What a confusing topic this is! For anyone with a prescription drug plan that enters into the ‘donut hole’ or coverage gap, it’s difficult to know what it will take to get out of it! So let’s put some thought into this, let’s use some examples and maybe then will we actually understand how it works. So first we need to explain each stage, how much money one pays for drugs before, during and after the donut hole.
So let’s break things down, according to Medicare.gov there are four stages of drug coverage.
1 – Deductible
2 – Initial Coverage
3 – Coverage Gap (Donut hole)
4 – Catastrophic
Basically this means that your drug cost will differ depending on what stage you are in. As one would assume you normally start with stage 1 Deductible. But what does that mean to me? The answer depends on several things, a) what drugs I take b) what deductible my plan has and c) how much do my medications cost. All drug plans group their medications into tiers, usually tiers 1-5 with tier 1 being less expensive to tier 5 being VERY expensive. So one will always need to look at the list of drugs that are covered in their plan, called a formulary, to see what tier their drug is in (note: a medication tier placement could differ from one company to another).
Deductible means that I will have to pay that dollar amount before the health plan starts helping me to pay for the medication.
Deductible example: In January Mrs. Smith got prescribed a drug she saw advertised on TV (those are usually expensive), which costs $500 for a months supply, yikes! She looked into her plan benefits and saw her plan has a $175 Rx deductible. This means that her plan expects her to pay $175 out of the $500 before they start helping her with the rest of the cost.
At the Pharmacy Mrs. Smith pays $175. So now the prescription deductible has been met (for the remainder of the year) and Mrs. Smith moves into the Initial Coverage stage. But since there are still $325 left to cover the entire cost of the drug we need to know what the plan will cover.
In this stage your cost will depend on the tier your medication falls under, usually a co-pay (e.g. $20) or a percentage (e.g. 20%). So let’s go back to Mrs. Smith example but let’s add tier cost to know what she must pay from the remaining $325.
- 30 day supply:
- Tier 1 – $1 co-pay
- Tier 2 – $4 co-pay
- Tier 3 – $40 co-pay
- Tier 4 – $90 co-pay after deductible
- Tier 5 – 35% after deductible
- Deductible of $175 only applies for tier 4 & 5.
Since the medication is very expensive we will say that it’s a tier 4 drug therefore on top of having to pay the $175 deductible Mrs. Smith will have to pay an additional $90 co-pay as her portion of the remaining cost. Her prescription plan will pay the remaining $235.
So let’s recap, the medication total cost was $500. Since it was a tier 4 drug the deductible of $175 had to be paid, out of the remaining $325 Mrs. Smith had to pay an additional $90 as her co-pay and the plan paid the remaining $235. So in total Mrs. Smith paid $265.
Let’s take it into month two, Mrs. Smith goes to refill this very same drug in February. The total drug is still $500 but since she already paid her yearly deductible last month, she’s only has to pay her $90 co-pay and the plan pays the remaining $410.
So what about the other 2 stages, when do they come into play? Let’s add one additional detail to the Initial Coverage stage. Once the total cost of the drugs being filled reaches a set amount then Mrs. Smith would move into the next stage. For 2017 the Initial Coverage limit for all prescription drug plans is $3700. So that means that Mrs. Smith will continue to pay her $90 co-pay until the total drug cost of $500 adds up to $3700, which means she’ll only accumulate it as she refills her medication.
So assuming Mrs. Smith only takes this one very expensive drug, it’ll take 8 fills to reach a total drug cost of $3700, it’ll actually surpass it by $300 but the point is Mrs. Smith won’t enter the Donut Hole until August. What accumulates to the $3700 Initial Coverage Limit is not just what Mrs. Smith paid as her cost but also what her prescription plan paid.
Coverage Gap (Donut Hole)
In 2017 when you enter the Donut Hole this is what you must pay: Generic drugs you’ll pay 51% of the drug cost and 40% of the brand name drug cost.
So in Mrs. Smith case if she were to get her medication filled in September she will have to pay 40% of $500 which equals to $200. Who pays the remainder? The drug manufacturer pays 50% and her plan will pay the remainder 10%.
When does one get out of the donut hole and what contributes to the maximum one has to pay in this stage? Let’s do a month to month review so far of Mrs. Smith utilization.
- January – Mrs. Smith paid $265 (deductible + co-pay). The plan paid $265. Her total out-of-pocket is $265. Total medication cost $500.
- February – Mrs. Smith paid $90 co-pay. The plan paid $410. So her total out-of-pocket has been $355. Total medication cost $1000.
- March – Mrs. Smith paid $90 co-pay. The plan paid $410. So her total out-of-pocket has been $445. Total medication cost $1500.
- April thru August – Mrs. Smith pays $90 each month as co-pay and the plan pays $410. So her total out-of-pocket $895. The total medication cost has now reached $4,000. At this stage Mrs. Smith will enter the Donut Hole because the total cost of the drug has surpassed the $3700 Initial Coverage limit.
- September – Mrs. Smith now pays $200, (40% of the total drug cost) on top of that the manufacturer covers 50% of the drug cost. What Mrs. Smith paid and the manufacturer discount accumulates towards her total out-of-pocket, that is $200+$250=$450. So for September her total out-of-pocket has reached $1345. The total drug cost has reached $4500.
- October-December – Mrs. Smith pays $200 each month and the manufacturer pays $250. At the end of the year her total out-of-pocket reaches $2695. The total drug cost is $6000.
So in this scenario Mrs. Smith doesn’t get out of her Donut Hole because her total out-of-pocket never reached $4950. The total drug cost changes you from the Initial stage into the donut whole but doesn’t affect when you enter the Catastrophic stage.
Additional information while in Donut Hole:
- There is no manufacturer discount for generics, only Mrs. Smith cost (51% of the drug price) will count towards her total out-of-pocket cost.
When someone enters this stage, which requires that their total out-of-pocket reach $4950, the cost of generics will be the greater of $3.30 or 5% of drug cost. For brand name it’ll be the greater of $8.25 or 5% of total drug cost. Anyone that enters this stage will remain on it for the rest of the year.
Note that individuals who get Extra Help or Low Income Subsidy will have a different cost share as described above. For example if they get 100% Extra Help they are automatically moved into Catastrophic Stage, they don’t have to worry about the Deductible, Initial Coverage stage or Donut Hole. Need help figuring out if you qualify for Extra Help? Don’t hesitate to reach out to me.
We’ve gone through the different stages and explained what a member must pay in each stage. Most importantly we clarified what goes towards your Donut Hole. Once the total drug cost accumulates to $3700 one enters the Donut Hole but to get out of it the members total out-of-pocket cost much reach $4950. In the Coverage Gap the members cost share of 51% for generics and 40% for brand drugs count towards their total out-of-pocket and as a ‘bonus’ the manufacturer 50% discount amount also counts.
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