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Medicare doughnut hole

Have you heard the Medicare doughnut hole but aren’t sure what it means? Bankrate explains.

The Medicare doughnut hole is the informal name for the Medicare Part D coverage gap, in which Medicare recipients must pay more out of pocket for prescription drugs.

For 2017, Medicare recipients must pay the first $400 of drug costs themselves. After that, recipients pay only 25 percent of costs up to a total of $3,700; they subsequently pay all drug costs out of pocket, up to a total spend of $4,950. Once this out-of-pocket spending threshold is crossed, Medicare Part D catastrophic coverage begins paying 95 percent of prescription drug costs, with the recipient responsible for the remaining 5 percent.

Deeper definition

Medicare recipients who find themselves in the doughnut hole receive discounts on brand-name and generic drugs. In 2017, they pay 51 percent of the list price for generic medications and 40 percent of the list price for brand-name drugs.

Although recipients receive a 60 percent discount on brand-name medications, 95 percent of the total cost counts as out-of-pocket spending. Meanwhile, the 49 percent discount on generic drugs does not count as out-of-pocket spending; only the amount paid by recipients counts for spending thresholds.

Once recipients hit the $4,950 out-of-pocket spending threshold in 2017, catastrophic coverage kicks in. For the rest of the year, they pay the greater of 5 percent or $3.30 for generic drugs or the greater of 5 percent or $8.25 for all other drugs.

Note that the drug price discounts are slated to grow every year until 2020, when recipients will pay only 25 percent of the list price for generics and brand-name medications. People who need assistance paying for their prescriptions may qualify for extra assistance by contacting Medicare via phone or by visiting the Medicare website.

Medicare doughnut hole example

The retail costs of Henry’s medications are about $500 per month. In July, he exceeds the $3,700 limit and enters the doughnut hole. Now Henry will pay 51 percent of the costs of his generic medications and 40 percent of the costs for his brand name medications.

Two of Henry’s medications are generic and one is a brand drug. All he spends on generic and brand-name medications will be applied to his out-of-pocket spending total. However, an additional 55 percent of his brand-name prescription will be applied towards his total out-of-pocket costs. In October, Henry’s total out-of-pocket cost exceeds $4,950 and he enters catastrophic coverage. Approximately 95 percent of his prescription costs will be paid for the rest of the year.

Enrolling in Medicare? Here are 10 things to know before signing up.

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