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Ask Kim

What You’ll Pay in the Medicare Part D Doughnut Hole

The gap in coverage that requires you to pay most of your drug costs is shrinking again for 2015.

I read your What You’ll Pay for Medicare in 2015 column, but I did not see a mention of the doughnut hole for Medicare Part D. Isn’t the gap in coverage shrinking again for 2015?

SEE ALSO: Strategies to Pay for Retiree Health Costs

The “doughnut hole” is the gap in the middle of Medicare Part D coverage that requires you to pay most of the cost of your drugs until you reach the catastrophic-coverage level, at which point your plan picks up 95% of the costs. For 2015, after you pay a $320 deductible, your Part D plan provides coverage until your drug expenses for the year reach $2,960 (including both your share and the insurer’s share of the costs). Then you land in the doughnut hole.

At that point, you’ll get a 55% discount on brand-name drugs and a 35% federal subsidy for generic drugs (up slightly from a 52.5% brand-name discount and a 28% generic subsidy in 2014). Your pharmacy will apply the discount automatically when you purchase the medications. After your out-of-pocket costs reach $4,700, your plan will pay 95% of your covered drug costs.

Even though the brand-name-drug discount lowers your costs in the doughnut hole, 95% of the cost of the drug (including the 45% you pay and the 50% discount the drug company pays, but not the extra 5% paid by your plan) counts toward your out-of-pocket costs. But for generics, the amount covered by the government subsidy doesn’t count toward your out-of-pocket costs; only the 65% you pay counts.

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The coverage gap started to shrink in 2011 under the Affordable Care Act. Before then, you had to pay the entire cost of your drugs in the doughnut hole. The doughnut hole will continue to shrink until 2020, when the discount for brand-name drugs and the government subsidy for generic drugs rise to 75%, leaving you to pay just 25% of drug costs in the doughnut hole. See the Medicare Rights Center’s Closing the Doughnut Hole fact sheet for details about how much the gap shrinks each year.

When comparing plans using the Medicare.gov Plan Finder, you can see an estimate of your out-of-pocket costs by month, based on the plans’ coverage for your specific medications, and which month you’re likely to reach the doughnut hole. For more information about strategies for picking a plan for 2015, see It’s Time for Medicare Open Enrollment.

Got a question? Ask Kim at askkim@kiplinger.com.