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What You Need to Know about the Medicare Part D Coverage Gap

by | Mar 22, 2022 | Enrollment, Health Cost, Medicare

If you have prescription drug coverage through a Medicare Part D plan, you need to know about the coverage gap, also called a donut hole. Most people never reach this gap phase, but it’s still good to know about it so you aren’t blindsided by the costs if you do.    

4 Phases of Medicare Part D Coverage

There are four coverage phases for all Medicare Part D health plans. Part D was set up this way to control costs by encouraging the use of generic drugs rather than more expensive brand name medicines.

Source: National Council on Aging

Phase 1: Meeting Your Deductible 

Your plan may make you pay some of all of your prescription costs until you meet your deductible. In 2022, your deductible can’t be more than $480. Once you meet your deductible, you move to phase 2. 

Phase 2: Initial Coverage

You begin paying copayments for prescription costs out of your pocket. Your plan pays the rest. 

Example: A covered drug costs $100 and there is a $2 dispensing fee — $102Your copayment is 25% of $100 — $25.50Your plan pays the remaining $74.50

In 2022, the amount both you and your plan pay for prescription drugs is limited to $4,430. Once you go over that amount, you enter the donut whole or coverage gap. 

Phase 3: Coverage Gap

Brand and generic drugs are managed differently during the coverage gap. 

Brand Name Drugs

While in the coverage gap, you will have to pay up to 25% of the cost for brand name drugs covered by your Part D plan. You will also have to pay 25% of the dispensing fee.

ExampleA covered brand name drug costs $60 and there is a $2 dispensing fee — total cost: $62Your copayment is 25% of $62 — $15.50The drug manufacturer pays 70% to discount the drug — $42Your plan pays 5% of the drug cost ($3) and 75% of the dispensing fee ($1.50) — $4.50

Once the amount you and the drug manufacturer pay reaches $7,050, you move into phase 4. 

Generic Drugs

If you take generic drugs, your health plan will pay 75% of the costs during the gap phase. You will pay the remaining 25%. Only the amount you pay counts toward the $7,050 coverage gap limit. 

Example:A covered generic drug costs $20 and there is a $2 dispensing fee — $22Your pay 25% of $22 — $5.50Your plan pays the remaining 75% — $16.50

The amount the plan pays does not count toward the $7,050 gap limit. Only the amount you pay out of your pocket $5.50 counts toward the limit.  

Phase 4: Catastrophic Coverage

Once you’ve reached the $7,050 out-of-pocket limit, you enter into the catastrophic phase. You pay only a small portion of the costs. Check with your plan to get specific amounts.  

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