What is the Medicare doughnut hole?
Americans often talk about Medicare as a single health care plan. But in reality, it’s more like a patchwork quilt of separate plans that cover different medical needs. Medicare Part A covers hospital care, Part B covers outpatient treatments, and Part D covers prescription medications. (Officially, there’s no Medicare Part C, but the term is often used for Medicare Advantage plans from private insurers.)
But this quilt doesn’t provide full coverage for everything. Not only are there gaps between the patches, but the individual patches also have some holes in them. This is especially true for Medicare part D. There’s a big, gaping hole in it called the Medicare coverage gap or, more informally, the doughnut hole. And this particular doughnut hole is anything but sweet. It can cost you hundreds of dollars out of pocket every year.
Now here’s the good news: The coverage gap won’t be around much longer. A provision of the 2022 Inflation Reduction Act (IRA) is phasing it out. The Medicare doughnut hole began to shrink in 2023, and by 2025 it will be gone completely.
How Part D coverage works
The term “doughnut hole” comes from the way Medicare Part D coverage is structured. It covers prescription drug costs up to a certain dollar amount, then drops off, then picks up again. The places where Part D provides coverage are like the two sides of a doughnut; the gap in between is the hole.
Here’s a fuller look at the tiers of coverage, based on info from the Center for Medicare and Medicaid Services.
- Most Medicare Part D plans have a deductible. For 2024, the maximum amount for this deductible is $545. You must pay this entire amount out of pocket before you even bite into the “doughnut” of coverage.
- Initial coverage phase. At this point Part D begins to cover most of your prescription drug costs. You pay only a copayment or coinsurance, which varies depending on the drug and the details of your plan. For 2024, this coverage lasts until your drug costs reach a total of $5,030. (That’s the amount you and your plan spend put together.)
- Coverage gap (“doughnut hole”). At this point, Part D coverage drops off—but not completely. For generic drugs, Medicare continues to cover 75% of the cost. For brand-name drugs, Medicare covers only 5%, but you also get a 70% discount from the manufacturer. This leaves you responsible for the remaining 25%. You must also cover 25% of any dispensing fees, while your plan pays the other 75%.
- Catastrophic coverage. Fortunately, you don’t have to keep paying 25% forever. When your prescription drug spending reaches $8,000, Medicare Part D starts picking up the tab in full. For the rest of the year, you don’t pay another cent for your prescriptions—not even a copayment.
The $8,000 limit isn’t based just on the 25% you paid while in the coverage gap. It also includes your deductible and the 70% of brand-name drug costs covered by the manufacturer. That helps you climb out of the doughnut hole faster.
Managing costs in the Medicare doughnut hole
Falling into the doughnut hole isn’t quite as bad as it sounds. Even while you’re in this gap, the majority of your drug costs are covered. (In fact, in certain cases, hitting the coverage gap can actually lower your costs. Each Part D plan has its own formulary—a tiered list of drugs that are covered at different levels. For drugs on the upper tiers, plans may charge coinsurance as high as 50% during the initial coverage phase. If you’re taking one of these drugs, hitting the doughnut hole could cut your out-of-pocket cost in half.)
But when you’re on a tight budget, 25% of prescription drug costs can still be a hefty burden. Fortunately, there are several ways to lighten it.
First of all, you may be able to dodge the Medicare doughnut hole completely. If your prescription drug costs are low enough, you may never reach the $5,030 limit for the initial coverage phase. Sticking to generic drugs can help you keep your out-of-pocket costs down and avoid the coverage gap.
Second, if your income is low, you may qualify for the Medicare Part D Low Income Subsidy. This program, also known as Extra Help, eliminates most costs for Medicare Part D. It’s available to people whose income is up to 150% of the federal poverty level. You can apply for Extra Help through the Social Security Administration website.
Finally, there are some Medicare Part D plans and Medicare Advantage plans that include “gap coverage.” That is, they cover a larger share of drug costs while you’re in the doughnut hole. However, this coverage only applies to certain drugs, often generic ones. Also, plans with gap coverage tend to have higher premiums. You need to compare Part D plans carefully to see if the extra coverage is worth the cost for you.
The disappearing Medicare doughnut hole
After 2024, the Medicare doughnut hole won’t be a problem anymore. That’s thanks to the IRA, which made a number of changes to Medicare. One of these changes was to cap out-of-pocket costs for prescription drugs at $2,000 starting in 2025. Once you’ve paid that amount—including your deductible and copayments—you’ll have no more drug expenses for the year. No more Medicare doughnut hole, plus a limited price for the rest of the doughnut—that’s sweet news indeed.
