How Does the Medicare Donut Hole Work?

You didn’t know there were donuts in Medicare? There are! But…not the good kind. 

The Medicare donut hole has been around since Part D prescription drug plans were created. While it has changed over the years, it is still very much present. Medicare beneficiaries who take expensive prescriptions - or a lot of prescriptions - should understand what the Medicare donut hole is so they can budget for their prescriptions.

What Is the Donut Hole?

The donut hole is also referred to as the Medicare coverage gap. It’s part of every Part D plan, even if that Part D plan is built into a Medicare Advantage (Part C) plan. It happens in the third stage of coverage.

1. Deductible Phase
2. Initial Coverage Phase
3. The Coverage Gap
4. Catastrophic Coverage

Beneficiaries enter the coverage gap after they and their plan have spent a certain amount of money on prescriptions. That number changes every year, but this year (2023), it’s set at $4,600. Any money you and your plan have paid towards covered prescriptions is counted towards the threshold.

Once you’re in the donut hole, you’ll pay more for your prescriptions. You’ll pay up to 25% of the cost of your medications, which is a significant jump compared to what you would have paid in the initial phase of coverage. However, this number is at least down compared to what it was in 2020. Prior to that, beneficiaries paid up to 37% of the cost. For this reason, you may hear some insurance companies say the donut hole doesn’t exist. It does; it’s just a bit smaller.

How to Get Out of the Donut Hole

Fortunately, you won’t have to stay in the donut hole forever, depending on the cost of your medications. The threshold to reach catastrophic coverage also changes each year. In 2023, it’s $7,380.

The out-of-pocket threshold only includes payments made from you and discounts you might have received on covered, brand-name prescriptions. It does not include any amounts your plan contributed.

For example, if you got a manufacturer’s discount of 70%, that amount will count towards your out-of-pocket costs. You pay 25%, which also counts. However, the 5% that your plan paid will not count towards the maximum.

Once you've spent enough to reach the threshold, you'll be on the other side of the coverage gap and in catastrophic coverage. During this final phase, you'll pay a maximum of 5% for your prescription drugs.

Not everyone will enter the donut hole. But for those who often find themselves in this position, it’s very important you understand how to use your plan to get the most out of your benefits and minimize expenses. One way to do that is to have your plan reviewed every year during the Annual Enrollment Period. Drug plans can (and do) change every year, so it’s important to make sure you have the one that fits your needs. You can also review our article on how to save money on your prescriptions.

The independent agents at Local Medicare Specialists can answer any questions you have about the coverage gap. We’ll make sure you’re enrolled in the right plan for you and ensure you know how to use your benefits. Call today to speak with a local agent near you!