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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Donut Hole

What it is:

The donut hole is a situation that occurs as part of Medicare’s Part D prescription coverage. 

How it works (Example):

Let’s assume that John Doe is enrolled in Medicare. He pays his out-of-pocket premiums for his Part D prescription coverage all year. He also pays for all of his prescription costs until he meets the annual deductible, say $310 (that was the 2010 limit).

After John Doe’s out-of-pocket expenses reach that $350 deductible, Medicare begins to pay 75% of any subsequent prescription costs that year. John Doe pays the other 25%. 

Once Medicare and John Doe spend a total of $2,800 from that point, John Doe reaches the donut hole. He is now responsible for the full cost of his prescriptions until he has spent $4,550. 

After that point, Medicare coverage kicks back in and covers approximately 95% of the cost of drugs. John Doe pays the other 5%.

Why it Matters:

The donut hole requires Medicare beneficiaries to pay up to several thousand dollars for prescription drugs. Beneficiaries can purchase supplemental plans exist that mitigate the gap in coverage, but those plans entail premiums.

The Patient Protection and Affordable Care Act makes some changes to the donut hole, including offering a one-time $250 rebate check and discounts on drugs while in the donut hole. The legislation aims to end the donut hole by 2020.

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