Medicare Donut Hole

No, Medicare is not going to start paying for everybody’s Dunkin’ Donuts (NASDAQ: DNKN). The Medicare donut hole, or coverage gap, refers to that period in your Medicare Part D plan when your total prescription medication costs reach their limit. For 2021, the limit is $6,550. Once you reach the limit, you’re responsible for a portion of your Part D expenses.

The good news is that ever since the implementation of the Affordable Care Act in 2010, the donut hole has been closing. In the past, once you entered the gap you were responsible for 100% of your Part D costs. The size of the donut hole has been decreasing ever since 2010 and now stands at 25%.

What is Medicare?

Medicare is insurance for seniors 65 years or older. It’s funded by the federal government and your tax dollars. To qualify for Medicare, first you must be 65. Next, you need to have contributed to the system by paying your taxes for at least 10 years. Medicare funding is partially derived from payroll taxes. Whether you know it or not, you contribute to payroll taxes every time you get a paycheck.

Created in 1965, Medicare was established to help people over 65 get affordable health insurance. Believe it or not, back in 1965 only 25% of seniors had healthcare. After the implementation of Medicare, that number rose to nearly 100%. In that first year, more than 19 million Americans signed up for Medicare. Today, over 63 million people participate in the program.

Today, Medicare has expanded to cover both the disbaled and the chronically ill. If you’re disabled and qualify for Social Security Disability Insurance (SSDI), you’ll receive Medicare automatically after 24 months. Premiums get deducted straight from your disability check. Those who suffer from chronic illnesses like Lou Gherig’s Disease also qualify and get enrolled even sooner.

Initially only consisting of Parts A and B (hospitalization and medical services), Medicare today has expanded to include Part C (Medicare Advantage plans) and Part D (prescription medication coverage). Part D — that brings us to the donut hole.

What is the Medicare Donut Hole?

Every time you buy your prescription medication, the amount you spend gets tallied and stored. As long as you stay under your limit ($4,130 for 2020), your drugs are free. Once you hit that limit, you’re responsible for paying a portion of your prescription drug costs. 

This limit, or gap in coverage, is called the Medicare donut hole. The donut hole is the void between what you pay for initial coverage (0% or copay after meeting your deductible), and what you pay for catastrophic coverage (usually around 5%). In between, you’re responsible for a higher percentage of your prescription drug costs.

Medicare Part D was created with the average American in mind. Some people, however, require more than just the average amount of prescription medications. Part D was initially designed so that these people would pay more into the system once they reached a certain limit, sharing a greater portion of the costs. For many, these increased costs became prohibitive.

In the beginning, gap coverage intended to convince people to take more generic drugs, saving money over the more expensive name brands. As generic medications became the norm and people were still exceeding their Part D limits, it became apparent that further savings were needed.

Source

The donut hole intended to make Part D recipients more in-tune with how much they spend on medication. However, medical treatments through prescription medications have expanded since the early days, often replacing surgical procedures as the medical treatment of choice. As such, more and more Part D recipients started overextending their limits and paying more. The whole concept of the donut hole, a method for saving costs as a whole, needed revisiting.

The good news is the donut hole is shrinking. In the past, Part D recipients were responsible for paying as much as 100% of drug costs in the gap. Ever since the implementation of the Affordable Care Act in 2010, that percentage has been narrowing. As of 2021, it’s now 25%.

Why is the Donut Hole a Problem?

The whole donut hole premise is a problem when it comes to Medicare recipients being able to afford their prescription medications. The gap between initial and catastrophic coverage can for some mean not getting their meds at all. Even at 25%, it can pose a big problem.

Today, more people than ever are dependent upon prescription medications. Back in 1965 when Medicare was first introduced, the pharmaceutical industry was still in its infancy. The percentage of treatment by medication to other forms like surgery was much lower.

What counts towards the coverage gap?

• Deductibles, coinsurance and copayments
• Discounts on brand-name drugs
• Fees you pay in the donut hole

What doesn't count towards the coverage gap?

• Premiums for Part D
• Pharmacy dispensing fees
• Drugs not covered by Part D

Reducing Part D costs in the gap from 100% to 25% marks a considerable step forward but still leaves many behind when it comes to affording much-needed prescription medications. Some people, especially seniors, require more prescription meds than others.

Can You Avoid the Donut Hole?

The short answer is no, you cannot avoid the donut hole. Neither supplemental insurance nor the Medicare Advantage plan plug the hole. The only way you can avoid entering the donut hole is to not use so many prescription medications, but that’s not always up to you. Seniors are especially vulnerable to the gap in Medicare Part D coverage. You may not be able to avoid the donut hole completely, but you can skirt it with these tips.

1. Use generic medications when possible: Generic drugs are less expensive than brand-names. Request generic medication whenever possible. Generics save you as much as 80% to 85% over the price of brand-names.

Best Medicare Insurance

Need supplemental coverage for your Medicare policy? Supplemental plans like Medigap help “fill the gaps” and are sold by private insurance companies. The only problem is, there are so many out there, where do you begin? Don’t worry. Benzinga has put together a list of trusted companies for you.

Living with the Donut Hole

Unfortunately, there’s no way of avoiding the donut hole entirely if you need to take many expensive medications. If you’re getting up in age, you may rely on necessary prescription medications. Policies towards the Part D gap can change, however, and it’s a good idea to stay abreast of recent changes, like modifications in out-of-pocket expense limits.

Frequently Asked Questions