - the $957 counts toward meeting your annual Initial Coverage Limit (for example, $4,130) and entering the Coverage Gap or Donut Hole - and once you reach the Donut Hole, your insulin co-pay continues at $35 - and you will receive a 75% discount on all other formulary drugs.

As background . . .

Medicare notes that the "entire drug cost should be applied in the deductible phase.  Part D sponsors are reminded of the requirement that beneficiaries move through the deductible and initial coverage phases of the Part D benefit based on the total gross [retail] drug costs accumulated, which includes costs for drugs that might not be subject to a deductible." [emphasis added]

The "'Total Gross Covered Drug Cost Accumulator' is the sum of the beneficiary‟s covered drug costs for the benefit year known immediately before the sponsor begins adjudication of an individual claim.  The Total Gross Covered Drug Cost Accumulator value moves the beneficiary through the deductible phase (if any), the initial coverage period, and into the Coverage Gap.  [Medicare plans] use The Total Gross Covered Drug Cost Accumulator in combination with the True Out-of-Pocket(TrOOP) Accumulator . . . to validate benefit phase."

You can learn more by reviewing your Medicare Part D or Medicare Advantage plans (MAPD) Evidence of Coverage document.  Here is model text that should be similar to what you find when reviewing a drug plan that provides the $35 or less insulin coverage:
"Chapter 6, Section 4.1. You stay in the Deductible Stage until you have paid $[insert deductible amount] for your [insert drug tiers if applicable] drugs."

"There is no deductible for [insert 2021 plan name] for select insulins.  During the Deductible Stage, your out-of-pocket costs for these select insulins will be $[amount or range of monthly copays for select insulins].  To find out which drugs are select insulins, review the most recent Drug List we [insert: sent you in the mail] OR [insert: provided electronically].  If you have questions about the Drug List, you can also call Member Services (Phone numbers for Member Services are printed on the back cover of this [Evidence of Coverage] booklet)."
You can also see on the Medicare.gov site that insulin covered by the Medicare Part D plan under the Senior Savings Model will not be subject to the initial deductible and the initial deductible remains unchanged (at $445) when only $35 insulin is purchased throughout the year.

Example of Medicare.gov and insulin under SSM
Review:  What is the Senior Savings Model?

Starting in 2021, about 30% of all 2021 stand-alone Medicare Part D plans (PDPs) and Medicare Advantage plans with drug coverage (MAPDs) will offer low-cost Insulin coverage as part of the new Centers for Medicare and Medicaid Services (CMS) "Part D Senior Savings Model" which allows Medicare prescription drug plans across the country to offer different types of insulin at a maximum co-pay of $35 per month throughout all phases of your drug coverage: deductible, initial coverage, and the Coverage Gap (Donut Hole).

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