Medicare Doughnut Hole

Medicare Part D is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States. It was enacted as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) and went into effect on January 1, 2006.

The MMA establishes a standard drug benefit that Part D plans may offer. The standard benefit is defined in terms of the benefit structure and not in terms of the drugs that must be covered.

In 2007, this standard benefit requires payment of a $265 deductible. The beneficiary then pays 25% of the cost of a covered Part D prescription drug up to an initial coverage limit of $2400.

Once the initial coverage limit is reached, the beneficiary is subject to another deductible, known officially as the Coverage Gap but referred to more commonly as the "Donut Hole," in which they must pay the full cost of medicine.

When total out-of-pocket expenses on formulary drugs for the year, including the deductible and initial coinsurance, reach $3850, the beneficiary then reaches catastrophic coverage, in which he or she pays $2.15 for a generic or preferred drug and $5.35 for other drugs, or 5% coinsurance, whichever is greater. The $3850 amount is calculated on a yearly basis, and a beneficiary who amasses $3850 in out-of-pocket costs by December 31 of one year will start their deductible anew on January 1. Most low-income subsidy patients are exempt from all or part of the donut hole and the deductible.

The only out-of-pocket costs that count toward getting out of the coverage gap or into catastrophic coverage are True Out-Of-Pocket (TrOOP) expenditures. TrOOP expenditures accrue only when drugs on the enrolled-in plan's formulary are purchased in accordance with the restrictions on those drugs. Any other purchases do not count toward either the coverage gap or catastrophic coverage. Monthly premium payments do not count towards TrOOP.

It should be noted that the thresholds above related only to the "standard" defined benefit structure. Individual health insurance providers often offer their own variations of the standard benefit (sometimes known as "enhanced" benefit plans) that may eliminate the deductible phase completely and/or extend the Initial Coverage limit to shrink the size of the donut Hole. Typically, the premiums for these enhanced plans are higher to offset the increased benefit.

A coalition of drug manufacturers is working on a plan to help millions of low-income seniors pay for drugs when they hit the so-called doughnut hole in the new Medicare drug benefit.

Medicare "Doughnut-Hole" Bridge Plan Examined

Bridge Rx, a plan by some drug manufacturers to help low-income Medicare beneficiaries fill in the "doughnut hole" in Medicare drug coverage by providing drugs at a 50 percent discount, may "run afoul" of anti-kickback laws unless properly structured, federal officials warned. The doughnut hole begins at the point at which Medicare stops paying for drugs until enough costs are incurred, at which point Medicare coverage picks up again. The Department of Health and Human Services' Inspector General's office is concerned that if only a few companies participate in Bridge Rx, the discounts would essentially be payments to beneficiaries-kickbacks-to use participating companies' drugs. The office is expected to decide soon whether to approve Bridge Rx, at which point other companies may join, experts say. (The Wall Street Journal, 2/7/06)