Paying Cash Can Help Exit Medicare Drug Doughnut Hole

Counting your out-of-pocket costs for prescriptions under Medicare can get you out of the coverage gap faster.

(Image credit: (C) 2017 David Pereiras ((C) 2017 David Pereiras (Photographer) - [None])

Given the high cost of many prescription drugs, you sometimes are better off paying a lower cash price instead of using insurance. Why? Because, in some cases, the Medicare co-pay can be higher than the out-of-pocket expense for the same medicine, especially if you can use a discount coupon.

The strategy drew attention recently because of a new law that bans “gag clauses,” which had prevented pharmacists in some states from letting customers know about a lower price for their drugs if they paid cash or didn’t use insurance. The clauses had been regularly included in pharmacy contracts with insurers. The ban takes effect immediately for private insurance and is effective January 1, 2020, for Medicare Advantage and Part D prescription-drug plans. If you know to ask about a lower price, the pharmacist is permitted to tell you, even before the ban starts (see New Laws Lift 'Gag Clauses' on Pharmacists).

But what you may not realize is that if you have Medicare Part D or Medicare Advantage, and you pay the lower cash price at a pharmacy in your plan, the money you pay can count toward your out-of-pocket expenses. You will have to submit documentation to your Part D or Advantage plan, and you will be credited up to the amount of the co-payment or the co-insurance you would have paid under your insurance, says Julie Carter, senior federal policy associate at the Medicare Rights Center.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%
https://cdn.mos.cms.futurecdn.net/flexiimages/xrd7fjmf8g1657008683.png

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of Kiplinger’s expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of Kiplinger’s expert advice - straight to your e-mail.

Sign up

People definitely are not aware of this policy for the most part,” Carter says. “Still, all of the news around gag clauses and the cash price could mean people need to know this information more than before.”

Why It Matters

Having your out-of-pocket costs count under Medicare is important because the expenses you incur count toward getting you out of the coverage gap known as the doughnut hole. For 2018, once you and your plan have spent $3,750 on covered drugs, you’re in the doughnut hole. In the gap, you pay 35% of the costs of brand-name drugs and 44% of the cost for generics. Once you exceed $5,000 in out-of-pocket spending, you’re out of the coverage gap, and you automatically get “catastrophic coverage.” You face only a small co-insurance or co-payment of about 5% for covered drugs for the rest of the year. The coverage gap changes in 2019 (see below). Making sure your cash outlays for a drug count toward your total out-of-pocket costs can help you exit the coverage gap more quickly.

Some Medicare beneficiaries hear about the policy only if their pharmacist happens to know and shares the information, says Leslie Fried, senior director for benefits access at the National Council on Aging.

Though slightly hard to find, the policy is included in the Medicare Prescription Drug Benefit Manual at cms.gov (here's a link to the policy (opens in new tab); go to the chapter titled "Direct Member Reimbursement"). Call your Part D or Advantage plan to confirm it will count your expenses and to get information on the necessary documentation, Fried says.

You also should keep all your receipts. Then be sure to follow through and submit your documentation. “It will require you to jump through some hoops,” Fried says.

Doughnut Hole in 2019

Initial Coverage Period. You pay up to your annual deductible (the standard Part D deductible is $415). Then you pay 25% of prescription-drug costs up to $3,820.

Coverage Gap for Generics. For 2019, the doughnut hole closes for brand-name drugs -- you pay 25% of those costs until reaching catastrophic coverage. But the coverage gap remains for generics -- you pay 37% of those costs while in the coverage gap.

Exit the Gap. Once out-of-pocket costs total $5,100 in 2019, you exit the coverage gap. Catastrophic coverage kicks in, and you now pay the greater of 5% of drug costs or $3.40 for generics and $8.50 for brand-name drugs.

Mary Kane
Associate Editor, Kiplinger's Retirement Report
Mary Kane is a financial writer and editor who has specialized in covering fringe financial services, such as payday loans and prepaid debit cards. She has written or edited for Reuters, the Washington Post, BillMoyers.com, MSNBC, Scripps Media Center, and more. She also was an Alicia Patterson Fellow, focusing on consumer finance and financial literacy, and a national correspondent for Newhouse Newspapers in Washington, DC. She covered the subprime mortgage crisis for the pathbreaking online site The Washington Independent, and later served as its editor. She is a two-time winner of the Excellence in Financial Journalism Awards sponsored by the New York State Society of Certified Public Accountants. She also is an adjunct professor at Johns Hopkins University, where she teaches a course on journalism and publishing in the digital age. She came to Kiplinger in March 2017.