What's a Donut Hole? Examining Medicare drug coverage:
Updated: Dec 19, 2022
When the federal government launched the Original Medicare program in 1965, physician-administered drugs were included as part of Medicare's Part B benefits but prescriptions were not part of the package. As the cost of drugs continued to rise, a solution was needed. In January 2006, Medicare Part D; or the Medicare Prescription Drug Benefit; went into effect. Under the program, drug benefits are provided by private insurance plans that receive premiums from both enrollees and the government.
Eligibility and Enrollment
To enroll in Part D, Medicare beneficiaries must also be enrolled in either Medicare Part A or Part B. Beneficiaries can participate in Part D through a stand-alone prescription drug plan or through a Medicare Advantage plan that includes prescription drug benefits. If you choose a Medicare Advantage plan, you'll need to be enrolled in both Part A and Part B; and when you go this route your drug coverage is combined with your health care coverage under one policy. If you've decided to stay with Original Medicare (whether or not you've enrolled in a Medicare supplement insurance plan,) you'll need to add a separate Part D plan. And for beneficiaries on a Medicare Cost plan; your plan may or may not include prescription drug coverage; and if it does not you will need a separate Part D policy.
It is important to enroll in a Part D plan; or a Medicare Advantage plan with drug benefits; within 63 days of starting your Part B coverage. If you don't, you will in most cases pay a late enrollment penalty when you finally do decide to add it. Medicare calculates the penalty by multiplying 1% of the "national base beneficiary premium" (which is estimated to be $31.50 for 2023.) times the number of full, uncovered months you didn't have Part D coverage. This amount is added to your monthly Part D premium, and you’ll generally have to pay the penalty for your lifetime. What's more, the national base beneficiary premium may change each year, so your penalty amount may also change each year.
Part D Plans: Minimum Standards of Coverage
The way Part D plans work is unique. Generally speaking, Medicare Part D prescription drug plans have four different phases of coverage that reset annually, and beneficiaries move through the phases based on their drug costs and their out of pocket payments;
Initial Deductible: This is the dollar amount you will need to pay out of pocket for your prescriptions before your coverage begins.
Initial Coverage: During the initial coverage phase, most people pay a co-payment amount for prescriptions, and the plan pays the rest. You stay in the initial coverage phase until the cost of your drugs (paid by you and your plan combined) reaches a threshold amount. This phase, and those following, utilize the concept of "cost sharing" where you pay some of your cost and the plan pays the rest.
Coverage Gap (Donut Hole): In the coverage gap, beneficiaries pay 25% of the cost of their medications.
Catastrophic Coverage: If your total out-of-pocket expenses for your prescriptions exceeds a certain amount, you enter this phase where your co-payments are adjusted. Generally your costs in catastrophic coverage will be less than what you paid in the coverage gap, but more than what you paid during initial coverage.
The minimum standards of coverage required by Medicare for Part D plans are shown in the graphic below. These standards are adjusted annually and released by the Centers for Medicare & Medicaid Services (CMS) late each summer for the following year. See the 2023 standards below:
Many Part D plan providers (and Medicare Advantage plans) offer coverage that is better than the minimum standard. For example, your plan may not require you to pay a deductible at all. Or perhaps you will pay a deductible, but only on your higher cost medications. Some plans offer $0 co-pays on certain drugs in the initial coverage and even the coverage gap phase.
It's also important to note that most people never leave the initial coverage phase. In fact, only about 10% of all people enrolled in a Medicare drug plan will reach the coverage gap.
Plan formularies and networks
Each insurance carrier's Part D plans and Medicare Advantage plans have their own formulary. A formulary is a directory of the drugs that are covered by that specific plan. While the government has some general mandates around what types of drugs must be covered, not every drug is covered by every plan. That's why researching formularies is an important part of choosing your prescription drug coverage.
