Many people have heard of the Medicare Donut Hole, but even those on Medicare are not familiar with what the donut hole really means unless they fall into it.
When you are in the Medicare Donut Hole, you know it and quickly learn what it means.
Clients call me monthly asking, “What’s going on? My medication jumped from $45 to $145!” I say, “Oh, you’re probably in the Medicare Gap, or the more popular name is the ‘donut hole.”’ They ask, “What’s that?”
Even clients I have warned ahead of time usually still call with distressed and perplexed voices. People don’t really begin to grasp what’s happening until it happens.
Medicare Donut Hole Explained
How to explain the Medicare Donut Hole? There is nothing logical about the Medicare Donut Hole (or Medicare Gap). The government actuaries devised this idea to deal with many Medicare beneficiaries who are on many extremely expensive medications.
Think about it this way: We all pay for auto insurance. Most of us do not get into accidents or kill anyone, thankfully. Over a long driving career, there may be some fender benders, but nothing major.
So we complain a little, but we pay the insurance premiums. It’s the price of doing business. We understand that more people need to pay in than people take out for accidents and injuries for insurance to work. Medicare Part D prescription drug insurance is similar. We need more people paying in than taking out.
The Problem Of Expensive Prescriptions
When we were working, our employers and we paid a lot of health insurance premiums, including medication copays. The age group for employer plans is 18-64. Not many people were on Eliquis, Toujeo, Xarelto, Jardiance, Ventolin Inhalers, etc. However, when it comes to Medicare, you have people ages 65-100, and the percentage of persons on expensive medications is enormous.
If the cost and risk were evenly distributed among all participants without distinction, Medicare Part D prescription drug plans would be significantly more expensive — so expensive that those who aren’t on medications or very few medications would never buy a Medicare Part D plan.
Remember, you need more people paying into the insurance plan than taking out. The magical actuaries at Medicare came up with an idea. Voila, the Medicare Donut Hole!
4 Phases To the Medicare Part D Plans
The Medicare Part D prescription drug program is broken down into four phases. The first phase is the deductible. The deductible for 2023 will be $505. The purpose of any deductible is to ensure that people do not charge recurring and minor costs to the insurance plan. The consumer needs to foot the bill for those low-cost expenditures. All insurance policies have some deductible built into the policy. Otherwise, premiums would be astronomical.
Phase 1: Deductible
In the case of Part D plans, the deductible is usually only for the more expensive Tier 3 medications. The plan entirely or mostly covers minor and inexpensive medications.
Phase 2: Initial Stage
The second phase is the initial stage. The Medicare initial stage is how insurance generally feels to the consumer. There is a claim, and the insurance pays most of the claim. The insured pays a fourth or a fifth of the actual cost.
Most people on Medicare never get out of the Medicare initial phase. They may even be on many medications, but their cost is insufficient to drive them into the Gap.
Phase 3: The Gap / Medicare Donut Hole
The third phase is the Medicare Gap (or Medicare Donut Hole). You cross this threshold when you and the plan have paid at least $4,660 in the insurance company’s cost of the medications.
You’ve paid about a fourth of the cost out of your pocket. The insurance companies paid the rest. You have now thoroughly and completely crossed over into the Medicare Gap (or Medicare Donut Hole).
In the Gap, pharmaceutical companies discount the medication cost by 75%. You pay 25% of the actual cost. The reasoning is that now the persons who most benefit directly from the medications should bear the burden of the cost. Again, if it were evenly split among participants, those with no or few medications would opt out of Part D plans and significantly reduce the premium paid into the pool.
Phase 4: Catastrophic
The final phase is catastrophic. Like it sounds, the costs are catastrophic for most people by this point. You have paid $7,400 out of your pocket in actual or discounted costs. This amount is based on the actual costs of the medications. You need to pay the $7,400 out of your pocket to descend to the next level.
This phase is probably called catastrophic because you have paid out a catastrophic amount of money for medications, which is catastrophic for your budget.
In this stage, instead of paying the actual cost of the medications, the insurance company and Medicare step back in. Medicare significantly subsidizes the cost. Beneficiaries pay copays of $4.15, $10.35, or 5%, whichever is higher. The cost and tier determine the copay.
Then, the whole process starts over again on Jan. 1 each year.
Changes to the Medicare Donut Hole In 2024
Because of recent legislation in Congress, this entire system may be significantly altered starting in 2024. Hopefully, for the good, but as it stands, this is what and how the Medicare “Donut Hole” works.
Medicare usually makes some changes every year. Medicare changes Part D without exception. Medicare and the insurance companies make adjustments based upon drug costs and contracts with pharmaceutical companies. Medicare is also gradually eliminating the dreaded gap in Part D coverage, better known as the “Donut Hole.”
Medicare Changes Part D Deductible
The change that gets the most recognition this year is the Medicare Part D changes deductible. Medicare changes Part D deductible from $350 in 2016 to $400 in 2017. That is a 14% increase to the deductible alone, which is a constant reminder to review your Medicare Part D plan each year with your agent.
Part D Shell Game
A $400 deductible is sizeable. Most of the Part D plans have the deductible, but some do not. The way those plans are able to eliminate the deductible is by spreading the deductible out through the various co-pays on your medications. The other way is to apply the deductible only to higher Tier, more expensive drugs, e.g., Tier 3-5 medication. The Part D plans are a bit of a shell game shifting costs from this drug to another. It is important to not be distracted by the various co-pays. Medicare.gov has a wonderful medication calculator that will compared all of the Part D plans in your area side-by-side. You want to use that tool and focus on the total number that you will spend. Too often, Medicare beneficiaries will focus on one co-pay or an initial deductible. The bottom line is the total amount coming out of your pocket.
Medicare.gov Medication Calculator
That being said, we all have limited budgets. A big deductible may be too big for your wallet. It may make sense to use a Part D plan without a deductible to even out your costs over the year. If you are going on a Part D plan more than half way through the year because you just turned 65, it may make sense to pick a plan with no deductible. Why pay the big deductible and turn around and pay it again in January? That is why it is important that your agent go through your list of medications, talk about the costs, and figure out the best plan for you. An experienced agent should be able to effectively use the Medicare prescription drug calculator to show you how your medication costs will play out in the coming year. Also remember to check whether you qualify for the EXTRA HELP Program.