- May 22, 2020
Ever heard of the Medicare Part D “Donut Hole?” The “donut hole” is a term describing a huge gap in prescription drug coverage in Medicare Part D. Today, we’re going to teach you all about the Medicare Part D “Donut Hole,” plus show you how to avoid it. Let’s get started.
Four Stages of Medicare Plans
In order to understand the “donut hole,” you first have to understand that all Medicare drug plans have four different stages. Each stage represents a different out-of-pocket cost, meaning your out-of-pocket expenses could change four different times in the same year. However, every January, all Medicare drug plans reset to stage one.
Stage one is called the deductible stage, stage two is the initial coverage stage, stage three is the coverage gap (aka the donut hole), and stage four is called catastrophic coverage.
Let’s take a closer look at each of these stages.
This year, every drug plan with a deductible has a deductible of $435. This just simply means that when you pick up your prescriptions and pay your copay, that copay amount is applied to your yearly deductible amount. Now, the truth is probably 80 percent of all people that are on drug plans will never reach their deductible. In other words, most people stay in stage #1 all year long. However, if you do meet your deductible (by paying the $435 in co-pays) then you go on to stage #2.
In stage two, you’ll be responsible to pay co-pays for your medications. The amount you pay in co-pays is determined by a tier system. Most drug plans have five tiers, and the lower your medication ranks on the tier, the cheaper your co-pay will be. Typically, co-pays in stage two are very reasonable. Now, this is very similar to the co-pay system in tier one except for one major difference.
In stage two, Medicare is not just tracking the amount you’re paying in copays
(like in stage one). Instead, they’re also tracking the retail cost of your medication. So while you may be only paying $10 for a medication co-pay, the retail cost might be $100. Medicare is keeping track of that retail cost and adding it all up. Why are they tracking the retail costs?
If you ever reach the retail total (or the threshold) Medicare has set for the year, then you’re done in stage two and will be moved to stage three (or the donut hole).
The retail threshold amount for this year is set at $4,020. Now keep in mind, you don't pay that amount, it’s just the retail cost of your medications.
Let's say you're a dependent diabetic and the total retail cost of your meds is $1,000 every month. This means you're going to take about four months to reach that retail threshold. Once you’ve reached the threshold, Medicare will move you on to stage three.
Once you reach the donut hole stage, you will now be responsible to cover 25 percent of the retail cost of your medications. So if you’re on meds that cost $1,000 each month, you’re spending $250/month out of your own pocket. Often times, your out of pocket costs will rise exponentially in this stage, making the donut hole a problem for many people.
But the good news is, only five percent of the Medicare population ever hits the donut hole stage, and only one percent ever come out of it. If you do end up coming out of the donut hole (which usually takes a while) you’ll go to the fourth and final stage.
In stage four, also called the catastrophic stage, you only have to pay five percent of the retail costs of your medications. So, despite its ironic name, everyone's a happy camper in the catastrophic stage.
How to Avoid the Donut Hole
As you can see, the donut hole stage, where you’re responsible to pay 25 percent of your medication’s retail cost, is the worst possible stage to be in. So how can you avoid the donut hole? There are several ways to avoid it.
If it’s possible, always opt to take generic medications. Now, there are not always generic equivalent alternatives to your medication, but many times there are, and they are typically just as effective as the name-brand. And they cost much less, meaning it will take longer to reach your deductible and/or your retail cost threshold.
The second way to avoid the donut hole stage is to get free samples from your doctor. Oftentimes, doctors are willing and able to bill to give you free samples and since they're free, those meds are not counted towards the retail cost threshold.
The third way to avoid the donut hole stage is to pay cash. If you’re on expensive meds, sometimes it’s better to pay cash and get a coupon, because when you use coupons, you're paying a cash price. Which is not going toward your total retail costs.
Medicare drug plans have four different stages, each representing different out of pocket costs. The third stage (aka the donut hole stage) is the most expensive stage since you’re required to pay 25 percent of your medication’s retail costs.
There are several things you can do to avoid entering this stage. First, you can opt for generic medications instead of name-brand ones. Second, see if your doctor can give you free samples, and third, you might consider paying cash for your more expensive meds. These are just a few of the things you can do to avoid the donut hole stage.
We understand how difficult making the right Medicare decisions can be. To take the next step, watch our full course here, or schedule a free one-on-one call with a certified Medicare School Guide who can answer your questions, compare plans options, and even help you enroll. Click here to get started.
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