What Is the Medicare Donut Hole?

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Medicare Part A and B are sometimes called original Medicare. They cover hospital stays, doctor bills, preventive care and outpatient treatment, but not prescriptions. Medicare Part D, established later, pays for drug prescriptions. The "donut hole" is a gap in Part D coverage that can leave seniors struggling to pay prescription costs. Changes to health-care laws may shrink the hole.

Plan D

Part D consists of a variety of prescription drug plans (PDPs) run by private companies in conjunction with Medicare. PDPs add drug coverage to original Medicare, as well as other programs such as Medicare savings accounts. Each PDP charges you a premium, and each has a different formulary, which is a list of drugs the plan will cover. You can review plans online at the Medicare.gov website. Choose the plan that suits you best or, if you prefer, skip enrolling in plan D altogether.

The Donut Hole

Medicare introduced Part D in 2006. Under the initial rules, a senior who signed up with a PDP paid all drug costs until she met the plan's deductible. After that, Medicare kicked in. The PDP paid 75 percent of covered drugs. The donut hole appeared if drug costs rose above an annual dollar limit. Above the limit, a senior paid 100 percent of prescription costs until she hit a second limit on out-of-pocket spending. Medicare then kicked in and typically paid 95 percent of drug costs. The limits rise over time, based on inflation.

Plugging the Hole

According to Medicare's website, starting in 2015 Part D users only pay 45 percent of the cost of name-brand drugs after they enter the donut hole. However, 95 percent of the cost counts toward the out-of-pocket limit. For generics, Medicare in 2015 pays 35 percent of the cost in the donut hole, increasing to 75 percent by 2020. Only your actual spending on generics counts towards the out-of-pocket limit. The health care law that imposes these changes has been challenged in court, but at time of writing was still valid.

Other Insurance

If you have better coverage under another plan, you can stick with it instead of enrolling in Part D. Medicare users who sign up for Part C typically get Part D coverage automatically. Part C consists of Medicare Advantage Plans. Private companies offer these plans to provide the same services you get through Parts A and B. If you sign up for Part C, you also get to enroll in a Part D PDP as well, if you choose.