Donut Hole

Medicare plans with prescription drug coverage (Part D) have a coverage gap called a "Donut Hole." This holds true for Medicare Advantage plans also.

♦ This means that after you and your drug plan have spent a certain amount of money for covered drugs (Initial period), you have to pay all costs out-of-pocket for your prescriptions up to the Donut Hole limit.

→ All might not be the best way of describing what you actually pay while in the Donut Hole. You will pay no more than 25% of the price for brand-name and generic drugs. Brand-name drugs are the big ticket items.

Once you have spent up to the yearly limit, your coverage gap ends and Catastrophic coverage kicks in to help pay for covered drugs until the end of year.

♦ For 2024 the Donut Hole starts at $5,030 and ends at $8,000. A $2,970 wide hole.

♦ For 2023 the Donut Hole started at $4,660 and ended at $7,400. A $2,740 wide hole.

♦ For 2022 the Donut Hole started at $4,430 and ended at $7,050. A $2,620 wide hole.

— In 2024, the hole widens another $230 but shifts $370, so you might fall into the hole a little later. But you will have to pay more to get out of the hole.

♦ In 2023, the hole widened $120 but shifted $230.

• In 2022, the hole widened $200 but shifted $200.

The news is all abuzz about the closing of the Donut Hole. This is a little misleading because the hole is still there. It is also getting wider every year.

♦ The Donut Hole will never be eliminated from your Medicare Part D prescription drug plan coverage.

Many people use the word "eliminated," but what is actually happening is the gap between what counts toward getting out of the Donut Hole is shrinking.

Since 2020, both brand-name and generic drugs cost a fixed 25% of retail while you are in the Donut Hole.

Compared to 2019 where brand-name drugs cost a fixed 25% of retail and generics cost 37%.

Both classes of drugs will count in helping to get out of the Donut Hole and into the next stage of drug coverage called Catastrophic Coverage.

After your costs reach the Donut Hole level you will pay no more than 25% for most brand-name drugs and biological drugs purchased during the time you are in the coverage gap. This savings comes from additional manufacturer discounts (70%) and the federal government paying more.

♦ In 2024, you stay in this gap (Donut Hole) until total costs reach $8,000.

It is a bit confusing but 95% of the cost for brand drugs counts toward getting out of the gap - what you pay (25%) plus the manufacture discount (70%) is added toward your total as if it were an expenditure and this helps you to get out of the coverage gap faster.

♦ Generics are treated differently. During the coverage gap you will pay 25% of the price for generic drugs.

For generic drugs, only the amount you pay (25%) will count toward getting you out of the coverage gap.

Deductibles count but drug plan premiums do not count. 75% of any plan's pharmacy dispensing fees paid by the plan also do not count.

♦ CMS is allowing the deductible limit to drift up again in 2024. It can now reach $545 on Part D prescriptions. In 2023, it was $505. In 2022, it was set at $480.

What this means is that Part D plans and Advantage plans have the go ahead to raise their prescription deductible. Most will jack the deductible up close to the maximum limit and most will continue to apply the deductible to higher tier drugs, like brand drugs.

• A few plans are altering their drug formulary to reclassify more expensive generic drugs as tier 3 drugs so that they fall under the deductible. It is critical to review your plan's formulary for next year.

♦ It has been estimated that between 2010 and 2015, Medicare beneficiaries have saved close to $21 billion on prescription drugs because of the gradual closing of the coverage gap.

♦ End result - people using generic drugs will save some money while in the Donut Hole. However, with the Donut Hole widening someone using a lot of prescriptions is likely to pay considerably more than in 2023.

→ Some Medicare drug plans already include coverage in the gap. People with these plans may end up paying less.

• It is best to review your coverage during open enrollment, October 15^th to December 7^th.

Catastrophic coverage

Medicare spending on prescription drugs has grown from $44 billion in 2006 to $216 billion in 2021. Most of that growth has been in the catastrophic phase of coverage, largely driven by prices of specialty drugs.

♦ In 2024, a change will take place. There will no longer be any out-of-pocket costs once a person reaches the catastrophic coverage level($8,000).

