When first implemented in 2006, Medicare Part D plans had a built-in gap in coverage. During this coverage gap (aka, “Donut Hole”) drug plans paid nothing toward the cost of your medications. But that’s no longer the case.
In 2012, the Affordable Care Act (ACA) implemented a phase-in of discounts for beneficiaries in the Coverage Gap phase of their plan. To demonstrate the rapid change, in 2018, those in the Donut Hole paid 35% of the cost of brand-name drugs and 44% for generics. In 2020, the final year of the phase-in, beneficiaries pay 25% of the cost for any brand-name or generic medication.
If you thought that the Coverage Gap was going to be totally eliminated from 2020 Medicare Part D plans, you’re not alone. The Coverage Gap phase, which acts as a second deductible, is a design characteristic of the Part D program. The key to understanding the Part D Donut Hole going forward is to look at the four phases of Medicare prescription drug plans:
- Initial Deductible: In this phase, you pay 100% of all costs until spending reaches the annual standard deductible set by your plan.
- Initial Coverage Limit (ICL): In this phase, you and your plan share costs until spending reached the annual ICL, which adjusts each year.
- Coverage Gap (Donut Hole): In this phase, you pay 25% of the retail costs of all generic and brand name medications.
- Catastrophic Coverage: In this phase, you pay up to $3.60 for all generic/preferred multi-source medications and up to $8.95 for all others.
What makes Part D difficult to understand is the difference between what you pay and how the Centers for Medicare and Medicaid Services (CMS) does its accounting on drug spending. Across all phases, CMS looks at the total retail costs of drugs to determine which phase of your Part D plan you are in.
2020 Part D Initial Deductible
The maximum Part D Deductible will increase by $20 in 2020 to $435. That’s a $75 increase in just five years.
The Deductible is the amount you pay at the pharmacy before your plan begins paying its share. If your monthly prescriptions cost $180, and your plan’s Deductible is $435, your plan won’t help pay for your medications until March (month 3).
2020 Part D Initial Coverage Limit (ICL)
The Initial Coverage Limit increased $200 in 2020 to $4,020. The ICL has increased $710 in the past five years. You should expect to incur $896.25 in out-of-pocket costs after your Deductible and until the ICL is reached. This is your portion of the costs. Your Part D plan picks up the rest.
ICL is an important figure, as it determines when you will fall into the Donut Hole. After your Deductible is met, you pay your share of covered costs up to the total prescription costs meeting the Initial Coverage Limit. If you don’t have regular prescriptions or your medications are mostly generics, you may never reach the annual ICL.
2020 Part D Coverage Gap (Donut Hole)
The key to understanding the Coverage Gap phase, and most importantly how long you’ll be in the Donut Hole, is to understand the Part D Total Out of Pocket Threshold (TrOOP). Catastrophic coverage begins after your prescription spending reaches the TrOOP threshold of $6,350. In other words, the Donut Hole is between the ICL ($4,020) and TrOOP ($6,350), or $2,330 of total drug costs.
While in the Coverage Gap you receive a 25% discount on all medications. A little more than 90% of total brand name medication costs and approximately 10% of generic drug costs are applied to your TrOOP. So the actual amount you spend out-of-pocket is far less than the difference between ICL and TrOOP.
While not gone, coverage in the Donut Hole is now easier to understand, as both brand-name and generic medications are both discounted 75%. This is the end of discount adjustment in this phase.
2020 Part D Catastrophic Coverage Benefit
As with most components of Part D coverage, catastrophic coverage costs are increasing. In this phase, you’ll pay $3.60 for your generic drugs, up from $2.95 five years ago, and $8.95 for your brand name medications, up from $7.40 five years ago. This represents the lowest rate of increase across all of the coverage phases.
2020 Part D Premiums
The average monthly premium for Medicare Part D prescription drug plans will decrease from $31.83 in 2019 to $30 in 2020. This is the third straight year that the average cost of Part D premiums will decline.
The actual amount you will pay in 2020 will vary depending on which prescription drugs you take, which plan you choose, and where you live. How much you pay out of pocket for your medication also depends on the deductible, copays, and the pharmacy you use. These all play into your out-of-pocket costs.
Future Part D Cost Reductions
The Trump administration recently dropped the most significant portion of its plan to reduce drug prices, even as CMS announces lower costs under Part D. Specifically, the Department of Health and Human Services will no longer pursue a rule prohibiting the payment of certain rebates on drugs in Medicare Part D plans. The idea was to target pharmacy benefit managers (middlemen), whose negotiations with pharmaceutical companies and insurers influence what Medicare beneficiaries pay for their drugs.
When first announced, drugmakers supported the concept, and some drug pricing experts said it could help reduce prices. However, the Trump administration scrapped the plan after getting feedback from the public and stakeholders. Since the announcement to drop the price reduction plan, President Trump has hinted at a “most favored nation” clause that would tie American drug prices to what other countries pay. Additional details about how that would work or when it would roll out have not been released.