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Medicare's donut hole is a period when an enrollee's cost for drugs increases. It's important to understand how this coverage gap in your health care works and how to avoid it.

By Valencia Higuera
Updated September 29, 2020

Key Takeaways:

  • Medicare Part D prescription drug plans have four coverage phases or stages.

  • The Medicare Part D donut hole is a coverage gap where you're responsible to pay 25% of your drug costs for generic and brand medications.

  • The donut hole has been slowly closing since 2012 and will officially close in 2020.

  • Once exiting the donut hole, the amount you'll pay out-of-pocket for prescription drugs drops to 5%, with Medicare picking up the remainder of the tab.

  • Keeping your prescription expenses low can help you avoid the donut hole.

If you're enrolled in a Medicare Part D prescription drug plan, you've probably heard about the Medicare Part D coverage gap, also known as the donut hole. This is a coverage phase that limits what your Part D prescription drug plan pays for medications, meaning you'll pay more out-of-pocket for prescriptions. The purpose of the donut hole is to keep the total cost of Medicare's prescription drug program low.

What Does It Mean to Be in the Donut Hole?

Medicare Part D prescription drug plans are included with many Medicare Advantage plans, but you can also purchase Part D as a standalone policy. Regardless of how you receive this coverage, most Part D drug plans include a coverage gap (donut hole).

Being in the donut hole means your total drug costs for the calendar year — including what your plan pays and what you pay for deductibles and copayments — exceeds the initial coverage limit of $4,020. Costs that do not count toward meeting this threshold include your monthly premiums.

To thoroughly understand the donut hole, you must understand the four coverages phases of a Medicare Part D drug plan:

  • Phase One: Deductible

  • Phase Two: Initial coverage

  • Phase Three: Coverage gap (donut hole)

  • Phase Four: Catastrophic coverage

During the deductible phase you'll pay the full cost of your prescription drugs out-of-pocket until you hit your deductible. In 2020, the maximum Medicare drug plan deductible is $435.

You'll enter the initial coverage phase after paying your deductible. In this phase, you'll share the drug cost with your plan. Most drug plans charge a fixed copayment in this phase (e.g.., $5, $10, $15 or $20). You will remain in the initial coverage phase until your drug cost exceeds $4,020, at which point you'll enter phase three or the donut hole.

What is the Donut Hole for 2020?

Once you're in the donut hole or coverage gap, what you pay out-of-pocket for prescription medications temporarily increases. You'll no longer pay a copay for medications. Instead, you're responsible for 25% of the cost of covered prescriptions (generic and brand), with discounts from drug manufacturers covering the remaining cost.

The good news is that legislative changes in recent years have gradually reduced how much Medicare Part D enrollees pay for prescription medications while in the donut hole.

Before the Affordable Care Act (ACA), out-of-pocket prescription drug prices were higher in this phase, with many people in the donut hole paying 100% of the cost of their medications. Starting in 2012, though, the ACA took measures to slowly close the donut hole.

In 2016, Medicare Part D enrollees — in the donut hole — paid 65% and 45% of the cost of their generic and brand-name drugs, respectively, and 44% and 35% in 2018.

In 2020, they'll pay no more than 25% for both generic and brand drugs in phase three, officially closing the donut hole.

RELATED: What are the best Medicare Advantage Plans for 2020?

How Long Do You Stay in the Donut Hole?

To get out of the donut hole, you must (1) wait for your Medicare drug coverage cycle to reset each year on January 1, or (2) your overall drug costs for the calendar year must exceed $6,350.

If your drug cost exceeds $6,350 in a calendar year, you'll move to the fourth and final phase of drug coverage. In the Catastrophic coverage phase, you'll pay no more than 5% of the cost for drugs. Medicare pays the remaining 95% for the remainder of the year.

How to Save on Prescription Medications

Since the cost of prescriptions increases in the donut hole, many Medicare part D enrollees look for ways to avoid the coverage gap altogether. The primary way to avoid this gap is to keep your drug costs as low as possible.

1. Use generic alternatives

If your doctor prescribes a brand-name medication, ask about a generic alternative. Generic medications have the same ingredients and dosing requirements as brand medications. They're also just as effective in treating conditions and relieving symptoms.

2. Order a 90-day supply

Rather than get a 30-day supply of a long-term maintenance medication, ask your doctor to write a prescription for a 90-day supply. Many retail and mail order pharmacies offer discounts when buying medications in larger quantities. You should also compare pharmacy prices to make sure you're getting the lowest price for your medications.

3. Apply for the Extra Help program

If you have limited income and resources, you may qualify for financial assistance through the Extra Help program. You can submit an application online through the Social Security Administration.

If you're eligible, you'll avoid the donut hole and receive Medicare Part D drug coverage throughout the year. You will also have no premium, $0 deductible, and limited out-of-pocket expenses.

4. Make lifestyle changes

Losing weight, eating better, and stopping bad habits (overusing alcohol and smoking) can improve your overall health. As your health improves, you can possibly taper off your medications and buy less throughout the year. Do not stop taking medications without speaking with your doctor first.

RELATED: What are the best Medicare Supplement Plans for 2020?

Final Word on Medicare Part D Donut Hole 2020

Prescription drug costs can increase with age, so it's important to purchase a drug plan that meets your needs and keeps your out-of-pocket expense affordable. To learn more about Medicare Part D drug coverage and compare plans, speak with a licensed insurance agent who can help answer any additional questions you may have.

Valencia Higuera is a personal finance writer with more than 10 years of professional writing experience. She resides in Chesapeake, Virginia.