Explaining the Donut Hole in Medicare Part D
Fair Square Medicare

Explaining the Donut Hole in Medicare Part D

Donut hole stock photo

By Ford Carlisle

Nov 1, 2022

Falling into the Donut Hole can increase your out-of-pocket expenses. Here's how you can prepare:

Let's face it, prescription drug prices are out of control — even with Medicare coverage.

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To address this issue, the government passed the Inflation Reduction Act this summer, which aims to lower prescription drug costs for Medicare beneficiaries.

While this is good news for Medicare beneficiaries, you'll have to wait until 2024 to enjoy some of the benefits. This means 2023 is the last year where you need to worry about the "Donut Hole." Luckily, Fair Square Medicare has your back, and we'll help you plan for your prescription drug coverage for 2023 to avoid the "Donut Hole."

So ... what exactly is the Medicare Donut Hole, and how can you avoid it?

What's the Donut Hole?

The Donut Hole — AKA the Medicare Part D Coverage Gap — is one of four Medicare Part D coverage phases. In each of these coverage phases, your prescription benefits change.

When Does the Donut Hole Happen?

Your prescription drug benefits coverage changes when your total paid costs reach your plan's predetermined limit.

What's the Result?

Increased out-of-pocket expenses.

So, how much exactly will you have to pay? Is there a way to avoid the Donut Hole altogether?

We'll get to that. But first, you need to understand your TrOOP expenses.

What Is TrOOP?

TrOOP stands for true out-of-pocket costs. It's the amount you spend on drugs while insured by a Prescription Drug Plan.

As your TrOOP increases, you progress through the different coverage phases of your Medicare plan.

What Are the Coverage Phases of Medicare Part D?

Medicare Part D has four coverage phases that renew and reset each calendar year:

  1. Deductible

  2. Initial Coverage

  3. Coverage Gap (Donut Hole)

  4. Catastrophic Coverage

Medicare Donut Hole 2023

‎Let's look at each one in more detail.

Phase 1: Deductible

Your annual Medicare coverage cycle always begins with the deductible phase.

Your deductible is a set amount you must pay before Medicare starts covering your costs. (In 2023, the maximum Part D deductible is $505).

So, until you meet your deductible, you might have to pay full price for your medications.

However, keep in mind:

  • Different plans have different deductibles, and some plans may not have a deductible at all

  • Some plans cover tier 1 and tier 2 drugs before you meet the deductible

Note: Your plan's coverage and deductible depend on which drug tier your medication falls into.

Phase 2: Initial Coverage Period

Once you meet your deductible, your Initial Coverage phase begins. That means your plan starts paying for your medications.

However, the Initial Coverage phase doesn't provide 100% coverage.

You still have to pay a copayment or coinsurance for part of the total cost of your drugs (retail price). The exact amount depends on the following:

  • Your drug plan — your plan can sometimes raise your copay or coinsurance for a particular drug if:

    • The manufacturer increases the price of the drug

    • Your plan starts to offer a generic form of that drug, but you keep taking the name-brand drug

  • Your pharmacy — different pharmacies can charge different prices for the same drug

  • Your drug tier

The Initial Coverage phase ends once you spend a predetermined amount (i.e., a specified TrOOP) on medications. Currently, the amount is $4,200 (in 2023, it'll jump to $4,660).

Once you reach your Initial Coverage limit, you enter the Donut Hole.

Phase 3: Coverage Gap (Donut Hole)

When you're in the Donut Hole, you pay around 25% of the cost for your generic and name-brand drugs, while your plan and the manufacturer pay the rest.

Here's a breakdown of the costs:

  • If your medication is a generic drug:

    • You pay 25%

    • Your plan pays 75%

  • If your medication is a name-brand drug:

    • You pay 25%

    • Your plan pays 5%

    • The drug manufacturer pays 70%

So, how does the Donut Hole increase out-of-pocket costs?

Well, as long as you're in the Donut Hole, you're paying 25% of your drug costs each time you need a refill. These expenses add up quickly.

You can't enter phase 4 until your TrOOP exceeds $6,350 (or $7,400 in 2023), so you could be in the Donut Hole for a while.

Phase 4: Catastrophic Coverage

Once your TrOOP reaches a specific amount each year, you move to the final phase — Catastrophic Coverage. In this phase, you pay only 5% of the drug's retail price for the rest of the year.

The Inflation Reduction Act eliminates the 5% beneficiary coinsurance requirement in the catastrophic coverage phase — capping annual out-of-pocket costs at about $3,250 in 2024 and $2,000 in 2025.

How Do I Calculate My TrOOP?

Your TrOOP determines when you enter and exit the Donut Hole phase.

Your true out-of-pocket costs include the following:

  • Your annual deductible

  • Your copays and coinsurance in the Initial Coverage phase

  • The amount your plan pays in the Initial Coverage phase

  • Your copays and coinsurance in the Coverage Gap phase ( the Donut Hole) — 25% of drug costs

  • The amount the drug manufacturer pays for your medications in the Coverage Gap phase — 70% of the cost of prescription medications

Your TrOOP does NOT include:

  • Your monthly premium

  • The amount your plan pays in the coverage gap phase

  • The portion of the pharmacy dispensing fee (75%) paid by your plan

  • The amount you pay for drugs that are not included in your plan's formulary

How Can I Avoid The Donut Hole?

Entering the Donut Hole can significantly increase your out-of-pocket expenses, which we all want to avoid. However, it is estimated that only 12% of Medicare beneficiaries ever enter this phase.

How?

If your TrOOP stays under $4,200, you won't move past the Initial Coverage phase. Many people don't need expensive medications, so their out-of-pocket expenses are low, and they remain in phase 2 for the entire year.

In other words, lower TrOOP = better chances of avoiding the Donut Hole.

So, how can you reduce your TrOOP?

Try the following strategies:

  • Swap a name-brand drug with a generic drug — Generic prescription drugs are typically less expensive. Ask your doctor or pharmacy if this is an option

  • Shop wisely — When choosing a prescription drug plan, look for one that covers all your medications and gives you the best possible rates

  • Look for discounts

    • Look for plans that offer discounts on bulk mail orders

    • Ask your doctor for the manufacturer's discount on name-brand and specialty drugs

    • Utilize GoodRx when it's cheaper than going through your Medicare plan

  • Shop around

    • Different pharmacies charge different prices for the same drugs — so compare the costs at two or more pharmacies before buying your medications

    • You might also be able to get generic drugs at a low price if you pay in cash

  • Seek Extra Help — If you're eligible, Extra Help (aka the Low-Income Subsidy) can help pay for some of your out-of-pocket expenses

Conclusion

While Medicare Part D helps cover most of your prescription drug costs, falling into the Donut Hole can significantly increase your out-of-pocket expenses.

To avoid the Donut Hole, look for opportunities to save money — select the right drug plan, switch from name-brand drugs to generic drugs, use discount coupons, and get help if necessary.

If you still have questions about the Medicare coverage phases or are struggling to find a prescription drug plan that suits your needs, Fair Square Medicare is here to help. Call us at (888)-376-2028.

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