How the Medicare Part D Doughnut Hole Works

How does the Medicare Part D doughnut hole work, and is it still shrinking in 2015? --H.M., Tampa

The so-called doughnut hole is the gap in the middle of Medicare Part D prescription-drug coverage that requires you to pay most of the cost of your drugs until you reach the catastrophic-coverage level.

For 2015, after you pay a $320 deductible, your Part D plan provides coverage until your drug expenses reach $2,960 (including both your share and the insurer’s share of the costs). Then you land in the doughnut hole and pay most of the cost of your prescriptions out of pocket—although you get a 50% discount on brand-name drugs from the drug company and your plan pays another 5%; you also get a 35% federal subsidy for generic drugs. When your out-of-pocket costs reach $4,700, your plan pays 95% of your covered drug costs.

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Even though the pharmacy applies the discount in the doughnut hole automatically, both the 45% you pay and the 50% discount the drug company pays for brand-name drugs (but not the 5% paid by your plan) count toward your out-of-pocket costs. For generics, only the 65% you pay counts toward your out-of-pocket costs.

The gap will continue to shrink until 2020, when the discount for both brand-name and generic drugs rises to 75%.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.