What is the Medicare Donut Hole and How Can You Prepare?
Medicare can feel complicated. It’s easy to get overwhelmed when sorting through pages of requirements and coverage limitations. If you’re on Medicare Part D, you probably already expect to hit an annual cap for your prescription coverage. But the Medicare Coverage Gap, also known as the Medicare donut hole, does something interesting.
Yes, you hit a cap. But eventually, that cap disappears again, and your medications are once again covered. How does this work, and how can you prepare?
What is the Medicare Donut Hole?
Medicare is a federal program designed to provide insurance coverage to retirees. For those who meet lifetime income qualifications1, Medicare Part A is free, covering hospitalization and home health care. Medicare Part B is available for a small fee and covers doctor visits. If you need more coverage, you’ll source Medicare Part C through a private insurer.
Medicare Part D covers pharmaceuticals, and premium costs vary based on your plan benefits. The basic plan monthly premium is $34.50 in 2024. You’ll also pay more if your annual income exceeds $103,000, or $206,000 if married filing jointly.
Once you’ve chosen a plan, it will cover your medication costs up to a certain amount. You may pay a deductible, depending on the plan you choose, but federal law limits2 deductibles to $545.
Medicare has a limit each year, which is known as the Medicare coverage gap or donut hole. Once you hit this cap —$5,030 in overall medication in 2024 — you’ll pay up to 25% of your medication cost until your out-of-pocket spend reaches a certain threshold. At that point, Medicare’s catastrophic coverage3 phase will kick in. With catastrophic coverage, you’ll pay nothing for your medications through the end of the year. In 2024, you’ll have full coverage for qualifying medications once your out-of-pocket spend reaches $8,000.
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How To Prepare for the Medicare Coverage Gap
The Medicare coverage gap doesn’t have to break the bank. You can minimize the impact of coverage limitations with a little advanced planning.
1. Choose the Right Plan
The best thing you can do to avoid the Medicare donut hole is to slow down the time it takes to reach it. This starts with the plan you choose. Each Medicare Part D plan has its own formulary — a fancy word for the list of drugs it covers. Review the list with each plan and make sure your medications are covered. You may need to contact your provider to see if you can substitute some of your current medications for similar, covered versions.
While you’re reviewing plans, also pay attention to the coverage tiers. Drugs in higher tiers will cost more out-of-pocket than drugs in the lower tiers. You may find some of your medications are in the highest tiers, but if your provider will exchange them for a generic version, you can lower your cost.
If one of your medications is at a higher tier and you can’t switch it, you can see if you qualify for an exception. You, your representative or your prescriber can file an exception request4. This will either move a drug to a lower tier or add it to your list of qualifying prescriptions. Exceptions are only granted when a medication is deemed medically necessary for the patient.
2. Consider a Medicare Advantage Plan
Medicare isn’t the only source of insurance once you reach retirement age. You can sign up for a Medicare Advantage plan that covers some of your out-of-pocket expenses. In addition to helping pay for medical visits, Medicare Advantage can also supplement your Part D coverage, taking care of some of your pharmaceutical drug costs.
“It’s important that you do your research or get help from a professional with this,” said Doug Carey, a chartered financial analyst (CFA) and president and owner of WealthTrace5. “There are a lot of plans available, and some of them will not cover what the Medicare recipient needs.”
3. Rely on Generics
Many popular medications have generic versions that cost 80-85% less than name brand medications without sacrificing potency. But your medical providers won’t always prescribe the generic versions. By merely switching to the generic version on as many medications as possible, you’ll slow down the time it takes to reach the coverage limit. Once you do reach it, you’ll see lower out-of-pocket costs on all your medications, keeping costs low.
“Many times there’s another medication option that’s similar enough to your existing prescription, but it comes at a lower price,” Carey said.
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4. Apply for Assistance
Medicare isn’t the only way to keep medical costs low in retirement. Just as Medicare helps older adults with health care bills, programs are available to boost what Medicare can do. Some of that assistance comes from outside the federal government.
“There are pharmaceutical assistance programs that can help,” Carey said. “These programs are usually offered by states6, pharmaceutical companies7 and non-profit organizations8. They can help lower the costs of prescription drugs.”
Whether you’ve reached the Medicare coverage gap or not, if your income is less than or equal to 150% of the federal poverty level, you can apply for a Low Income Subsidy9. If you qualify, you’ll have full coverage for your Part D premiums and expenses with no deductibles. The Low Income Subsidy keeps you out of the coverage gap Medicare applies to other program participants.
Lastly, don’t forget to shop around for the best prices on prescription medications. Apps like GoodRX and SingleCare will show you which pharmacy has the best prices. If a coupon is available, you’ll have to choose between going through insurance or paying out of pocket, but it can be a great way to handle the donut hole and Medicare out-of-pocket costs.
The Medicare coverage gap can increase your medical expenses in retirement, but it is avoidable. If you’ve tried the above tips and feel stuck, talk to your prescribing physician or pharmacist about options to lower your costs. They might know of local programs or discounts that can make things more affordable for you.
Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.
Sources:
1.Lifetime Income Qualifications
3. Medicare’s catastrophic coverage
5. WealthTrace
