Understanding The Medicare Part D Donut Hole

 

 

 

What is the Medicare “Doughnut Hole”?

The Medicare Doughnut Hole is the gap in the 2014 Medicare Plan D coverage between $2850 and $4550 in prescription drug spending. (Please see below for an important note on how your prescription drug spending costs are calculated.)

During this gap in coverage, you’ll pay 47.5% of the plan’s cost for covered brand-name prescription drugs and 72% of the price for generic drugs. In 2014, this is a gap in coverage of $1700 that you must pay more money in order to make it through the doughnut hole. However, there are very helpful alternatives that we will show you later on this website.

The exact dollar amounts to enter and exit the doughnut hole change every year with the coverage gap now shrinking every year.  It has been predicted that by 2020 the your cost for generic drugs will shrink to 25% while in the gap.

It is fairly critical that you understand how your prescription drug expenditures are is calculated with Plan D. Not only is the amount that YOU pay for your medication counted towards your prescription drug spending, but the amount that your MEDICARE PRESCRIPTION DRUG PLAN pays on your behalf is also counted towards your expenditures. Many people are being surprised by the fact that they hit the Doughnut Hole so early. They are surprised because they believed that only the amount that they spent personally was counted towards the $2850 required to reach the Doughnut Hole.

 

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How is the Medicare Part D Doughnut Hole broken down in terms of dollars and cents?

In 2014, the Doughnut Hole begins at $2850 in prescription drug expenditures. (Remember your drug expenditures are the combined total of what you spend and what your Medicare Drug Plan spends on your behalf.)

During the first $2850 of spending for the year, before you reach the Doughnut Hole, there is $945 in out of pocket expenditures (OOP).

Here is how the out of pocket (OOP) expenses breaks down in the first $2850 of spending on Medicare Plan D:

$310 in OOP expenses from the 2014 Medicare Part D deductible + $635 in OOP expenses for the 25% co-pay on the other $2540 ($2850 doughnut hole threshold – $310 annual deductible = $2540). Therefore, $310 annual deductible + $635 in co-payments = $945 in out-of-pocket expenses during the first $2850 of spending.

Once you’ve reached the doughnut hole, the gap in coverage continues until your out-of-pocket (OOP) expenses have reached $4550 for the year.

Where did this $4550 figure come from? Well, $4550 is simply the required amount of out-of-pocket spending that Medicare accountants determined as your spending requirement for 2014. Now, if you spend this amount, you will have reached the catastrophic coverage point in which Medicare now pays 95% of your drug costs.

Items that count towards OOP in the coverage gap

  • The discount you get on brand-name drugs in the coverage gap
  • What you pay in the coverage gap
  • Your yearly deductible, coinsurance, and copayments

Items that don’t count towards OOP the coverage gap

  • The drug plan premium
  • Pharmacy dispensing fee
  • What you pay for drugs that aren’t covered

$2850 that you and your Medicare plan spent to reach the Doughnut Hole starting point + $1700  the entire price (including the discount the drug company pays) will count as out-of-pocket costs must spend to get through the Doughnut Hole = $4550.

Therefore, you must have drug expenditures of $4550 or more in 2014 in order to reach the catastrophic coverage point and make it through the Doughnut Hole.

To summarize, the Doughnut Hole is a gap in coverage in the Medicare Part D program between the drug expenditure amounts of $2850 and $4550. While in this coverage gap Medicare Prescription Drug Plan enrollees’ are responsible for paying additional drug expenses.

Here is a chart that may help to make these calculations a little more clear:

STANDARD BENEFIT 2014


Deductible:

Beneficiary pays the first $310
Medicare Plan pays $0


Initial Benefit Period:
Beneficiary pays 25% of the next $2540
(25% of $2540 = $635)
Medicare Plan pays 75% of the $2540
(75% of $2540 = $1905)


Doughnut Hole $2850 “Threshold”:
This is the amount that the beneficiary (you) and the plan have spent combined ($310 + $2,540 = $2,850)


Doughnut Hole:
Beneficiary pays 47.5% of cost for covered brand-name prescription drugs and 72% of the price for generic drugs for the next $1700 (You plans cost for covered brand-name drugs counts towards this $1700 )

Catastrophic Coverage:

Starting Point ($4550): point in which Medicare now pays 95% of your drug costs.

