Medicare prescription drug (Part D) plans can have a coverage gap — called the “donut hole” – that limits how much Medicare will pay for your drugs until you pay a certain amount out of pocket.
Although the gap has gotten much smaller since Medicare Part D was introduced in 2006, there still may be a difference in what you pay during your initial coverage compared with what you might pay while caught in the coverage gap.
Part D Deductible and Co-Payment
When you first sign up for a Medicare prescription drug plan, you will have to pay a deductible. In 2023, this cannot be more than $505.
Once you’ve paid the deductible, you may still need to cover your co-insurance (also called co-payment) amount. Medicare will pay the rest. Co-insurance is usually a percentage (for example, 20 percent) of the cost of the drug. If you pay co-insurance, these amounts may vary throughout the year due to changes in the drug’s total cost.
Entering the Donut Hole
Once you and your plan pay a total of $4,660 (in 2023) in a year, you enter the coverage gap. This is what’s otherwise known as the notorious “donut hole.”
Previously, coverage stopped completely at this point until total out-of-pocket spending reached a certain amount.
However, the Affordable Care Act has mostly did away with the donut hole. In 2023, until your total out-of-pocket spending reaches $7,400, you’ll pay 25 percent for brand-name and generic drugs.
Once total spending for your covered drugs exceeds $7,400 (the "catastrophic coverage" threshold for 2023), you are out of the coverage gap and you will pay only a small co-insurance amount. Learn more about coinsurance drug payments on the Medicare website.
Once you are in the coverage gap, your yearly deductible and co-insurance payments count toward the amount you need to pay to reach catastrophic coverage. The amount of out-of-pocket costs that you have to pay to reach catastrophic coverage will vary, depending on the type of drugs you take.
In the case of brand-name drugs, you will pay only a certain percentage of the price. However, the entire price will count toward the amount you need to qualify for catastrophic coverage. With generic drugs, only the amount you pay will count toward getting you out of the donut hole. Access more information about this coverage gap on Medicare.gov.
Bear in mind that only payments for drugs that are covered by your plan count toward the out-of-pocket threshold. Your premium and the portion of the drug cost that Medicare pays do not count toward reaching catastrophic coverage, either. Also, any help with paying for Medicare Part D costs that you receive from an employer health plan or other insurance does not count toward this limit.
Connect With the Experts
The rules around Medicare can be very complicated. If you are looking for guidance, consider consulting with an elder law attorney in your area.
You also may seek out answers to your questions by calling 1-800-MEDICARE (1-800-633-4227). Here, you can access free support 24 hours a day, seven days a week, except for certain federal holidays. Also at your disposal is your local State Health Insurance Assistance Program, or SHIP. This, too, is a free service and offers unbiased advice from trained professionals.
You may also want to read more about Medicare’s prescription drug benefit.