The Four Stages of Medicare Drug Coverage

If you’ve done some research into Medicare, especially drug costs, you’ve probably come across information on the Donut Hole (also called the coverage gap). No, the donut hole is not a tasty breakfast treat, it’s actually a Medicare rule regarding drug pricing that can affect out-of-pocket costs in a very significant way.

The purpose of this article is to explain the various stages of drug coverage under medicare, including the donut hole and how these stages work and impact your costs. 

Stage 1 - Deductible

If your drug plan has a deductible, this means you pay full retail cost until the deductible is reached. The highest possible deductible in 2024 is $545. Deductibles are typically only applied to brand-name drugs but not always. 

Stage 2 - Initial coverage phase

After you’ve met your deductible you fall into the initial coverage phase. During this phase you typically pay flat dollar amounts for generics and a combination of flat dollar and co-insurance (% of retail) for brand name drugs. These are generally referred to as your “copays”. Common copays for a generic drugs range from $0-$10+, for brand names $35-$47+.

Stage 3 - Donut Hole

If the full retail cost of your prescriptions combined with your out of pocket costs reach $5,030 in the year (2024) then you fall into the donut hole. When you hit the donut hole you no longer pay flat dollar amounts like you did in the previous stage. Instead, you pay 25% of the retail cost. Your plan and drug manufacturer pay the other 75%.

 For low-cost generics, this is not a huge issue and many plans cover generics during the donut hole. However, using the example of a brand name drug that costs $1000 retail, this means a drug that was once maybe $47 now costs $250 for a 1 month supply in the donut hole. If you take multiple, high retail cost medications, you can reach this stage pretty quickly. 

Stage 4 - Catastrophic Coverage

To reach catastrophic coverage and get out of the donut hole, your True out of Pocket Costs (TrooP) have to reach $8,000 (2024). Your true out-of-pocket costs are calculated as:

Your YTD out of pocket costs for drugs (deductibles, copays/co-insurance etc.) + the 25% you pay during the donut hole + the 75% paid by the plan/manufacturer. $8,000 isn’t necessarily what you will pay out of pocket in total/year, but it could reach that amount or go higher depending on your medications. 

When you reach catastrophic levels, Medicare will cover 100% of your medications and you will have no additional copays for the rest of the year

So there you have it: the 4 stages of Medicare drug coverage. We help individuals analyze their drug costs and maximize benefits every day at Doctor’s Choice. If you need help finding the right plan or know someone who does, send us an email at Help@doctorschoiceusa.com or call us at 401-404-7373. Thanks for reading!