Donut Hole (Medicare)

The Medicare Part D coverage gap (informally known as the Medicare donut hole) is a period of consumer payment for prescription medication costs which lies between the initial coverage limit and the catastrophic-coverage threshold, when the consumer is a member of a Medicare Part D prescription-drug program administered by the United States federal government. The gap is reached after shared insurer payment - consumer payment for all covered prescription drugs reaches a government-set amount, and is left only after the consumer has paid full, unshared costs of an additional amount for the same prescriptions. Upon entering the gap, the prescription payments to date are re-set to $0 and continue until the maximum amount of the gap is reached: copayments made by the consumer up to the point of entering the gap are specifically not counted toward payment of the costs accruing while in the gap.

In 2006, the first year of operation for Medicare Part D, the donut hole in the defined standard benefit covered a range in true out-of-pocket expenses (TrOOP) costs from $750 to $3,600. (The first $750 of TrOOP comes from a $250 deductible phase, and $500 in the initial coverage limit, in which the Centers for Medicare and Medicaid Services (CMS) covers 75 percent of the next $2,000.) In the first year of operation, there was a substantial reduction in out-of-pocket costs and a moderate increase in medication utilization among Medicare beneficiaries, although there was no evidence of improvement in emergency department use, hospitalizations, or preference-based health utility for those eligible for Part D.

The dollar limits increase yearly.

The following table shows the Medicare benefit breakdown (including the donut hole) for 2009. For 2010, the total TrOOP increased to $4,550 before catastrophic coverage began.

The structure defined above is the benefit structure defined by Medicare, and from a health-plan perspective defines the amount of money that CMS will reimburse to health plans for covering prescription drugs. Individual health plans may choose to offer alternative benefit structures, generally with higher premiums, that either reduce or eliminate the donut hole.

Individuals identified as "dual eligible" by CMS are not subject to the donut hole, as their prescription coverage is fully subsidized.

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