Donut Hole (Medicare)

Within the Medicare Part D prescription drug program, the Donut Hole (or Doughnut Hole) is the phase of coverage in which all costs are covered by the enrollee rather than CMS. The term "coverage gap" is preferred by CMS and Prescription Drug Plans, but Donut Hole has been more widely adopted in the popular media.

In 2006, the first year of operation for Medicare Part D, the donut hole in the standard defined benefit covered a range in True Out of Pocket (TrOOP) costs from $750 to $3600. (The first $750 of TrOOP comes from a $250 deductible phase, and $500 in the Initial Coverage Limit, in which CMS covers 25% of the next $2000.)

The dollar limits will increase yearly.

The following table shows the Medicare Benefit Breakdown (including the Donut Hole) for 2006.
 * The Total Drug Spend represents the actual cost of the drugs purchased, factoring in any Medicare discounts.
 * The TrOOP (True Out Of Pocket Costs) represents the amount of their own money that the patient has paid.
 * The Donut Hole is shown below in grey.

2006 Medicare Part D Payments

Note: In 2007 the $2250 amount was changed to $2400 and the $3600 became $3850. The structure defined above is the benefit structure defined by Medicare, and from a Health Plan perspective defines the amount of money that CMS will reimburse to health plans for covering prescription drugs. Individual health plans may choose to offer alternative benefit structures, generally with higher premiums, that either reduce or eliminate the donut hole.

Individuals identified as "dual eligible" by CMS are not subject to the donut hole, as their prescription coverage is fully subsidized.

Criticisms
Since a large government program that forces all insureds to pay a sizable premium but would only provide annual benefits to a small fraction would be politically unpalatable, the actual drug program was designed so that everyone who bought drugs would get some benefit. This is not technically insurance but an expense reimbursement feature similar to some "dental plans" that have very low total payment limits of $500 to $2000 per year and premiums that are a sizable fraction thereof.

Health economists rationalize this gap as a political compromise in which the optimal insurance policy for the non-poor is stop-loss in which benefit payments would only start after an insured suffers the stop-loss limit of $3000 to $5000, after which the insurance covers 100% of the cost. This is seen to diminish the use of drugs when they are not necessary. For the needy who cannot absorb the total $3000 to $5000 stop-loss limit, supporters argue that plan should have a much lower (even zero dollar) limit. In those cases, the all needed drugs would be provided free. Medicare Part D is structured this way.

Critics charge that this approach does not discourage "wasteful" drug use, but instead forces a disproportionate burden onto patients with chronic illnesses.