It’s something Medicare beneficiaries often have trouble understanding.
I’m talking about the prescription drug coverage gap, also known as the “doughnut hole” or “donut hole.”
The coverage gap was part of the original Part D prescription drug program, but it has been changed several times since its inception in the 2000s.
There were additional changes that took effect in 2019, and it appears the current set up will last for a while, each year, the coverage gap starts fresh.
Let’s begin with the policy deductible.
Not all policies have deductibles.
But if a policy chooses to have a deductible, it cannot exceed a certain ceiling. The ceiling amount is $435 for 2020 and will be $445 in 2021.
Once you exceed the deductible, prescription drugs that are covered by the policy cost you only the copayment or per-prescription deductible amount.
The coverage gap begins after you and the plan together have spent more than $4,020 in 2020 on covered drugs.
The gap will start at $4,130 in 2021.
When you’re in the coverage gap, you pay no more than 25% of the cost of covered brand-name prescription drugs in 2020.
Some plans let you pay a lower percentage in the coverage gap.
The manufacturer pays 70%, and the plan pays 5%.
Your 25% of the cost and the manufacturer’s 70% both count toward your total out-of-pocket spending to determine when you exit the coverage gap, though you are paying no more than 25%.
In addition, there is a dispensing fee.
You pay 25% of this fee. Only your share of the dispensing fee counts toward your out-of-pocket costs for the year.
You’ll also pay 25% of the price of generic drugs in the coverage gap, and Medicare will pay 75%.
For generic drugs, only the amount you pay counts toward your out-of-pocket costs.
Prescription drugs are of course an increasingly expensive necessity for many retirees. In next week’s issue of Retirement Watch Weekly, I’ll explain in detail how you can avoid paying too much for them.
After you’ve spent $6,350 out of pocket for prescription drugs in 2020 ($6,550 in 2021), you’re out of the coverage gap and under what Medicare calls catastrophic coverage.
In this category, you pay only a small deductible or coinsurance amount for each prescription for the rest of the year, no matter how much your medications cost.
At the beginning of the next year, you start over.
As an estimate, you had to purchase prescriptions with a retail cost of about $9,719.38 in 2020 to enter catastrophic coverage and will have to purchase about $10,048.39 of prescriptions in 2021.
But the exact amounts depend on your mix of brand-name and generic drugs purchased.
If your prescription are all generics, the total retail value of your prescriptions must exceed $24,000 to enter catastrophic coverage.
Here’s an example:
Suppose you reach the coverage gap in your plan and have a prescription filled for a brand-name drug.
The price for the prescription is $60, and there’s a $2 dispensing fee for a total cost of $62. You pay 25% of the total price, or $15.50.
The amount you pay plus the manufacturer’s 70% of the medication ($42) count as your out-of-pocket spending. That’s $57.50 of out-of-pocket spending for this prescription.
Let’s say you fill a generic prescription for $20 with a $2 dispensing fee. You pay 25% of the prescription cost and 25% of the dispensing fee for a total of $5.50.
That’s your total out-of-pocket spending on that prescription.
The amounts for the annual deductible, the start of the coverage gap and the beginning of catastrophic coverage are adjusted for inflation each year.
The next year’s amounts will be announced late this year.
Understanding the coverage gap is important, because different plans have different annual deductibles and have you pay different percentage of costs when you are in the coverage gap.