What Is the Medicare Donut Hole?

"Medicare donut hole" is a slang term for the Medicare Part D coverage gap--the gap between the initial Medicare drug coverage limit and catastrophic coverage limits. Or, to put it another way, this is what happens when a beneficiary's prescription drug expenses grow beyond what Medicare part D can cover under its ordinary limits, but they don't grow past the point where the beneficiary can qualify for Medicare Part D's catastrophic coverage. Medicare beneficiaries who find themselves without any Medicare Part D coverage whatsoever can be under severe financial strain. The recently passed Patient Protection and Affordable Care Act contains provisions designed to close the donut hole, but it will be years before they take effect.

Understanding Medicare Part D

Medicare Part D is a federal program designed to help subsidize the costs of prescription drugs for Medicare beneficiaries. The law was passed in 2003 in response to the rising prescription drug prices, which increased to the point where, in many cases, it was less expensive for Medicare beneficiaries to travel to Canada to buy the drugs they needed than it was to buy them in the United States.

Medicare Part D benefits are open to Medicare beneficiaries who were enrolled in Medicare Part A and/or Medicare Part B. They can join either a Prescription Drug Plan or a Medicare Advantage Plan. In other cases, Medicare funds are used for the portion of the beneficiaries' prescription drug expenses. The value of the portion varies depending on the cost of the drugs, the beneficiary's income and which plan the beneficiary is enrolled in. Generally speaking, the Medicare portion of the coverage shrinks in inverse proportion to the cost of drugs and the beneficiary's income. Once the prescription drug costs rise above $2,830, the Medicare portion is cut off altogether, and the beneficiaries have to pay their drug costs out of their own pockets.

Understanding Catastrophic Coverage

Catastrophic coverage kicks in when Medicare beneficiaries spend more than $4,550 of their own money on prescription drugs. At this point, Medicare funds cover most of the coverage. The beneficiaries will have to pay $2.40 for each generic drug and $6.00 for other drugs or 5 percent of the drug costs (whichever one is higher).

Medicare Part D Donut Hole and the Beneficiaries

This arrangement works well for people whose prescription drugs cost less than $2,830 and more than $4,550. However, beneficiaries whose prescription drug expenses fall somewhere in between find themselves in a bind as their expenses suddenly jump.

Medicare beneficiaries can take out additional private insurance coverage to close the donut hole. In many cases, these plans wind up costing them more than Medicare Part D coverage. Premiums, for example, can get twice as large. Low-income beneficiaries can apply for federal and state subsidies to cover the gap. That said, there have also been many cases where falling into a donut hole wound up being a temporary condition as the prescription drug expenses quickly piled up without a subsidy. However, this usually lasts several months, which can be far too long for the beneficiaries' comfort.

The Donut Hole and the 2010 Health Reforms

The 2010 health reform package includes several measures designed to phase out the donut hole over several years. In 2010, beneficiaries who fall into the donut hole will receive a $250 rebate from Medicare to help cover the costs. In 2011, Medicare beneficiaries who fall into a donut hall will be able to get a 50 percent discount on the total cost of their brand-name drugs. Over the next few years, Medicare will gradually introduce additional discounts on generic and brand-name drugs. By 2020, the donut hole will effectively be closed. The Medicare beneficiaries will have to pay 25 percent of their prescription drug costs; the rest will be covered by Medicare.