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FAQ: The Shrinking Medicare Doughnut Hole

The widely unpopular “doughnut hole” — the coverage gap in the Medicare drug benefit — is headed for oblivion, under the new health law. Beginning this year, seniors who hit the doughnut hole will get substantial discounts on both brand-name and generic drugs. Those discounts will increase over time, effectively closing the gap by 2020. The change is “quite significant,” says John Rother, AARP’s executive vice president for policy and strategy. In the past, when people had to pay full price for the drugs in the coverage gap, they sometimes stopped filling prescriptions, he says.

Q: How does Medicare drug coverage, and the doughnut hole, work this year?

Drug plans vary, but here’s generally how it works: After paying a deductible of $310, beneficiaries with Medicare drug coverage are responsible for 25 percent of the cost of their prescription drugs; the drug plans pick up the other 75 percent, explains the National Council on Aging. Once the seniors run up an additional $2,530 in costs – of which $632.50 is paid by the senior and $1,897.50 is picked up by the drug plan – the beneficiaries enter the doughnut hole.
At that point, beneficiaries are fully responsible for their drug bills. To soften the blow, under the law, seniors this year will get a 50 percent discount on brand-name drugs and a 7 percent discount on generic drugs until they have spent an additional $3,607.50. At that point, seniors escape the doughnut hole and the drug plan covers about 95 percent of the cost of prescriptions for the rest of the year.

Q: How much will seniors save this year?

The discounts can save seniors as much as $1,800 a year, according to the NCOA. AARP’s Rother estimates that typical seniors who hit the doughnut hole will save about $700.

Q: Who saves?

About 4 million Medicare beneficiaries will fall into the doughnut hole this year, and thus could benefit by the law’s provision, NCOA says. Low-income people who receive federal help with Medicare, such as those who also qualify for Medicaid (the state-federal program for the poor and disabled) won’t get the discount.

Q: Won’t drug makers raise prices to make up their losses?

That could very well happen, says the Congressional Budget Office. Medicare drug plans negotiate prices with pharmaceutical manufacturers and pharmacies, and this year’s discounts will come off of those agreed-to prices. Drug makers could partially offset that lost income by raising the prices they charge the drug plans, CBO Director Douglas Elmendorf told Rep. Paul Ryan, R-Wis., in a letter last fall. Higher prices would affect all beneficiaries, not just those who hit the doughnut hole. Elmendorf also said the plans might increase the prices they charge to pharmacies or reduce rebates paid to insurers. 

Q: What happens after 2011?

Under the law, the doughnut hole will disappear by 2020. Starting that year, beneficiaries will be responsible for 25 percent of the cost of their drugs – no matter the size of their bill.

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Cost and Quality Medicare