The Medicare Part D "Donut Hole" - What Does it Actually Mean?
By Don Drake, Connelly Law Offices, Ltd.
The Medicare open enrollment period has officially ended on December 7th. Every year, Medicare health and drug plans can make changes to their coverage, cost, providers, and pharmacies in their networks. Medicare beneficiaries have the opportunity to switch their health plans and prescription drug coverage to better suit their needs for the following year. These changes will take effect starting January 1, 2024. However, some people may still have misconceptions about certain Medicare plans, particularly prescription medication and the "donut hole" coverage gap.
"Many individuals struggle to understand the Medicare Part D donut hole, a complicated stage of prescription medication coverage that involves numbers, phases, and specific circumstances," stated professional fiduciary and certified elder law Attorney RJ Connelly III. "This coverage gap, colloquially known as the "donut hole," is not as daunting as many make it out to be."
"It is a common misconception that individuals must pay full price for their prescription drugs once they reach this gap in coverage, which is not true," continued Attorney Connelly. "In reality, the Medicare Part D plan has four phases, and the third phase is the Coverage Gap or Donut Hole. The Coverage Gap was initially a gap in drug coverage during a calendar year, but those on Medicare do not pay 100% of the costs of their medications while in the Donut Hole. Unfortunately, this misunderstanding has led to some people 'rationing' their medications, which can be life-threatening."
To clear up any confusion, we will explain the Medicare Part D donut hole in this blog post. We will go into detail about the different phases of the plan, how the coverage gap works, and what options are available to individuals who find themselves in this stage of coverage. By understanding the nuances of Medicare Part D coverage, individuals can make informed decisions about their healthcare and avoid any potentially dangerous misunderstandings. Let's start by explaining the four stages of Medicare Part D.
FOUR STAGES OF MEDICARE PART D
We need to understand the four stages of drug coverage under the Medicare Part D plan to explain the donut hole accurately.
Stage 1: The Deductible
Before your Medicare Part D plan starts covering the cost of your prescription drugs, you may be required to pay an annual deductible. You must pay this deductible out of pocket before your plan begins to pay for your medications. The deductible amount varies between plans, and some may not have a deductible.
The maximum deductible amount for Part D plans in 2024 is $545. This means that you will not have to pay more than this amount before your plan begins to cover your prescription drugs. Once you have met your deductible, your initial coverage period will begin. During this time, you will pay a copayment or coinsurance for each medication that you receive, and your plan will cover the rest of the cost.
Stage 2: Initial Coverage
After you have paid any deductible that applies, you will enter what is known as the Initial Coverage Stage. During this stage, your plan will cover its portion of the cost of your covered prescription drugs, while you will be responsible for your portion, which may be in the form of a copayment or coinsurance amount. The amount you are required to pay will vary depending on the specific drug you are purchasing and the location where you are filling your prescription.
Once the total amount you and your drug plan have paid for prescription drugs during the year reaches the Initial Coverage Limit, currently set at $5,030 for 2024, you will transition into the Part D Coverage Gap.
Stage 3: Coverage gap - The Donut Hole
It is important to understand the concept of the Coverage Gap, also referred to as the Medicare "donut hole", while enrolling in a majority of Medicare prescription plans. This gap refers to a temporary limit on what your drug plan will cover for prescription drugs. However, it is not applicable to members who receive Extra Help to pay for their Part D costs.
If you enter the coverage gap, you need to pay no more than 25% of the cost for brand-name and generic prescription drugs, as covered by your Part D plan. This percentage is the maximum you will be responsible for paying.
It is also crucial to know what counts and what doesn't count towards moving out of the Coverage Gap. Your yearly deductible, coinsurance, copayments, and the discount you receive on brand-name drugs in the coverage gap are the factors that count towards moving out of the gap. Whereas your drug plan premium, pharmacy dispensing fees, and what your plan pays do not count toward moving out of the Coverage Gap.
Therefore, understanding the Coverage Gap and its implications can help you choose the right Medicare prescription plan and manage your healthcare costs more efficiently.
Stage 4: Catastrophic Coverage
Beginning in 2024, individuals enrolled in Medicare Part D will not be required to make any payments for the prescription drugs covered under their plan during the Catastrophic Coverage stage. This means that once the total out-of-pocket costs for the drugs have exceeded a certain limit, the plan will cover the remaining costs for the rest of the year. So, in 2024, members will not have to pay anything for the covered Part D drugs during the catastrophic coverage phase.
