The Medicare Gap

The Medicare (Part D) prescription drug coverage gap, also known as the “donut hole,” refers to a period in which a beneficiary surpasses his or her initial benefit amount and is required to pay a higher share of prescription drug costs.

Once the beneficiary’s total drug expenditures surpass a certain threshold, catastrophic coverage kicks in and Medicare, again, picks up some of the tab.

The Affordable Care Act (Obamacare) includes a provision to gradually close this Medicare coverage gap (the donut hole) by 2020. At time of publication, the now defunct American Healthcare Act (Trump Care) did not attempt to cancel this initiative.

It’s also unlikely that any future health care legislation will attempt to cancel the initiative, as the adverse effect on seniors comes with a severe level of political risk.

Even though it’s 2017 and we’re only three years away from eliminating the donut hole completely, it’s still important to know how the donut hole may affect your Medicare Part D coverage, both this year and in the years ahead.

The Donut Hole

Most Medicare Part D recipients reach the donut hole coverage gap once they accumulate $3,700 in total 2017 drug expenses.

Both your out-of-pocket payments (copay and deductible) and Medicare’s payments contribute to this $3,700 benchmark.

Part D “initial coverage” ends here and won’t restart until you qualify for “catastrophic coverage,” which requires a total spend of $8,071.

Note: Not only do your own payments and Medicare’s payments count toward the $8,071 benchmark, but any of your drug costs paid by family members or various charities and government assistance programs will also be included.

The space between initial Part D coverage and catastrophic coverage is the “donut hole” or “coverage gap.”

Under Obamacare, it becomes easier year by year for Part D beneficiaries to afford drugs while inside the donut hole.

Last year (2016), Part D beneficiaries inside the donut hole paid 45% of the cost of brand-name drugs. This year (2017) those beneficiaries will pay 40%. The burden will continue to go down through 2020— 35% in 2018, 30% in 2019, and 25% in 2020.

For generic drugs, beneficiaries inside the donut hole paid 58% in 2016 and will pay 51% this year, 44% in 2018, 37% in 2019, and 25% in 2020.

The closing of the donut hole will also involve expanding the amount of initial part D coverage offered.

In 2015, the initial coverage limit was only $2,960. Last year (2016), the initial coverage limit was $3,310, a few hundred dollars less than 2017’s $3,700 limit. In 2018, presumably, the initial coverage limit will increase again, further narrowing the donut hole.

On the opposite side of the equation, however, the catastrophic coverage threshold increased from $7,062.50 in 2016 to $8,071 in 2017.

Alterations to the catastrophic threshold levels, as well as to initial plan deductibles and benefit amounts, will help Medicare offset some of the costs incurred by shrinking and eventually eliminating the donut hole.

Even though we know what will happen inside the donut hole through 2020 (since it’s been written into law), we don’t yet know exactly how other facets of Part D coverage will be adjusted. In our graphic above, you’ll notice the question marks at either end of the 2018, 2019, and 2020 donuts pertaining to initial and catastrophic coverage.

We don’t yet know exactly how Medicare will take shape in the coming year, but we can (and should) take note of the trends: initial coverage limits will likely increase. Catastrophic coverage thresholds will likely increase as well.

Deductibles will increase.

Copays will also increase in proportion to the rising cost of drugs.

The Bottom Line

The shrinking and eventual elimination of the Medicare Part D donut hole will greatly reduce drug expenses incurred by beneficiaries who exceed their initial coverage amount.

Out-of-pocket expenses, though more even keel across the board, will rise slightly in certain areas, such as deductibles and copays.

This article is part of an ongoing series that explores the future of Medicare. ClydeBank Media does not provide retirement planning services – the information presented here is the opinion of the author and should be considered simplified. Please see our complete financial information disclaimer.

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