Many of us think of sweet treats when we hear the phrase "donut hole." But for millions of Americans, the "donut hole" has been anything but sweet. However, 2011 will usher in changes to the donut hole that promise to leave a better taste in the mouths of millions of Medicare recipients.
The federal health care reform law, passed in March 2010, includes a provision to phase out the donut hole -- a gap in medication coverage for Medicare recipients -- and gradually eliminate it by 2020. The first step in elimination of the donut hole was a one-time $250 rebate that went to Medicare recipients in 2010.
In 2011, Medicare recipients who reach the donut hole will receive a 50 percent discount on an array of brand-name prescription drugs, and costs will be lowered for generic drugs in the donut hole. Starting in 2013, the cost of brand-name prescription drugs in the donut hole will be decreased even more.
For a Medicare beneficiary who's in the donut hole, estimated cost savings during closure of the gap will climb from $553 in 2011 to $2,217 in 2020, according to estimates from the U.S. Department of Health and Human Services.
Since Medicare Part D was enacted in 2003, the donut hole has been a source of confusion. When most people arrive at the coverage gap for prescription drugs, they're surprised that they're responsible for medication costs. A Kaiser Family Foundation report released in 2008 found that people with chronic conditions, such as Alzheimer’s and diabetes, were most at risk of bumping up against the coverage gap.
An estimated 27.6 million Americans are enrolled in Medicare Part D; about 3.4 million of them fall into the donut hole.
How Medicare Part D works
Medicare Part D was intended to protect seniors from increasing or unexpected drug costs. If you belong to a Medicare HMO or are on Medicare and Medicaid, you may automatically be enrolled in a prescription drug plan. Medicare supplement insurance, for which you pay a premium, does not include drug plans. In these cases, consumers pay a premium for a drug plan that they select, based on their prescription needs.
Congress initially created this coverage gap to be able to claim that the newly retooled program would cost no more than $400 billion over 10 years, according to Kathryn Nix, a blogger for the conservative Heritage Foundation think tank.
“The donut hole never made any sense as a benefit design,” says Robert Moffit, senior fellow at the Heritage Foundation's Center for Policy Innovation. “It was merely a way to provide universal coverage for drugs and meet a Congressional Budget Office requirement to make sure the entitlement cost was not too outrageous."
Closure of the donut hole will affect about 10 percent of the Medicare population, Moffit says.
“Regardless of what happens to the donut hole, the influx of the first wave of baby boomers will increase the demand for drugs and other medical services,” Moffit says. “All things being equal, that will mean increased costs for seniors and taxpayers alike.”
According to the federal Centers for Medicare & Medicaid Services, your actual drug plan varies depending on what kind of prescriptions you buy, which plan you choose, whether you go to a pharmacy in your plan’s network, whether your drugs are on your plan’s formulary (list of approved drugs) and whether you belong to the Extra Help program. Extra Help is a Medicare program to help low-income people; it pays for Medicare prescription drug program costs, such as premiums, deductibles and coinsurance.
'Donut hole' details
The example below shows costs for covered drugs in 2011 for a plan that has a coverage gap. The enrollee pays a monthly premium throughout the year.
• The member pays the first $310 of drug costs before the plan starts to pay its share. This is considered the yearly deductible.
• The member pays a co-payment, and his or her plan pays its share for each covered drug until the combined amount (plus the deductible) reaches $2,840.
• Once the member and the plan have spent $2,840 for covered drugs, the Medicare recipient falls into the coverage gap, or “donut hole.” In 2011, the Medicare recipient gets a 50 percent discount on covered brand-name prescription drugs. That counts as out-of-pocket spending and helps a Medicare recipient climb out of the coverage gap.
• Once the member has spent $4,550 out of pocket for the year, the coverage gap ends. Now, the Medicare recipient pays only a small co-payment for each drug until the end of the year. This is known as catastrophic coverage.
“It will be up to the consumer to figure out whether to buy generics when available or to take the 50 percent discount on brand-name drugs,” says Daniel Hammer, a Medicare recipient in Boynton Beach, Fla.
Most people buy generics because they're less expensive, but with the 50 percent discount, some brand-name drugs might be cheaper than their generic counterparts. It's up to the consumer to compare the costs.
Many of the medications covered on Medicare drug plans, which are run by health insurance companies or other private providers, are generic. To get Medicare prescription drug coverage, you must join one of these plans.
"If you are getting close to the donut hole, it might be worthwhile to check out local pharmacies to compare prices of generic drugs, especially discount stores like Walmart or Costco,” says Roberta Citron, an independent insurance agent in Boca Raton, Fla.