What Is the Donut Hole Effect of Medicare Part D?

The so-called donut hole in Medicare Part D coverage is the relative gap in coverage that occurs after a Medicare patient reaches the initial spending limit for covered drugs and before the patient qualifies for catastrophic coverage. The initial limit for drug coverage is $2,960 as of 2015.

The spending limit includes the deductible, the patient's costs and the drug plan's costs. While in the coverage gap, patients pay 45 percent of the cost of brand-name drugs, with the Medicare Part D plan paying only 5 percent and the drug company giving a 50 percent discount, as of 2015. For generic drugs, patients pay 65 percent and Medicare pays 35 percent. 95 percent of the costs of brand-name drugs and 65 percent of the cost of generic drugs count towards out-of-pocket expenses. Once a patient's out-of-pocket expenses reach $4,700, catastrophic coverage begins and Medicare pays 95 percent of drug expenses, as of 2015.

Patients who have full Medicaid coverage, take part in state Medicare Savings Programs that pay Medicare Part B premiums or get Supplementary Security Income benefits receive extra help to meet prescription drug costs during the Medicare Part D coverage gap. The coverage gap is set to decrease each year, until in 2020 patients pay only 25 percent of the cost of either brand-name or generic drugs while in the gap.