The drugs in each plan's formulary are assigned to a tier. Drug tiers dictate where in the spectrum the drug will fall when it comes to beneficiary cost sharing:
Your drug may be on the formularies for many different plans, but the tier is it assigned might be different. Knowing your drug's tier for each of the plans available to you is key to choosing one that will help you keep your costs as low as possible. (If you have several prescriptions, talking with an agent who specializes in Medicare can be helpful when it comes to researching the drug formularies and tiers of the plans available to you.)
Some of your prescriptions may be regulated by your plan's coverage guidelines. These often include:
Safety checks and drug management guidelines drugs that pose an addiction risk
Prior authorization requirements (proof of need) for some drugs
Quantity limits, based on the type of drug
Step therapy, which requires you to try a generic or lower-cost alternative to a drug for a period of time before a more expensive drug will be covered
Excluded drugs; including but not limited to over-the-counter medications, drugs used for cosmetic purposes, and drugs purchased outside of the United States
Most Part D plans also have a pharmacy network. This means that based on where you get your prescriptions filled, you might pay a higher or lower co-pay for the same drug, or the drug might not be covered at all. It's important to know which pharmacies are in-network for the plan you choose. If you have a pharmacy you prefer to use, your advisor can help you find a plan that includes that pharmacy as part of their network. And finally, most plans also offer a mail order option. You will usually find you have the lowest out-of-pocket costs for your drugs when you choose mail order.
Prescription drug plans require that you pay a monthly premium. Like formularies and tiers, premiums will vary based on the plan you choose. Often you will find that the higher your premium, the less you pay as you go; but that is not always the case. Sometimes you might opt to choose a higher premium plan if it's the one that offers you the lowest drug costs throughout the course of the year as you move through the phases of coverage.
Because of this, it's helpful to work with an advisor who has the knowledge, experience and tools to take your prescription list and project your total Part D expenses for the year; including premiums; going plan-by-plan to see which one is anticipated to save you the most money by the end of the calendar year. Because your costs will vary by month as you work through the phases of coverage, it's important to look at the big picture to understand which plan is best suited for you.
NOTE: If you get your prescription drug coverage as part of your Medicare Advantage plan, your drug premium is part of the one premium you pay for your medical and drug coverage combined. But there are still all of the same considerations related to formularies, tiers, networks and annual cost
Some Medicare beneficiaries can qualify for a program called Extra Help, which is a financial needs-based program overseen by the Social Security Administration. Extra Help supports Part D beneficiaries in several ways, including by assisting with the costs of monthly Part D premiums, annual deductibles, and co-payments. Qualification requirements are:
You have Medicare Part A and/or Medicare Part B
Your combined savings, investments, and real estate are not worth more than a specified amount: for 2023 that amount is $15,160 (or $30,240 if you are married and living with your spouse)
You can apply online for Extra Help, but only after you've enrolled in prescription drug coverage. (In some cases, including if you receive Medical Assistance in Minnesota, your enrollment in Extra Help will be automatic.)
Whether you have a Medicare Advantage plan or Part D prescription drug plan, you can change your plan for the following year during the Annual Enrollment Period (AEP.) AEP takes place each year from October 15 through December 7. During this time, you'll have an opportunity to review your prescription drug coverage and, if you like, make a change that becomes effective on January 1. It's important to take advantage of AEP because:
The list of prescriptions you need to take may change
Your plan may change its formulary, tiers or pharmacy network
Premiums may change
New plans may come available that weren't options for you in prior years
You may be able to change plans outside of AEP under specific circumstances, including if you move out of your current plan's coverage area, if you move in or out of a nursing home, or if you participate in Extra Help.
Clearly, navigating all of the complexities around prescription drug coverage can be confusing. But you don’t have to go through the process alone. Consider reaching out to an agent who specializes in Medicare for help researching plans based on your unique set of circumstances including your prescriptions, pharmacies and financial considerations. Best of all, the services of a licensed, independent insurance broker are free to you.