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Medicare's Donut Hole

Understanding the Dreaded Medicare Part D "Donut Hole"

by Don Drake, Connelly Law Offices, Ltd.

Connelly Law Offices, Ltd.
Attorney RJ Connelly III

Last week, we wrote about Medicare Advantage plans and the importance of educating yourself when making a choice among those who provide these policies. In this blog, we are going to discuss the infamous "Donut Hole" for Medicare Part D or prescription coverage. So, let's get started.


What is it?

"The most misunderstood and often confusing portion of prescription drug coverage for many of our clients is what we refer to as the donut hole," said certified elder law attorney (CELA) RJ Connelly III. "It is confusing because it involves numbers, circumstances, and phrases that can make us pull out our hair, or what is left of it. The Donut Hole is where there is a gap in coverage but contrary to popular belief, those on Medicare do not pay 100% of the costs of their medications while in the Donut Hole."


Let's talk about numbers and stages.


FOUR STAGES OF MEDICARE PART D

We can't explain the donut hole accurately without a quick overview of the four stages of drug coverage under the Medicare Part D plan.


Stage 1: The Deductible

This first stage begins every year on January 1st. With that said, starting in 2023, the highest deductible you will pay for your prescriptions before any coverage kicks in is $505. This amount can vary by whatever plan you may have and sometimes the deductible is only for certain tiers of drugs. Once you’ve paid your deductible on prescriptions, you move on to the next stage, your initial coverage.


Stage 2: Initial Coverage

When you enter the initial coverage stage, you begin to share the cost of your prescriptions. Your drug plan will kick in most of the cost, and you will typically pay a coinsurance or copay amount. When your out-of-pocket amount reaches $4,660 (in 2023), you will find yourself on the threshold of stage three—the Medicare donut hole.


Stage 3: The Donut Hole

We've arrived at the infamous "donut hole". At this point, even though you’ve met your out-of-pocket costs, there will still be a gap of $2,720 (in 2023) until the next stage of Medicare Part D coverage begins. That means while you’re in the donut hole you’ll pay:

  • Up to 25 percent of the cost for covered brand-name prescriptions whether you buy them at your local pharmacy, order them online, or get them by mail; and

  • Potentially lower costs if your plan offers additional discounts with certain pharmacies for specific drugs.

But wait, there's more. To get you out of the donut hole, any brand-name drug that you buy at this point will count towards your out-of-pocket cost, even though you will only pay a 25% maximum cost for them. A little confusing.


For example, let's say the drug you need is only available as a brand name and costs $300 for the prescription. You will pay just a quarter of that cost ($75.00), but the entire cost ($300) will count towards the donut hole.


Generic drugs are a bit different. Your Part D coverage will pay 75% of the cost and you will pay the 25%, but only the amount you pay will count towards the donut hole amount before you move on to the catastrophic phase of coverage.


For example, if the generic drug costs $200 and you pay 25% or $50. Only the $50 will count towards the donut hole.


Stage 4: Catastrophic Coverage

When you arrive at this stage of coverage, you will pay either 5% of the cost of the drug or a small copay, whichever is greater, for the medications for the remainder of the year. Your drug plan will pick up 95% of the drug costs.

Connelly Law Offices, Ltd.

"TrOOP"- What's This?

"TrOOP, stands for the total out-of-pocket costs that a person will spend on prescribed drugs before exiting the donut hole and moving into the catastrophic coverage phase of the Medicare Part D coverage," said Attorney Connelly. But do all drugs count towards the TrOOP? Most do, but there are some guidelines that the Centers for Medicaid have in place.


Prescriptions That Count

So, what drugs count towards your total out-of-pocket expense and get you out of the Donut Hole? According to the Centers for Medicaid, they must meet these conditions:

  • Your generic or brand-name drugs are on your Medicare Part D prescription drug plan’s formulary or drug list OR;

  • Your prescriptions were not on your plan's formulary, but you are allowed to count the coverage costs toward true out-of-pocket costs because you requested a coverage determination (formulary exception) that was granted by your Medicare plan, and your non-formulary drugs are now covered by your plan - AND;

  • Your medications were purchased at one of your Medicare plan's network pharmacies, OR;

  • Your Medications were purchased at an out-of-network pharmacy in accordance with the plan’s out-of-network policy (for instance, this was an emergency fill and no network pharmacy was available and you submitted the prescription to your Medicare Part D plan).

"Last week, I was reviewing an estate plan and trust with a client when we discussed the donut hole and prescription costs," stated Attorney Connelly. "His question was about the amount of prescription spending that is needed to emerge from the hole. He was surprised to learn that there are other expenditures that also count towards the TrOOP, and this is important to know, so we have listed them in our blog."


Other Costs That Count

As Attorney Connelly said, there are other expenditures that count towards the TrOOP besides the spending that occurs within the Donut Hole. Let's look at them.

Connelly Law Offices, Ltd.
Understanding prescription coverage can be confusing

The annual initial deductible That is, the amount a person pays for their Medicare Part D covered prescriptions before their Medicare Part D drug plan begins to pay. Most Medicare Part D plans have an initial deductible and begin with coverage after the deductible is met. So, if your Medicare Part D plan has an initial deductible, you pay 100% of the cost of your medications -- up to your initial deductible limit -- and then your Medicare Part D plan begins to pay along with your co-insurance or co-payment. What you pay during the initial deductible phase counts toward your TrOOP.

Your formulary drug cost-sharing The amount a person pays for each Medicare Part D plan covered prescription drug after their drug plan begins to pay (i.e., your co-payments or coinsurance). So if you have a $30 co-payment for a particular medication that is covered by your Part D prescription drug plan, you get TrOOP credit for the $30. If someone else, like a friend or family member, makes the payment for you (say, $30 in this example), then this amount is also counted toward TrOOP. So if your medication has a retail cost of $100, and your coverage cost is $30, your Medicare plan pays the other $70, and you get the $30 counted toward TrOOP.

Any payments a person makes during their plan’s coverage gap

This includes what you pay and what others pay on your behalf (for instance, the brand-name drug manufacturer is paying 70% of your brand-name drug cost while you are in the Donut Hole and this 70% of retail cost is counted toward your TrOOP or Donut Hole exit point). For example, if you purchase a formulary brand-name Medicare Part D drug in the Coverage Gap or Donut Hole - you will get the Donut Hole discount of 75% (you pay 25%) and get credit for 95% of the retail cost toward TrOOP. Using the example from above, if your brand-name formulary drug has a negotiated retail cost of $100, you will pay $25 (25% of the retail price) and $70 (or 70%) will be paid by the Pharmaceutical Industry (the additional 5% will be paid by your Medicare Part D plan but does not count toward TrOOP). So, you pay $25, but you will receive $95 (95%) credit toward your TrOOP.

Payments for Drugs by a third party