Medicare’s prescription drug benefit is known as Part D and is provided by private insurers. Medicare Part D was signed into law as part of the Medicare Prescription Drug Improvement and Modernization Act of 2003; and it can be purchased stand-alone or integrated with a Medicare Advantage plan (also known as Medicare Part C). Medicare Part D has distinct coverage phases, including a Coverage Gap (or “Donut Hole”) that has been vastly improved for consumers under more recent legislation.
As of 2020, enrollees with Standard Part D coverage and in
the Donut Hole pay 25% of the cost of their drugs until they reach the Catastrophic
Coverage phase (as opposed to paying the full cost while in the Donut Hole,
which had been the case before the Affordable Care Act started closing the gap).
For background, Medicare Part D plans may impose an Initial Deductible
up to $445 in 2021 (an increase of $10 from 2020). The deductible is the amount you must pay before the plan begins to share in costs. Some plans (generally with higher monthly
premiums) do not impose any deductible; and it is common for Part D plans to feature
a plan deductible, but only apply it to medicines classified in the plan’s higher Drug Tiers (Part D plan sponsors typically assign medicines into five Tier levels).
Once the Initial Deductible is met, consumers are charged copays
or coinsurance as published in each Part D plan’s Summary of Benefits. Copay amounts may vary based on the plan’s pharmacy
network (preferred vs. standard, or mail order service), as well as Drug Tier
level. Consumers sometimes
inquire, why doesn’t my copay at the pharmacy match to the amount shown in my
plan’s Summary of Benefits document?
Answer: If the pharmacy drug cost
is lower, you pay the lower amount.
The standard Medicare Part D plan structure also includes an
element called the Initial Coverage Limit, or ICL, which is $4,130 in 2021 (an
increase of $110 from the 2020 ICL of $4,020).
The ICL marks the point where you enter the Donut Hole. More specifically, you enter the Donut Hole
when the total negotiated retail value of your covered annual prescription drugs exceeds your plan’s ICL. At the
inception of the Medicare Part D program, consumers generally bore all costs in
the Donut Hole.
So, will you enter the 2021 Donut Hole?
If your prescribed medications for 2021 have a retail value exceeding
$350/month, you are likely to enter the Donut Hole during 2021. Generally, less than one-quarter of Medicare beneficiaries
with Part D coverage enter the Donut Hole each year. Consumers sometimes avoid entering it by seeking out lower cost options (such as pharmacy coupons) instead of using
their plan for certain drugs.
If you reach the Donut Hole phase of your 2021 Part D coverage, the drug discount is 75%.
While in the Donut Hole, generic formulary drug costs are 25% of your plan's negotiated retail prices. For example, if you are in the 2021 Donut Hole and your generic medication has a retail cost of $100, the Standard Part D plan benefit requires you to pay $25 for a refill. And the $25 that you spend for a covered formulary drug counts toward your 2021 out-of-pocket limit (or TrOOP, explained below).
While in the Donut Hole, the 2021 brand-name drug discount also
is 75%, meaning that you pay 25% of your plan’s negotiated brand drug retail
costs. The pharmaceutical industry pays
for 70% of the cost of these medications in the Donut Hole; and you receive credit
for 95% of the retail drug cost toward meeting your 2021 TrOOP (the 25% of
retail costs you pay plus the 70% drug manufacturer discount).
For example, if you reach the 2021 Donut Hole and purchase a
brand name medication with a retail cost of $100, you will pay $25 for the
formulary medication, and receive $95 credit toward meeting your 2021 TrOOP
(which is the Donut Hole exit point).
So, what exactly is “TrOOP” and is it the same as my
actual out-of-pocket drug costs?
There is not a short answer to this question, so please read
on!
TrOOP is the Medicare Part D program’s annual "Total
out-of-pocket costs" and is known as "True out-of-pocket costs".
In general, TrOOP includes all payments for medications
listed on your Part D plan's formulary and purchased through a preferred or
standard network pharmacy. Both the payments
you make, and payments that Pharma companies make on your behalf, count towards
TrOOP. If you switch Medicare Part D
plans during a plan year, your TrOOP will be transferred to your new plan (it
travels with you).
TrOOP is important because after it reaches $6,550 in
2021 (an increase of $200 from the 2020 level), you move to the final state of
your Medicare Part D coverage, known as Catastrophic Coverage. In the Catastrophic Coverage stage, your
medication costs are reduced to $3.70 for generics or $9.20 for brand-name
drugs (or 5% of the drug cost - whichever is greater).
The components of TrOOP are as follows: it includes the amount of your Initial
Deductible (if any) and your co-payments or co-insurance during the ICL phase;
and as noted above it includes what you pay and a portion of what the
Pharma companies pay while you are in the Donut Hole (of the 75% Donut Hole
discount on brand-name drugs, 70% of that counts towards TrOOP as that portion
is paid by the drug manufacturer). The additional 5% Donut Hole discount on
brand-name drugs and the 75% Donut Hole discount on generics do not count
toward TrOOP, as they are paid by your Medicare Part D plan.
TrOOP also includes payments made for your drugs by any of
the following programs or organizations: "Extra Help" from Medicare;
Indian Health Service; AIDS drug assistance programs; most charities; and most
State Pharmaceutical Assistance Programs (SPAPs).
TrOOP does not include monthly premiums or non-formulary drug
purchases.
Because TrOOP includes the lion’s share of what drug
manufacturer’s pay on your behalf for brand-name drugs while in the Donut Hole, your actual
out-of-pocket costs at time of Donut Hole exit likely will be much lower.
Will you exit the Donut Hole and enter the 2021
Catastrophic Coverage phase?
Based on CMS drug cost estimates, if your monthly retail
formulary drug costs approach $850, you are likely to exit the 2021 Donut Hole
and enter Catastrophic Coverage.
Medicare Part D plan sponsors can offer the Standard Part D plan design, or a design under which the measured actuarial value equals or exceeds the actuarial value of Standard Part D coverage. Actuarial equivalence is a required test to confirm that expected paid claims under the plan sponsor's prescription drug coverage are at least as much as expected paid claims under the standard design. Plans sponsors with multiple benefit options must apply the actuarial value test for each option.
Until next time,
Andrew Herman
