What You Need to Know
Medicare beneficiaries still face a coverage gap for prescription drugs but instead of having to pay for all drug costs, it’s 25%.
You pay the same percentage for brand-name or generic drugs. But there what gets counted toward your out-of-pocket costs differs.
What you pay for Medicare Part D prescription drug coverage depends on how much you earned two years ago.
If you wait on enrolling in Medicare Part D when first eligible, you could pay a late enrollment penalty.
Unfortunately, it doesn’t refer to a sugary treat – the Medicare “donut hole” is a coverage gap in Medicare Part D that exists after your total drug costs have hit a certain amount, but before they’ve gone high enough to qualify you for catastrophic coverage.1
Although it’s still called the donut hole, it’s not the same coverage gap that used to exist. In the past, this coverage gap meant Medicare Part D users were responsible for full drug costs for a period. But changes to Medicare closed the gap, so users are now only responsible for a fixed percentage of their drug costs.2
What Are the Payment Stages of Medicare Part D Prescription Drug Coverage?
There are four payment stages of Medicare Part D prescription drug coverage, which starts over January 1 of each year.3
- Annual deductible: Each year, you must pay a certain amount for your prescriptions before your Medicare drug plan starts covering some costs. Deductibles vary, depending on the Medicare drug plan you have, but no plan can have a deductible of more than $480 in 2022. Some plans have no deductible at all.
- Initial coverage: Once you’ve met your deductible, your plan will pay for some of the costs of your covered prescription drugs. You will owe a copayment or coinsurance for each covered prescription drug, and your Medicare Part D coverage will pay for the rest. The initial coverage period lasts until you’ve paid $4,430 in total drug costs, including what you have paid and what your plan has paid. Once your total drug costs have reached a certain threshold you enter a coverage gap, commonly known as the donut hole.
- Medicare coverage gap or donut hole: Although consumers used to be responsible for all or most drug costs within the donut hole, now you’ll be responsible for 25% of the cost of your drugs. This may or may not be significantly different from what you pay under your initial coverage.
- Catastrophic coverage: Once you hit $7,050 in out-of-pocket costs for covered prescription drugs, your catastrophic coverage kicks in. Within this coverage, you’re responsible for lower copays and coinsurance for covered drugs for the rest of your plan year.
How Does the Coverage Gap Work?
Once you’re in the coverage gap, or donut hole, you’re responsible for a percentage of your covered drug costs. What you’ll pay depends on whether it’s a brand-name or generic prescription drug.4
- Brand-name prescription drugs: You’ll pay up to 25% of the cost for covered drugs, although almost the full cost of the drug will count toward your out-of-pocket costs that will get you out of the coverage gap. There is also a dispensing fee, and you’ll pay 25% of that as well.
- Generic drugs: You’ll pay 25% of the price of covered generic drugs, and unlike brand-name costs, only the amount you pay will go toward your total out-of-pocket costs.
How Can You Get Help Paying for Prescription Drug Coverage?
You may also be able to get help through state pharmaceutical assistance programs, through assistance programs from pharmaceutical companies themselves, or by choosing a Medicare drug plan that offers additional coverage during the gap.6
If you don’t sign up for Medicare Part D when you’re first eligible, you may have to pay a late enrollment penalty.
How Did the Medicare Donut Hole Work Before?
Originally, once Part D participants reached the end of their initial coverage, if they didn’t receive low-income subsidies, they were required to pay 100% of their drug costs until their out-of-pocket totals qualified them for catastrophic coverage.7
When Did the Donut Hole Close?
The donut hole gradually lessened until it closed in 2020, leaving users responsible for 25% of costs for both brand-name and generic prescription drugs, versus the 100% they had to pay previously.8
How Much Will You Pay for Prescription Drug Coverage?
Premiums for Medicare Part D coverage vary by plan. And if you join a Medicare Advantage Plan (Part C) or Medicare Cost Plan that includes Medicare prescription drug coverage, there may be an amount for drug coverage included in the plan’s monthly premium.
If your modified adjusted gross income is over a certain threshold, you may have to pay a Part D income-related monthly adjustment amount (Part D IRMAA). Medicare uses your tax returns from two years ago to do the calculation.9
Part D Premiums by Income
If your filing status and yearly income in 2019 was:
|File individual tax return||File joint tax return||Married and file separate tax return||You pay each month (in 2020)|
|$91,000 or less||$182,000 or less||$91,000 or less||Your plan premium|
|Above $91,000 up to $114,000||Above $182,000 up to $228,000||Not applicable||$12.40 + your plan premium|
|Above $114,000 up to $142,000||Above $228,000 up to $284,000||Not applicable||$32.10 + your plan premium|
|Above $142,000 up to $170,000||Above $284,000 up to $340,000||Not applicable||$51.70 + your plan premium|
|Above $170,000 and less than $500,000||Above $340,000 and less than $750,000||Above $91,000 and less than $409,000||$71.30 + your plan premium|
|$500,000 and above||$750,000 and above||$409,000 and above||$77.90 + your plan premium|
If you don’t sign up for Medicare Part D when you’re first eligible, you may have to pay a late enrollment penalty. The amount of the penalty depends on how long you went without Part D or creditable prescription drug coverage. You’ll generally pay this penalty for as long as you have a Medicare drug plan.10
Although the donut hole is significantly smaller than it used to be, it’s still smart to understand how your costs are affected within the gap between initial coverage and catastrophic coverage.
You don’t have to enroll in Medicare annually, but each year you’ll have the chance to review your coverage and change plans if desired. You can make changes between October 15 and December 7.11 This is especially important if you know your medical needs may change, so put an annual reminder in your calendar in October to go over your options.