In 2019, nearly 1.5 million Medicare Part D enrollees had out-of-pocket spending above the catastrophic threshold.

♦ As new, high-priced drugs come to market and are covered under Medicare Part D, the current requirement to pay a coinsurance of 5% in the catastrophic phase can lead to thousands of dollars in out-of-pocket costs.

Out-of-pocket cap

Adding an out-of-pocket cap to Part D has been proposed by policymakers on both sides of the aisle.

The Inflation Reduction Act of 2022 (IRA) signed on August 16, 2022 by President Biden will set an out-of-pocket cap. It starts in 2024.

• In 2024, it will eliminate the 5% copays while in the catastrophic coverage level.

This is not a big change but it is expected to lower most people's total out-of-pocket cost considerably.

The biggest change takes effect in 2025.

♦ Starting in 2025, there will be what is called a "hard cap" on out-of-pocket spending set at $2,000.

This "hard cap" is not so hard though. Going forward this limit will be allowed to increase based on future increases in Part D costs.

Allowing the "hard cap" to increase year after year is a big disappointment, especially for seniors living on social security and it's limited increases.

Kaiser Family Foundation estimates that 1.4 million Part D enrollees incurred annual out-of-pocket costs for their medications above $2,000 in 2020, averaging $3,335 per person. This includes 1.3 million people who had spending above the catastrophic threshold.

If the $2,000 cap had been in place in 2020 Part D enrollees would have saved on average $1,355.

The IRA also gives the federal government the right to negotiate the prices of a few expensive drugs each year. This won't start until 2026 for Part D drugs and 2028 for Part B drugs.

The IRA limits insulin copays to $35 per month for Medicare Part D beneficiaries, starting in 2023. Senate Republicans refused to allow a broader application to included diabetic patients who are covered by private insurance. So for now, this $35 copay limit applies only to people with Medicare.

• Some in the GOP have threatened to throw a monkey wrench into the works, should they return to power. Some believe drug companies should not have to negotiation prices with the federal government.

The IRA is estimated to reduce the federal deficit by $237 billion over 10 years.

How we finally got there

In 2022, Senate Republicans proposed a $3,100 limit and House Democrats pushed a $2,000 limit. Both plans would require manufacturers to kick in a greater percentage. Currently in the catastrophic phase manufacturers kick in 0%.

Under the Senate plan they would be asked for 14% and under the House plan it would be 30%.

Both proposals pushed the plan sponsors (insurance companies) to cover a much higher percentage. The reasoning is that insurance companies would likely negotiate more aggressively with manufacturers for better prices.

Beneficiaries would benefit greatly but the federal government would also cut its expenditures in the catastrophic phase from the current 80% level down to 20% for brand drugs and 40% for generic drugs.

• Insurance companies were not happy and big bad pharma cried up a storm. They have now turned to promoting conservative candidates who are willing to run ads claiming Medicare recipients have lost something.

The IRA also limits prescription drug plan premium increases to no more than 6% per year for years 2024 through 2029.

No cap for Part B drugs

Capping Part D drugs does not cap drug spending on Part B drugs. These are expensive drugs administered in physician's office, usually by injection. These drugs are subject to 20% coinsurance with no cap.

Some Medicare beneficiaries have retiree benefits or Medigap coverage to help pay their 20% share.

Around 6 million Medicare beneficiaries lack supplemental coverage.

Another 26 million are enrolled in Medicare Advantage plans where they typically face a 20% coinsurance up to their plan's out-of-pocket maximum, which is limited to $8,850 in 2024. Most Medicare Advantage plans are expected to raise their limits to close to the maximum allowed.

And once again, this limit is not fixed but is raised year after year.

♦ Part B drug costs can easily become excessive. For example, the Alzheimer drug (Aducanumab) is priced at $56,000 a year. This means a 20% cost-sharing responsibility would be more than $11,000 a year.

Advocates argue that it is Part B drugs that need immediate relief.

In October 2019, President Trump kicked the hornet's nest by proposing tying some Medicare Part B drug prices to lower prices in other countries. He was immediately attacked by conservative groups and Big Pharma. This never went anywhere.