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The Medicare Part D Coverage Gap “Secret” That Smart Seniors Must Know

Medicare Prescription Drug PlansFor most people turning 65, the Coverage Gap (or ‘Donut Hole”) rules in their Medicare Prescription Drug Plans are confusing.

Many of our clients admit to us that they have never reviewed these rules, and relied mostly on sales materials.

Well,  we will review the Coverage Gap the right way and reveal some facts that may save you some money and perhaps a few headaches.

 

Most Medicare Prescription 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.

Not everyone will enter the coverage gap. The coverage gap begins after you and your drug plan have spent a certain amount for covered drugs. In 2017, once you and your plan have spent $3700 on covered drugs (the combined amount plus your deductible), you’re in the coverage gap. This amount may change each year. Also, people with Medicare who get Extra Help paying Part D costs won’t enter the coverage gap.

Once your out-of-pocket expenses while in the coverage gap, as defined by Medicare and explained below, reach $4,950, you enter the Catastrophic Coverage phase. In this phase, you would pay just a small copay or coinsurance amount for the rest of the plan year.

Medicare Part D Donut Hole Explained

Once you reach the coverage gap in 2017, you’ll pay 40% of the plan’s cost for covered brand-name prescription drugs. You get these savings if you buy your prescriptions at a pharmacy or order them through the mail. The discount will come off of the price that your plans has set with the pharmacy for that specific drug.

Although you’ll only pay 40% of the price for the brand-name drug, the entire price (including the discount the drug company pays) will count as out-of-pocket costs which will help you get out of the coverage gap.

This is a surprise, although a pleasant one, for most seniors. And I might add, a surprise to many brokers and agents.

Example

Helen 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.  Helen pays 40% of the plan’s cost for the drug and dispensing fee ($62 x .40 = $24.80).

The amount Helen pays ($24.80) plus the manufacturer discount payment ($30.00) count as out-of-pocket spending. So, $54.80 counts as out-of-pocket spending and helps Helen get out of the coverage gap. The remaining $7.20, which is 10% of the drug cost and 60% of the dispensing fee paid by the drug plan, doesn’t count toward Helen’s out-of-pocket spending.

The coverage for generic drugs works differently from the discount for brand-name drugs.  In 2017, Medicare will pay 51% of the price for generic drugs during the coverage gap.  You’ll pay the remaining 49% of the price.

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

Example

Bill reaches the coverage gap in his Medicare drug plan. He goes to his pharmacy to fill a prescription for a covered generic drug.

The price for the drug is $20, and there’s a $2 dispensing fee that gets added to the cost. Bill will pay 49% of the plan’s cost for the drug and dispensing fee ($22 x .49 = $10.78).

The $10.78  amount he pays will be counted as out-of-pocket spending to help him get out of the coverage gap.

Items that count towards the coverage gap (donut hole)

  • Your yearly deductible, coinsurance, and copayments
  • The discount you get on brand-name drugs in the coverage gap
  • What you pay in the coverage gap

Items that don’t count towards the coverage gap (donut hole)

  • The drug plan premium
  • Pharmacy dispensing fee
  • What you pay for drugs that aren’t covered.

So, what can we take away from this donut hole explanation?

First, if you are in the donut hole,  Medicare Prescription Drug Plans not only credit what you pay, but also what the insurance company and drug manufacturer contribute, as a way get you through the donut hole faster and minimize your out-of-pocket expenses.

But this is true only for your brand name drugs.

This is fine and good, but if you are taking mostly generic drugs, only the amount you pay is credited toward that $4.950. So, if you enter the donut hole and are using  covered generic drugs, you will pay 72% of your drug costs out-of-pocket.

Since generic drugs are generally less expensive than name brand drugs, you may never reach the $4,950 threshold in order to get to the Catastrophic Coverage phase

This means you would most likely pay for 72% of your drug costs for the rest of the plan year.

The Donut Hole “Secret”

The donut hole, or coverage gap, “secret” is really more of an advance planning “heads up”:

What many seniors do if they see that they will be close to entering the donut hole is to delay as much as possible reaching the initial $2,850 limit.

There are a couple of ways to accomplish this:

  • Order your drugs by mail. Many plans have a greatly reduced or even $0 copay if you order a three month supply by mail using their preferred supplier. This alone could keep you out of the donut hole for the entire year.
  • Don’t use your plan to pay.  If you are very close to entering the donut hole and using your plan to pay for a one or two month supply of a generic drug will put you over that $2,850 threshold, it may be wise to pay for that drug out of your own pocket.  Some “Big Box” chains offer very low pricing for many generic drugs.

Closing the Donut Hole

This “heads up” planning may not be as much of an issue in the future.

The Affordable Care Act, also known as health reform, closes the Part D donut hole.

Health reform plans to phase out the donut hole by decreasing your share of drug costs during the donut hole until it reaches 25% in 2020 for both brand-name and generic drugs.  The phase-out works differently for brand-name and generic drugs, but your share for both should be 25%

 

For more complete information on Medicare Prescription Drug Plans, Medicare Advantage Plans, or Medicare supplements, give our office a call at 415-999-5071 or drop us a line.

 

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