What Happens to the Medicare Part D Donut Hole in 2017?

Spilled pills from prescription bottle representing prescription drug coverage gao as known as Donut Hole

The majority of Medicare Part D (prescription drug) plans have a coverage gap, also known as the “donut hole.” In plain language, this means there will be a temporary limit on what your plan pays for your prescription medication. To reach the donut hole, you (and your drug plan) have to spend a certain amount on covered medicines in a calendar year. In 2017, you don’t reach the donut hole until you spend $3,700. The amount will change annually, and the goal is to close the coverage gap by 2020.

How Did the Donut Hole Appear?

The purpose of Medicare Part D is to help seniors cover the cost of prescription medication. Upon its introduction, Part D paid all costs up to a certain point; then, the recipient paid the rest. Initially, seniors were benefiting from affordable medication. Over time, the spiraling costs of the pharmaceutical industry meant that Part D coverage could no longer provide coverage in the same manner.

The amount paid by Part D and the amount retirees had to pay started to grow into what we now call the donut hole. This gap grew ever larger until the advent of the Affordable Care Act (ACA) in 2010. The implementation of a new billing system reduced the level of wasteful spending in Medicare. The government decided to use some of this money to close the coverage gap.

What Happens in 2017?

As per the government’s plan, the donut hole has closed slightly in 2017 compared to the previous year. In 2016, the coverage gap began at $3,314, but it has now increased to $3,700. This is good news because your plan will pay more towards the cost of your prescription medication before you reach the donut hole.

In addition, the percentage you have to pay for your drugs while in the donut hole has decreased in 2017. In 2016, seniors had to pay 45 percent of the cost of brand name drugs and 58 percent of the cost of generic drugs. In 2017, you will pay 40 percent of the cost of brand name medication and 51 percent of the expense of generic medication. By 2020, you will only have to pay 25 percent of the price of both brand name and generic drugs in the donut hole.

In 2017, 95 percent of the price of brand name drugs will count towards your out-of-pocket costs. The plan pays 5 percent of the drug cost and 55 percent of the dispensing fee; neither figure counts toward your out-of-pocket spending.

Here are a couple of examples of donut hole costs in action using brand name and generic drugs.

Brand Name

John has reached the donut hole in his Part D plan. His prescription for a brand name drug costs $120, and there is a $4 dispensing fee added to the cost. John must pay 40% of the price of the medication and dispensing fee, which is $49.60 (124 x 0.4). Exactly $109.60 of the total cost goes toward John’s out-of-pocket spending ($49.60 plus the $60 manufacturer’s discount).

Generic

Mary has reached the coverage gap in her Part D plan. Her prescription for a generic drug costs $40 plus a $4 dispensing fee. She will pay 51% of the total price, which is $22.44 (44 x 0.51). All of the $22.44 counts towards her out-of-pocket costs.

Once your out-of-pocket spending reaches $4,950 in 2017, you will leave the donut hole and go straight to catastrophic coverage. At this stage, you pay either 5% of the cost of brand name drugs or $8.25 per prescription, whichever is higher. You pay 5% of the cost of generic drugs or $3.30 per prescription, whichever is higher.

Final Words

The hope is that the new government will continue the path towards eliminating the donut hole by 2020. Note that the following costs contribute toward your out-of-pocket spending:

  • The manufacturer’s discount received in the donut hole
  • Your annual deductible, copayments, and coinsurance
  • What you pay when in the donut hole

The following costs don’t count towards your out-of-pocket spending:

  • The pharmacy dispensing fee
  • The amount you pay for drugs not covered by your plan
  • The Part D premium

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