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How will the Medicare Part D Doughnut Hole effect me?

How the Doughnut Hole affects you personally depends on how much you spend on prescription medications in 2014.

If you spend less than $2850 on medications in 2014 you will not be affected at all by the Medicare Doughnut Hole. A basic rule to remember is that if you spend $237 or less per month in 2014 you will not reach the Doughnut Hole.

If you spend more than $2850 but less than $4550 (between $237 and $379 monthly) on medications in 2014 you will hit the Doughnut Hole but you will not make it through to the other side to hit the catastrophic coverage point. At the catastrophic coverage point Medicare starts paying 95% of your drug expenditures.

If you spend more than $4550 (over $379 monthly) on medications in 2014 you will go through the Doughnut Hole and reach the catastrophic coverage point. This will mean that you personally spent $3216.25 while in the Doughnut Hole and that Medicare plan will start paying 95% of your prescription expenses on any amount beyond the $5726.25 expenditure point. Please note this 95% coverage is only on expenditures beyond the $5726.25 point it does not apply to any previous expenditures under the $5726.25 mark.

Interesting fact: Exactly how much do you spend in 2014 to get through the Doughnut Hole? And how much do you really save?

Annual Estimated premium in 2014 = $300 (12 x $25 average monthly premium)
+ Annual Deductible = $310
+ Cost you pay in the initial period from (25% of $2540) = $635
+ Cost you pay in the donut hole $4550 – $2850 = $1700
+ if half your drugs are generic your $850
+ if half your drugs brand-name your cost $404

Total True out of Pocket Expense = $2499

Therefore, to calculate your savings we need to take $4550 (Your cost + your Medicare plan’s cost paid through the doughnut hole) – $2499 (your total costs) = $2051 (or 45% of $4550 is what your Medicare plan actually pays).

If I receive a Low Income Subsidy from Medicare (i.e. full extra help or partial extra help),How will the Doughnut Hole affect me?

Fortunately, if you receive the Medicare benefit called full extra help supplement, you will receive continuous coverage throughout the Doughnut Hole. You will not have to pay for your medications between the Doughnut Hole range.

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Will I hit the Doughnut Hole?

You will hit the gap in coverage in the Medicare Drug Plan, called the Doughnut Hole, only if you spend more than $2850 on your medications in 2014 (i.e. you are spending more that $237 a month). If you spend less there will be no gap in coverage for you. Also if you receive Full Extra Help from Social Security you will not hit the Medicare Doughnut Hole.

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When will I hit the Doughnut Hole?

Tip: Watch your monthly Medicare drug plan statements to see how close you are to hitting the gap ($2850).

Exactly WHEN you hit the coverage gap during the year depends on how quickly you spend enough to reach the Medicare Doughnut Hole starting point. In order to figure out when you will hit the Medicare Doughnut Hole simply take the dollar amount $2850 and divide it by your monthly medication costs. This will give you the number of months that it will take for you to reach the Donut Hole.

Example: $2850 ÷ $314/month = 9 months

January 1 + 9 months = In October you will hit the doughnut hole if you spend $314/month.

Note: You should receive regular monthly statements from your Medicare card provider. These statements should also help you to estimate when you will hit the Medicare Doughnut Hole.

Here is a chart that will help determine when you will hit the doughnut based on your monthly spending:

Monthly Medication Costs # of months to reach the DH Date Reached
$2850 1 month February
$1425 2 months March
$950 3 months April
$712.50 4 months May
$570 5 months June
$475 6 months July
$407 7 months August
$356 8 months September
$317 9 months October
$285 10 months November
$259 11 months December
$237.5 12 months Will not reach DH

You can also visit MedicareDoughnutHole.com and use our Doughnut Hole predictor tool.

