Medicare Part D is a prescription drug benefit program the federal government provides for Medicare beneficiaries. If you’re currently covered by Medicare Part D or planning ahead for your medical costs in retirement, you’ve probably heard about something called the “donut hole" or "coverage gap," which can temporarily limit your prescription drug coverage.
There have been quite a few changes to Medicare Part D coverage in the past few years, leaving many Medicare beneficiaries questioning how to plan for the future. So, below, let’s look at what the “donut hole” is, how Part D prescription drug coverage has changed, and what you can expect in 2024 and beyond.
The Medicare Part D “Donut Hole” Before 2019
The “donut hole” was a coverage gap that existed in standard Medicare Part D prescription drug plans before 2019. When you hit the “donut hole” phase of your coverage, you had to pay a larger share of your prescription drug costs out of pocket.
It was one of four “phases” in your Medicare Part D coverage, and here's how it typically worked:
- Phase 1: Deductible. You pay all costs for your prescription drugs until you meet your deductible.
- Phase 2: Initial Coverage. After you meet your deductible, you pay a copay or coinsurance, and the plan covers the remaining portion of the costs up to an initial coverage limit.
- Phase 3: “Coverage Gap” or “Donut Hole.” Once you and your Part D plan collectively spend enough to reach the initial coverage limit, you enter the “donut hole.” During this phase, you pay more of your drug costs, and the Part D plan covers a smaller percentage. In the “donut hole,” your out-of-pocket costs could be quite steep, depending on the type of prescription drugs you need.
- Phase 4: Catastrophic Coverage. After your out-of-pocket spending reaches a certain limit, you exit the “donut hole” and enter the catastrophic coverage phase. In this phase, you’re only responsible for a small coinsurance or copayment for the remainder of the year.
Medicare Part D “Donut Hole” Closed in 2020, But Coverage Gap Remains Until 2025
Of course, as we said above, there have been major changes to the Medicare Part D “donut hole” in recent years. Provisions in the Affordable Care Act have been gradually rolling out since 2011, and they ultimately eliminated the classic “donut hole” in 2020. Now, you still enter a coverage gap after the initial coverage phase, but you are responsible for a lower percentage of the cost of your prescription drugs.
However, that’s not the end of the changes.
The Inflation Reduction Act of 2022 includes provisions that will further reduce prescription costs for Medicare Part D beneficiaries. In 2024, the coinsurance requirement in the catastrophic coverage phase will be eliminated, limiting your out-of-pocket costs. In 2025, out-of-pocket costs will be officially capped at $2,000, and the coverage gap phase will be eliminated. Additionally, provisions in the Inflation Reduction Act will extend cost-saving programs for Medicare beneficiaries in 2024, and you’ll have more options to spread your out-of-pocket payments across the year starting in 2025.
Not sure if you’re adequately covered? Learn more in our FAQ, “Do I need additional coverage alongside Medicare?”
Get Answers About Your Medicare Part D Prescription Drug Coverage
Understanding what phase you’re in and when you’ll hit each threshold with your Medicare Part D plan is complicated, and what counts toward your out-of-pocket spending may not match up with what you actually spend. However, if you’re unsure, your Medicare Part D statements will show you your phase, a tally of your total drug costs, and how close you are to the next phase.
It’s also always a good idea to review your Medicare Part D plan with a licensed insurance agent, and that’s especially important as the costs and requirements continue to transition. At Leonard Financial Solutions, we’ll work with you to make sure you have the most current information about your drug coverage and fully understand how these changes affect your prescription spending.