Medicare Donut Hole: Part D Coverage Gap Explained

Prescription drug costs can be a major financial concern for many adults, especially older adults on Medicare. While a few specific medications are covered under Medicare Part B, most Medicare patients need additional drug coverage. If you have Medicare Part A and/or Part B, you have the option to add prescription drug coverage with a Medicare Part D Plan.

Understanding Medicare Part D coverage is essential to getting the most from your plan. The coverage gap, often referred to as the Medicare “donut hole,” limits your coverage and results in temporary higher out-of-pocket costs. Knowing how this affects you can help you prepare for a temporary increase in your prescription drug costs.

What is the Medicare donut hole?

The Medicare donut hole is a gap in prescription drug coverage through Medicare Part D. This coverage gap will cause a temporary increase in your out-of-pocket costs for medications. All Part D plans have a donut hole, or gap, in prescription coverage; however, depending on your prescription needs, you may never reach it.

Medicare Part D is an optional plan covering most outpatient prescription medications. These plans are available through private companies contracted with the government to offer Medicare Part D plans. You have the option of enrolling in a stand-alone prescription plan or bundling Part D with Part A and B coverage.

How does Medicare Part D prescription coverage work?

Medicare Part D is the optional coverage available through Medicare that helps cover the cost of prescription drugs. There are more than 800 Part D plans available. However, all of these plans follow the same basic rules outlined by Medicare.

4 stages of the Medicare Part D coverage gap

You can think about the stages of Medicare Part D coverage as a cycle that starts over at the beginning of each year. Even if you don’t reach all four stages in one year, you cycle back to stage 1 with each new year. How far you get in the cycle depends on the prescription costs of your medications.

Stage 1: Deductible

The first stage of the cycle is the deductible stage. You are responsible for 100% of your medication costs during this stage. You must meet the deductible before moving to the next phase. The Medicare Part D deductible is now $505. Once you have paid $505 out-of-pocket, you move into stage 2.

Stage 2: Initial coverage

The second stage starts the prescription drug coverage. During this stage, you are only responsible for the copay amount for each prescription. Prescription copay amounts can vary based on the medications you take and the pharmacy you use. Some plans have preferred or mail-order pharmacies that allow you to get your medications at a lower copay amount.

Stage 2 ends when you reach the coverage limit. Starting in 2023, the coverage limit is $4,660. When you reach this dollar amount, you fall into the next stage.

Stage 3: The donut hole

The third stage is the coverage gap, or “donut hole.” When you get to this stage, you are responsible for 25% of the total cost of your medications. For example, if you take a brand-name prescription drug that costs $100 monthly, you are responsible for paying $25 out-of-pocket. The drug manufacturer covers 70%, and your plan pays the remaining 5%. Please note that these 2023 prices and are subject to change each year.

You will remain in the donut hole stage until your TrOOP (True Out-of-Pocket Costs) reaches $7,400 (as of 2023). For brand-name drugs, the 25% you pay out-of-pocket and the 70% paid by the drug manufacturer count toward your TrOOP. For generic drugs, only the 25% that you pay counts.

You are out of the donut hole once your TrOOP reaches $7,400. Catastrophic coverage will automatically kick in at that point. These dollar amounts are subject to change yearly. Be sure to check your plan's most current updates to find out your TrOOP amount.

Stage 4: Catastrophic coverage

The final stage is called the catastrophic coverage phase. When you get to this phase, your drug costs decrease. In this stage, you will pay $4.15 for generic medications and $10.35 for brand-name medications, or 5% of the total cost, whichever is more. You remain in this phase until the end of the calendar year. Starting January 1st, you will return to the deductible stage.

How does the Medicare donut hole differ in 2023?

Changes have been made to Medicare Part D for 2023. The deductible amount has increased from $480 to $505. The coverage limit was increased from $4,430 to $4,660. The TrOOP has also increased by $350 to $7,400. While the coverage limit increase is helpful, the increased deductible and TrOOP can result in more out-of-pocket costs.

Do Medicare Advantage plans cover the donut hole?

Medicare Advantage plans bundle Medicare Parts A and B and, in some cases, Medicare Part D. These plans are offered by private companies and contracted through government Medicare plans; therefore, Part D rules apply. This means Medicare Advantage plans do not pay for additional coverage when you're in the donut hole. Since Medigap plans do not cover medication costs, they do not provide coverage when you’re in the donut hole.

How do I get out of the Medicare donut hole?

The only way to get out of the donut hole is to go through it. Once you are in the coverage gap, you must meet the TrOOP limit of $7,400 before exiting it. The only exception to this occurs at the start of a new calendar year. If you are still in the donut hole phase at the end of the calendar year, you will start over at Stage 1 at the beginning of the new year, regardless of reaching the TrOOP.

While the only way out of the donut hole is through it, there are ways to avoid or postpone falling into it. The coverage gap applies when your drug costs reach $4,660. By reducing your prescription drug costs, you can increase the time it takes you to get to the coverage limit amount.

There are several ways to reduce your prescription drug costs. Some tried and true methods are:

• Choosing generic rather than brand name drugs.
• Discount programs through the drug manufacturer.
• Check your plan’s drug formulary, and use drugs on the list when possible.
• If your plan has a preferred pharmacy, make sure you use that pharmacy.
• Check for discounts through mail-order pharmacies.
• Use discount coupon programs like GoodRx.com.

These methods can go a long way in reducing your prescription costs. Discount programs, like the ones offered by GoodRx.com, can make your medications less costly than your Medicare Copay. Using these coupons on the less expensive medications instead of using Medicare will reduce your coverage limit.