Medicare Coverage Gap

The Medicare Coverage Gap

One of the most confusing Medicare provisions is the coverage gap, often called the “donut hole.” It may be clearer if you look at it as the uncovered portion of the annual Medicare Part D Prescription Drug Coverage. Here’s a way to understand it better. This also applies to drug coverage that is integrated into a Part C Medicare Advantage Plan.

Annual deductible. Prescription drug plans typically have an annual deductible, not to exceed $405 in 2018. Before you reach the deductible, you have to pay the full cost of your prescriptions, although you may receive negotiated discounts.

Initial coverage period. After you meet the annual deductible, your plan will pay a portion of your prescription drug costs, and you will typically have a co-payment or co-insurance amount. A 25% co-insurance payment is the standard coverage required by Medicare, but most plans have different levels or “tiers” of copayments or coinsurance for different types of drugs.

The coverage gap. When you and your plan combined have spent a specified amount on drugs for the year ($3,750 in 2018), you enter the coverage gap. In 2018, you would have paid 35% of your plan’s price for covered brand-name prescription drugs and 44% of the price for generic drugs. The gap is closing over the next two years. You remain in the coverage gap until you reach an annual out-of-pocket spending limit ($5,000 in 2018). Spending that counts toward that limit includes:

– your deductible, copay, and coinsurance;

– the manufacturer’s discount on brand-name drugs in the coverage gap; and

– your out-of-pocket payments in the gap.

It does not include your premiums, the amounts the plan pays, or your payments for non-covered drugs.

Catastrophic coverage. Once you have reached the out-of-pocket limit, you receive catastrophic coverage with much lower payments. In 2018, you would have paid the greater of 5% of drug costs or $3.35/$8.35 for each generic and/or brand-name drug, respectively.

Some plans have more generous coverage in the gap. You may be able to avoid the coverage gap by using generic medicine, when appropriate, to lower your drug costs. The Affordable Care Act mandated that beneficiaries pay no more than the standard 25% co-insurance amount for drugs by 2020, effectively ending the “coverage gap,” if the act remains intact.

As always, we recommend researching the different plans that are offered each year. Let us know what you are quoted and what you need, and we’ll help you figure it out.

Blue Spark Capital Advisors

We're a fee-only Registered Investment Advisory and financial planning firm based in New York City and the Berkshires.

We specialize in working with women after divorce, death of a spouse, or other life transitions such as retirement or job change. We provide financial planning and investment management services.

We believe in a holistic approach. Movement in each piece of your financial plan impacts the others, so we consider your entire picture.

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