"TrOOP"- What's This?
The term TrOOP stands for True Out-of-Pocket Costs, which refers to the amount you pay before your Part D drug plan coverage begins. In addition to that, TrOOP also covers your formulary drug cost-sharing. Let us give you an example of how this works.
Suppose you have a prescription for a medication that costs $100. If you or someone on your behalf makes a copayment or coinsurance amount of $25 for this covered medication, then your plan will cover the remaining $75. As a result, you will receive a $25 TrOOP credit.
Furthermore, TrOOP also covers both your actual out-of-pocket costs for prescription medications and drug costs that another party covered on your behalf once you’re in the Coverage Gap. If you receive a brand-name drug Donut Hole discount from the medication manufacturers, this amount applies to your TrOOP.
To elaborate further, suppose you’re in the Donut Hole, and you buy a covered brand-name drug. In that case, you’ll receive a discount of 75%, which means you’ll pay only 25%. However, you’ll also receive a TrOOP credit of 95% of the retail cost, while your Part D plan will pay the remaining 5%.
You will also receive credits for medication payments made by third-party programs or organizations.
Any money you use from your Medical Savings Account (MSA), Health Savings Account (HSA), or Flexible Spending Account (FSA).
Indian Health Services (IHS).
AIDS Drug Assistance Programs (ASAPs).
Qualified State Pharmaceutical Assistance Programs (SPAPs).
Various qualifying charities, providing they are not linked to your current or former employer or union or by a drug manufacturer’s Patient Assistance Program (PAP) that circumvent Part D benefits.
What is not covered?
Several types of payments do not count towards TrOOP. Firstly, your monthly plan premiums, although you have to pay them to enroll in a Part D drug plan, are not considered part of your TrOOP expenses.
Secondly, the cost-sharing portion of covered drugs does not count towards TrOOP. This includes deductibles, coinsurance, and copayments. It is important to note that prescription medications purchased outside the US and its territories do not count towards TrOOP expenses either, so buying medications from foreign pharmacies is not counted.
Similarly, drugs that are not included in your Part D plan’s formulary or those that your plan covers but are excluded by Medicare rules, such as hair growth drugs, are also excluded from TrOOP expenses. Over-the-counter medications and vitamins are not included in TrOOP expenses, regardless of whether they require a prescription or not.
Keep in mind that if certain third parties make payments on your behalf or reimburse you for your drug costs, they do not count toward your TrOOP. These third parties include:
Group health plans include the Federal Employees Health Benefits Program (FEHBP).
Employer or union retiree coverage.
Government-funded health programs, including Medicaid, TRICARE, and Children's Health Insurance Program (CHIP).
Other insurance or third-party groups that have a legal obligation to pay for your prescription medication costs.
If you're receiving any assistance towards your out-of-pocket cost for prescription drugs from these third parties, you must inform your drug plan. This will help ensure that you're receiving the correct benefits and that your TrOOP expenses are accurately calculated.
A Final Word
"If you are someone who mostly relies on lower-cost generic drugs and does not spend much on prescription drugs, then it is possible that you may not reach the donut hole threshold before the end of the year," stated Attorney Connelly. "Additionally, if you qualify for the Medicare Extra Help low-income subsidy, then you will not experience the coverage gap."
"Here's the good news -- the Medicare coverage gap 'donut hole' will be eliminated completely by the end of 2024," continued Attorney Connelly. "Beginning in 2025, the Inflation Reduction Act will introduce a new $2,000 out-of-pocket spending cap for Medicare Part D. Once you reach this threshold, you will not be required to pay any more Part D copays and coinsurance for the rest of the year. This new spending cap is aimed at reducing the financial burden on Medicare beneficiaries who require expensive medications."
Please note that the information provided in this blog is not intended to and should not be construed as legal, financial, or medical advice. The content, materials, and information presented in this blog are solely for general informational purposes and may not be the most up-to-date information available regarding legal, financial, or medical matters. This blog may also contain links to other third-party websites that are included for the convenience of the reader or user. Please note that Connelly Law Offices, Ltd. does not necessarily recommend or endorse the contents of such third-party sites. If you have any particular legal matters, financial concerns, or medical issues, we strongly advise you to consult your attorney, professional fiduciary advisor, or medical provider.