What Is the Medicare Doughnut Hole? - dummies

What Is the Medicare Doughnut Hole?

By Patricia Barry

Copyright © 2015 AARP. All rights reserved.

The doughnut hole — properly called the coverage gap — has undoubtedly been the best-known facet of the Medicare Part D program, and also the most hated. Before 2011, people who fell into it had to pay 100 percent of the cost of their drugs out of pocket. Today, the coverage gap still yawns, but it’s shrinking. (The gap is technically Phase 3 of Part D coverage.)

Under the Affordable Care Act of 2010, the Obama administration succeeded in getting drug manufacturers to provide large discounts in the doughnut hole for brand-name drugs. And the government discounted generics. These discounts are gradually being phased in over a ten-year period.

By 2015, the discounts had risen to 55 percent for brand names (50 percent from the manufacturers and 5 percent from the government) and 35 percent for generics. Therefore, in 2015, you pay 45 percent of the cost of brand names and 65 percent of the cost of generics. In 2016 you pay 45 percent and 58 percent respectively. These savings will increase until, by 2020, nobody pays more than 25 percent for any drug in the gap.

Here’s what you need to know about the doughnut hole under the new deal:

  • All Part D enrollees are eligible for the discounts if they fall into the gap — with the exception of those receiving Extra Help, which already provides year-round coverage without a doughnut hole.

  • You don’t need to apply for the discounts or fill out any paperwork. They’re deducted from your bill at the pharmacy (retail or mail-order).

  • The brand-name discounts provided by the drug manufacturers don’t prolong the time you spend in the gap. Their value counts toward the out-of-pocket limit that gets you out of the gap, even though you don’t actually pay them. However, anything that the government pays toward your drugs in the gap — either brand names or generics — doesn’t count toward the limit. (But keep in mind that while in the gap, you must buy your drugs through your Part D plan to have them count toward the limit.)

  • Under the law, drug manufacturers must provide the doughnut hole discounts on all their brand-name drugs as a condition for their being covered under Part D. So in the unlikely event that your drug is made by a company that declines to participate, you wouldn’t be able to get it from a Part D plan anyway.

  • The gap discounts also apply to drugs that your plan doesn’t normally cover but has agreed to cover in response to your doctor’s request for an exception to its rules.

  • If your Part D plan already gives some coverage for your drugs in the gap, your plan’s coverage is applied first and the discounts are applied to the remaining amount.

  • A small dispensing fee (of maybe $2 to $5) is added to your prescription cost at the pharmacy. You must pay this fee, which isn’t included in the discounts.

This change in the law hasn’t only collectively saved beneficiaries billions of dollars — more than $11.5 billion in the first 40 months alone — but has also created a weird side effect. Some Medicare beneficiaries find they’re actually paying less for some drugs in the doughnut hole than they paid earlier in the year under full coverage. Unbelievable? No, it can really happen.

For example, Brian’s Part D plan charged him a steep co-pay of $95 for a brand-name drug it had placed in a high price tier. The full cost of this drug was $150, but in 2015 the discount program meant that he was required to pay only 45 percent of the cost. So Brian was charged $70.50 for this drug in the gap — 45 percent ($67.50) plus a $3 dispensing fee — or $24.50 a month less than he’d paid before he fell into the gap.

As the discounts grow larger over the next few years, beneficiaries are likely to meet this strange situation more frequently.