Eric Reed SmartAsset July 8, 2019
Medicare coverage,
specifically Part D, is rather complex. For years, the potential benefits of
this program were overshadowed by the “donut hole.” This refers to a large gap
in Medicare drug coverage that would force enrollees to pay out-of-pocket for
prescription drugs for some time. In 2019, federal law removed the donut hole.
What Is
the Medicare Donut Hole?
In
2003, the George W. Bush administration spearheaded an expansion of Medicare
called Part D. This optional section covers self-administered prescription drugs.
Medicare recipients sign up for Part D through private insurers, either by
adding a private plan to their Original Medicare coverage or by expanding on
their private Medicare Part C coverage.
As it
was originally created, Medicare Part D relied on two segments of coverage to
pay for prescription drugs. The first section is the standard coverage through
the enrollee’s insurance plan. This covers prescription drugs up to a certain
spending cap. For 2019, this is $3,820.
After
you’ve spent that amount on prescription drugs, your standard Part D coverage
ends and what’s called “catastrophic coverage” takes over. This section of
Medicare Part D payment has no upper limit. In 2019, catastrophic coverage
begins at $5,100 in out-of-pocket prescription drug costs.
The
split between when standard coverage ends and catastrophic coverage begins is
called the coverage gap, or the donut hole. During this coverage gap, enrollees
once had to pay 100% of all costs for their prescription drugs. In 2019, that
would have put them on the hook for $1,280 in drug costs before insurance would
pick up again. As of 2019, however, the coverage gap no longer exists in this
way.
How the
ACA (Obamacare) Closes the Donut Hole
The
Affordable Care Act (the ACA), otherwise known as “Obamacare,” eliminated the
Part D coverage gap for 2019. This didn’t occur overnight, though, as the ACA
has steadily eroded the donut hole since it was passed.
Between
2010 and 2019, the law imposed a limit on how much insurance companies can
charge patients in the gap for prescription drugs. This cap grew with each
year. As of 2018, that was fixed at 35% of the cost for brand-name drugs and
44% of the cost for generic drugs.
For
2019, though, the ACA has entirely dismissed the coverage gap for brand-name
drugs. Through healthcare reform law, the enrollee’s copay of 25% will extend
until the catastrophic coverage limit (again, $5,100 in 2019). Above this cap,
catastrophic coverage begins.
The
copay for generic drugs in 2019 is 37% during the coverage gap. In 2020, the
ACA will close the coverage gap for generic drugs, reducing this copay to 25%
as well.
Here’s
a deeper breakdown:
Brand-Name
Drugs
Up to
the deductible limit, which is $415 in 2019, the patient pays 100% of all drug
costs.
Once
you surpass this deductible, the initial coverage period begins. At this time,
you and your plan will share the costs of your brand-name drug prescriptions.
The majority of plans hold a $3,820 limit.
Next,
the new version of the coverage gap will apply. Over this period of time, you
will pay for 25% of your brand-name drugs. The manufacturer will then offer a
70% discount and your plan pays 5%. That’s good for a total discount of 75%. To
help you reach the catastrophic coverage period quickly, everything but your
plan’s portion of the payment, or 95%, will go towards the $5,100 out-of-pocket
spending limit.
As soon
as you reach $5,100 in cumulative out-of-pocket spending, the catastrophic
coverage limit will start. The patient will then pay a 5% copay, with the
insurance plan and Medicare paying 15% and 80%, respectively.
Generic
Drugs
For the
most part, generic drug purchases work the same as brand-name drugs. The main
difference, though, is visible during the coverage gap. Rather than pay 25%
with a 75% discount, you’ll pay for 37% of the costs. That leaves the insurance
plan on the hook for nothing, and the manufacturer gives a 63% discount.
Furthermore, the discount on generic drugs will not go towards your
out-of-pocket spending limit. That means it will take longer to reach the
catastrophic coverage limit.
Starting
in 2020, generic and brand-name drugs will have the same cost breakdown.
Problems
With Medicare Part D
Medicare
users should be aware that even with protections in place for the coverage gap,
many enrollees continue to struggle with costs.
First,
patients can easily spend thousands of dollars per year through the standard
37% generic drug payment. Because the discount for generic drugs does not apply
to the out-of-pocket spending limit like it does for brand-name drugs, charges
can pile up quickly before they reach the $5,100 limit for catastrophic
coverage.
Once a
patient enters the catastrophic coverage phase they pay an unlimited 5% copay
on all drugs with no cap on these out-of-pocket payments. For most patients
this remains a manageable cost. But for other enrollees, even 5% can become a
substantial burden.
In
February, 2018 a group of 20 attorneys general and governors filed a lawsuit
challenging the legality of the Affordable Care Act. The basis for their claim
is that by reducing the individual mandate tax to $0 in 2017, Congress
effectively eliminated this aspect of the law. Further, the plaintiffs argue,
Congress would not have passed the law at all without the individual mandate
since this is an essential aspect of the ACA’s mandated insurance plan. As a
result, by reducing the mandate to $0 Congress effectively invalidated the
entire law.
Invalidating
the Affordable Care Act would cause immediate changes to the healthcare
marketplace. For Medicare enrollees, the donut hole would reopen. Since the ACA
filled the coverage gap, eliminating it would eliminate this protection. In
that case, enrollees would return to the original structure of Medicare Part D
in which they pay for 100% of their prescription drug costs above the coverage
limit and below the start of catastrophic coverage.
Bottom
Line
Medicare
can be an extremely helpful government program for retirees. So when you’re
planning out your retirement, be sure to take into account
your prospective Medicare benefits. In addition, Medicare rules and regulations
change regularly. To ensure your plans remain intact, try to stay up to date
when it comes to any law changes.
Tips
for Your Retirement Plans
·
Medical costs are just one part of retirement expense picture
you’ll need to grapple with. Fortunately, financial advisors are well-versed in
navigating retirement expenses. Finding a financial advisor doesn’t have to be
hard. SmartAsset’s financial advisor matching tool matches
you with financial advisors in your area in 5 minutes. If you’re ready to be
matched with local advisors that will help you achieve your financial
goals, get started now.
·
Medicare isn’t the only federal program designed to help
retirees. Social Security will help you by supplementing your retirement income
each month. To figure out about how much you can expect to receive, check out
the SmartAsset Social Security calculator.
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