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When will the average Medicare enrollee hit the coverage gap called the Doughnut Hole?

The Center for Medicare and Medicaid Services estimated that in 2006 the average Medicare Part D beneficiary spent $3080 a year on medications. A March 5, 2008 an AARP Report called Rx Watchdog Report: Trends in Manufacturer Prices of Brand Name Prescription Drugs Used by Medicare Beneficiaries—2002-2007, found that the drug companies raised the prices of drugs most commonly used by Medicare beneficiaries by 7.4% from 2006 to 2007.

So, if we take the $3080 spending estimate for 2006, we can assume that in 2007 the average Medicare beneficiary spent 7.4% more or $3308 in 2007. So, what will the average Medicare beneficiary spend in 2008 then? Well, we will need to make some assumptions. Taking data from the AARP report we found that the average annual drug price increase between 2002 and 2007 was 6.5%. Therefore, if we add the average 6.5% annual price increase to the 2007 total of $3308 we can assume that the average Medicare Part D beneficiary will spend $3523 on medications.

This means that the average Medicare Part D beneficiary will spend $293.60 per month or $9.65 per day on medications. If we take $3523 and divide it by $9.65 this tells us that it will take 260 days for the average Medicare beneficiary to reach the Doughnut Hole. This will be September 16th. However, a report by The Institute for America’s future estimated the Doughnut Hole day to be September 10th. Either way, we can safely assume that the average Medicare beneficiary will reach the doughnut hole between September 10th and September 16th.

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Do I still have to pay my monthly Medicare Part D premiums while I am in the Doughnut Hole?

Unfortunately, there is no “Doughnut Hole” when it comes to your monthly premiums. You still pay your full monthly premiums even while you are in the Doughnut Hole. During this time you are basically receiving zero benefit from the Medicare Plan D program but you are still required to pay your premiums.

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What expenditures count towards the $2850 level that puts me into the Doughnut Hole?

The portions of your prescription spending that count towards the $2850 are:

Your annual deductible ($310 in 2014), your co-payment amounts (25% of drug cost before you reach the Doughnut Hole) and the amount your Medicare drug plan pays for your drugs. Your monthly premiums are not counted towards this total or towards your out-of-pocket expense total.

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What is the reason that the government created a Doughnut Hole in the Medicare Prescription Plan?

The main reason touted by government officials for Congress creating a Doughnut Hole in the Medicare Part D plan was to control costs and to lower the potential burden of the Medicare prescription drug plan on taxpayers.

Another speculated reason is that Congress (due to lobbying pressures of pharmaceutical and insurance companies) wanted the program to look very enticing by being able to offer a benefit that, on the surface, looked like it was providing seniors with 75% off their drug expenditures. Congress simply could have created a plan that provided a benefit of 25 or 30% off for the entire year but that doesn’t sound nearly as exciting as 75% off. It’s much easier for them to market a program that sounds incredible…i.e. “Wow, you only pay 25% of the cost of your medications”. The part they conveniently forget to promote is that the savings are only there until you hit the Doughnut Hole then you are on your own.

If you are one of the unfortunate people who hit the Doughnut Hole you soon realize that the Medicare drug plan is not as great as it was first proclaimed to be.

When you factor in the annual deductible, average monthly premiums and co-payments, individuals that spend exactly $2850 (the starting point of the Doughnut Hole) will save 54.8% on their medications for the year. However, individuals who spend exactly $4550 (the end of the Doughnut Hole) will save 45%. That means that since there is a Doughnut Hole in the Medicare Part D plan, an individual who spends up to the Doughnut Hole starting point will save 10% more on their medications for the year than an individual who spends up to the end of the Doughnut Hole but does not reach the catastrophic coverage point. Does that seem fair? Why not simply average out the savings for everyone.

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Will the Doughnut Hole be the same in 2015?

No. By 2020, you’ll pay only 25% for covered brand-name and generic drugs during the gap—the same percentage you pay from the time you meet the deductible (if your plan has one) until you reach the out-of-pocket spending limit (up to $4,550 in 2014, and up to $4,700 in 2015).

