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If you’ve signed up for Medicare Part D, the prescription drug coverage, or intend to, you need to know about the limitations on coverage you may encounter.

Many plans have a coverage gap, often referred to as the “donut hole.” A Medicare Part D beneficiary enters the donut hole if and when your plan spends a certain amount for drugs that are covered.

(In 2021, you enter the gap after you and your drug plan spend $4,130 on covered medications. The cost can change each year.)

Exempt from the coverage gap are Medicare beneficiaries receiving Extra Help with Part D. The Extra Help program is for those who meet limits on income and other resources. Those who qualify receive assistance with deductibles, premiums, copays and coinsurance.

Medicare with Melissa: Watch this video on 2022 Medicare Donut Hole

Why is there a Donut Hole?

Before we further explore the coverage gap called the Donut Hole, let’s look at how it came to be.

When Congress approved Medicare Part D, legislators included a provision requiring beneficiaries to pay a portion of their drug costs. The idea was to help ensure seniors didn’t overspend on prescription medications.

The plan incorporated a 25% cost sharing of medications below a certain level, and 100% of spending on medications one level above that. However, if and when they passed that next level, Medicare beneficiaries would only have to pay 5% of any additional costs.

That next (middle) level earned the nickname “donut hole” for this reason.

Another aspect of the cost-sharing Congress envisioned, was seniors choosing generic medications where available over brand-name drugs, which are more expensive.

Brand-name medications

While in the donut hole, for brand-name medications, Plan D participants pay no more than 25% of the medication cost and 25% of the dispensing fee.

Discounted rates often apply if you buy your drugs either at a pharmacy or through a mail-order service.

Of the drug’s total cost, 70% is paid for by the manufacturer. Your plan pays 5%. Together, they cover 75%, and you pay 25%.

What you spend and what the drugmaker spends (95%) goes toward your out-of-pocket expenses, which in turn helps you escape the donut hole.

On the other hand, the drug plan’s 5% and 75% of the dispensing fee do not count as out-of-pocket spending.

If your Part D plan has donut hole coverage, you could get a discount once the coverage is applied. This discount will apply to what you still owe, if anything.

Generic medications

If you purchase a generic drug, you’ll pay 25% of the cost, as with a brand-name drug, in the coverage gap.

Medicare will pay the other 75%. However, unlike with brand-name medications, only the amount you contribute adds up to the total needed to emerge from the gap.

Should your drug plan have donut hole coverage, you could get a discount after your plan coverage applies to the price of the medication.

Emerging from the donut hole

So, what counts toward your out-of-pocket expenses?

Your annual deductible, copays, and coinsurance costs; brand name-drug discounts in the coverage gap and what you spend in the gap.

What doesn’t count: Part D plan premiums, pharmacy dispensing fees and what you pay for non-covered medications.

Learn More: Medicare’s Extra Help Program Can Save You Big Time on Prescription Drug Costs

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