What’s the “Donut Hole”?

Most Medicare drug plans have a coverage gap (also called the “donut hole”). This means there’s a temporary limit on what the drug plan will cover for drugs.

The “Donut Hole” or coverage gap begins after you have spent a certain amount on drug coverage. In 2021 that amount is $4,130. That amount will change every year but for 2021 that is the amount that has been declared from the CMS—Centers for Medicare and Medicaid Services.

Once you have reached the Donut Hole or Coverage Gap, you will pay no more than 25% of the cost of your brand-name drugs that are covered. Here is where it gets a bit tricky. Although you only pay 25% of the costs of the name-brand drug, 100% or full price of the drug will count towards your out-of-pocket costs. This 100% number will help you get out of the “donut hole”. Here is an example:

• Of the total cost of the drug, the manufacturer pays 70% to discount the price for you. Then your plan pays 5% of the cost. Together, the manufacturer and plan cover 75% of the cost. You pay 25% of the cost of the drug.

• There’s also a dispensing fee. Your plan pays 75% of the fee, and you pay 25% of the fee.

What the drug plan pays toward the drug cost (5% of the cost) and dispensing fee (75% of the fee) aren’t counted toward your out-of-pocket spending.

Here is an example directly from the Medicare.Gov website:

• Mrs. Anderson reaches the coverage gap in her Medicare drug plan. She goes to her pharmacy to fill a prescription for a covered brand-name drug. The price for the drug is $60, and there’s a $2 dispensing fee that gets added to the cost, making the total price $62. Mrs. Anderson pays 25% of the total cost ($62 x .25 = $15.50). 

• The amount Mrs. Anderson pays ($15.50) plus the manufacturer discount payment of $42 ($60 x .70 = $42) count as out-of-pocket spending. So, $57.50 counts as out-of-pocket spending and helps Mrs. Anderson get out of the coverage gap. The remaining $4.50, which is 5% of the drug cost ($3) and 75% of the dispensing fee ($1.50) paid by the drug plan, doesn’t count toward Mrs. Anderson’s out-of-pocket spending.

This can be confusing, please use a licensed agent to help you choose the plan that is correct for you.