Year You’ll pay this percentage for brand-name drugs in the coverage gap You’ll pay this percentage for generic drugs in the coverage gap
2014 47.5% 72%
2015 45% 65%
2016 45% 58%
2017 40% 51%
2018 35% 44%
2019 30% 37%
2020 25% 25%

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How many people will hit the Doughnut Hole in 2015?

Estimates of how many people will hit the doughnut hole in 2015 range from 3 million to 7 million Medicare Part D beneficiaries.

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What are out-of-pocket (OOP) expenditures?

Out-of-pocket expenses are any expenses for your drugs that you personally pay. These expenses include the $310 dollar annual deductible and any co-payments you pay.

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What expenditures do not count towards my out-of-pocket expenditures?

Your monthly Medicare plan premium does not count towards your out-of-pocket expenses.

Also any drugs that you pay for personally because they are not covered by your plan are not considered an out-of-pocket expense. Only drugs that are on your Medicare plan’s formulary and that you pay for personally are counted towards your out-of-pocket expenses.

If you use another insurance plan to pay for your medication those expenses are not counted towards your out-of-pocket expenses.

Any medications that you purchase from a pharmacy that is not included in your plan’s network of pharmacies will not be included towards your out-of-pocket expenses.

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What is the Medicare catastrophic coverage point?

The catastrophic coverage point is the point at which your Medicare card begins paying 95% of your medication expenses. In 2014, this point begins at $4550 worth of drug expenditure for the year. This point is set higher in 2015. In 2015, the catastrophic coverage point is estimated to begin at $4700 in expenditures.

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What other issues are there with the Medicare Part D program that may affect me?

A fairly major issue, which the impact of is being felt already, is the fact that Medicare is not allowed to negotiate prices with the big drug companies. The law stating that Medicare can not negotiate better prices on your behalf is affecting you right now. Prices have risen dramatically since the start of the program in 2006.

From April 2006 to April 2007, Medicare plan drug prices on the top 15 drugs rose 9.2% according to a Families USA study.

From the Families USA report: “Drug prices matter to Part D beneficiaries because they determine when beneficiaries meet their deductible and initial coverage limit. Moreover, when beneficiaries are in the coverage gap or “Doughnut Hole,” they must pay the full price charged by their plan. As drug prices increase, beneficiaries will reach the Doughnut Hole faster. In addition, drug prices are a major contributor to the cost of a drug plan’s premiums. As drug prices increase, so will beneficiaries’ premiums.”

A more recent report by AARP released on March 5, 2008 found that the prices of medications most commonly used by Medicare beneficiaries increased by 7.4% in 2007. We have yet to see what the rate of increase on drug prices in going to be in 2008.

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How can I avoid the Doughnut Hole?

You have three basic options once you hit the doughnut hole:

Option 1) Studies show that many Medicare beneficiaries can avoid the Doughnut Hole by expanding their use of generic medications. Using lower cost drugs, such as generics, can help your coverage last longer.

Option 2) Many Medicare providers offer a discount if you use their mail-order program.  Also If you have a chronic condition ask your doctor to write a prescription for a 90-day supply of your medication.  Your local pharmacy may give you a 90-day supply of your medications for the same price as the mail-order plan.

Option 3) Beneficiaries should carefully review his or her prescription drug plan yearly even if your coverage was satisfactory last year.  In 2014, some Medicare Part D drug plans provide some drug coverage in the donut hole. These plans, however, will most likely have a higher monthly premium and will only pay for certain medications.  You can find plans here that offer Medicare Part D drug coverage while in the donut gap.

Option 4) Start paying 100% of the full medication price established by your Medicare plan once you hit the coverage gap (often times the Medicare drug plan prices are even higher than the price you would pay for your medications outside your Medicare plan).

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MedicareDoughnutHole.com is continually being updated with innovative and advanced tools to help you understand and analyze your Medicare options. Be sure to return regularly to maximize your Doughnut Hole knowledge and to utilize these tools which will be available to you very soon.

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