Donut Hole

♦ For 2025 the Donut Hole is gone. Not filled in with jelly. Just gone. This is the result of the Inflation Reduction Act of 2022 (IRA) signed on August 16, 2022 by President Biden.

♦ Once you hit the out-of-pocket maximum ($2,400 in year 2027), you have exactly zero more costs ($0 copays) for the rest of the year.

The Inflation Reduction Act of 2022 includes several provisions to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government.

• This legislation passed with strong strong bipartisan and public support. It helps to address some of the high cost of rising drug prices.

The CBO estimates that the drug pricing provisions in the law will reduce the federal deficit by $237 billion over 10 years (2022-2031).

• President Donald Trump’s current policy agenda for Medicare emphasizes deregulation, market competition, and reducing federal spending. Many critics and regional leaders warn there will likely be an increase out-of-pocket plan premiums for millions of seniors.

The administration says Medicare can now negotiate "most-favored-nation" pricing deals directly with pharmaceutical manufacturers. This plays well on TV but Medicare itself does not use "most-favored-nation" (MFN) math for its standard drug price negotiations.

• Under the ongoing Medicare Drug Price Negotiation Program established by Congress, the Centers for Medicare & Medicaid Services (CMS) works directly with manufacturers to set a "Maximum Fair Price" (MFP) based on domestic criteria like research costs, production costs, and patent life—not by pegging prices to what foreign countries pay

Signed into law through the budget reconciliation process, Trump's OBBB act restricts eligibility parameters.

• The law eliminates Medicare eligibility for specific non-citizen groups, including refugees, asylum seekers, and individuals holding Temporary Protected Status (TPS).

Now that the Republicans have full control of the government, drug companies are hurrying to setup appointments to push for reversing many of the IRA's provisions that reduce their profits.

We will have to wait and see how this plays out. But as a rule, once something is given to people and they like it (lower drug costs) it is difficult to take it away. Remember how the repeal the ACA went down the last time.

Prescription deductible to increase

In 2027, the maximum prescription deductible for Medicare (Part D) will be $700.

This means that you will need to pay the first $700 of your prescription drug costs before your Medicare drug plan starts covering a portion.

There are a variety of Advantage plans but most will push their deductible up to the max and tinker with the generic drugs.

♦ There will be plans that reclassify some more expensive generic drugs as tier 3 drugs so they fall under the deductible. It is critical to review your plan's prescription drug list every year during open enrollment.

Most plans apply the deductible toward brand drugs and some expensive generics. If you only take lower cost generics, you may not be affected by this increase in prescription deductible.

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Donut Hole - Gone

The donut hole will continue to be explained below for reference and a bit of history. And so people do not forget how things used to be.

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

♦ What this means is 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.

♦ Starting in 2025, there was what is called a "hard cap" on out-of-pocket spending set at $2,000. This increases some each year. It will be $2,400 for year 2027.

Historiical Info

♦ For 2024 the Donut Hole started at $5,030 and ended 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 was always all about the closing of the Donut Hole. This was a little misleading because the hole was still there. It was also getting wider every year.

♦ The Donut Hole was never going to be eliminated from your Medicare Part D prescription drug plan coverage unless a new law was written to make it happen. That law was the Inflation Reduction Act of 2022 (IRA).

Many people used the word "eliminated," but what was actually happening was that the gap between what counts toward getting out of the Donut Hole was 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%.

% Paid while in Donut Hole

Year	Brand	Generic
2018	35%	44%
2019	25%	37%
2020	25%	25%
2021	25%	25%
2022	25%	25%

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

After your costs reached the Donut Hole level you will paid 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 stayed in this gap (Donut Hole) until total costs reached $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 has been allowing the deductible limit to drift up every year. And this is continuing to happen. In 2027 it will reach $700 on Part D prescriptions.

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.

♦ The cumulative savings passed $26.8 billion by the time the Affordable Care Act's (ACA) gradual closing of the "donut hole" was fully completed in 2020.

It has been estimated that for the millions of seniors who take high-cost specialty drugs for cancer or autoimmune diseases, this structural overhaul (capping out-of-pocket costs) is saving them an average of $3,000 to $5,000 per person annually compared to what they would have paid under the old system.

♦ End result - people using generic drugs saved some money while in the Donut Hole. However, with the Donut Hole widening someone using a lot of prescriptions was likely to pay considerably more than in 2023. It was like one of those "dog chasing its tail" moments.

→ Some Medicare drug plans were already including coverage in the gap. People with those plans ended up paying less.

Now with a hard-cap in place things are more predictable. Still ...

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

Catastrophic coverage

Total Medicare Part D gross prescription drug spending has reached $276 billion. Most of that growth has been in the catastrophic phase of coverage, largely driven by prices of specialty drugs.

♦ The catastrophic coverage phase still exists, but the rules have changed completely so you no longer pay anything.

Today, the catastrophic phase functions as a true, hard out-of-pocket maximum limit.

♦ Because the out-of-pocket maximum adjusts annually for inflation, the threshold to trigger catastrophic coverage will increase to $2,400 starting January 1, 2027

Out-of-pocket cap

Adding an out-of-pocket cap to Part D had 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 set an out-of-pocket cap. It started in 2025.

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

This was not a big change but it lowered most people's total out-of-pocket cost considerably.

The biggest change toke effect in 2025.

♦ Starting in 2025, there was 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 $9,350 in 2025. 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.

♦ President Trump is still actively pursuing international price benchmarking, and the effort has escalated beyond a mere proposal.

Under his current legislative and regulatory frameworks, the administration has doubled down on what it calls the "Most-Favored-Nation" (MFN) drug pricing model to force U.S. drug prices to match the lower rates paid in other wealthy, developed nations.

Rather than abandoning the 2019 "hornet's nest" proposal, the administration has implemented a dual approach to aggressively lock this framework into the healthcare system. They are calling it Globe Model & Guard Model.

Both of these models are very complicated and far beyond the scope of this article. Drug companies and manufacturing lobbyists are actively resisting these models.

Several pharmaceutical companies have signed voluntary agreements, but then turned around an raised prices on many brand-named drugs. So, what's up!