Closing the Donut Hole: Who Will Pay?

Submitted by Kathy Hepner, RN, BSN

Tags: donut hole Health Care Reform healthcare system Legislature Medicare Medicare Supplement prescriptions

Closing the Donut Hole: Who Will Pay?

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The dark black hole in the Medicare Part D prescription plan called the donut hole is finding the light, or is it?  Health care reform has promised to close the donut hole for Medicare recipients completely by the year 2020 (Gionfriddo, 2010).  The Consumer Report on Health (2012) confirms medication costs continue to rise with no end in sight.  Who will pay the gap between what is currently covered and the predicted added coverage with Health Care Reform?  According to the Center for Medicare and Medicaid Services (CMS, 2011) the Medicare trust fund is currently running in a deficit.  Reducing the burden of our Medicare population, with associated out-of-pocket expenses for prescription drugs, cannot be achieved by a system already running in a deficit.  As we start to unravel the mystery behind closing the donut hole, can we identify who will pay?

What is Medicare Part-D?

Medicare Part D was established as a prescription component to the Medicare program for seniors and the disabled under the Modernization Act of 2003 (CMS, 2012).  According to CMS, Medicare Part-D is a subsidized insurance coverage plan for prescription drugs and became effective on January 1, 2006. Part-D of Medicare is voluntary and requires a premium for participation.  Premium costs are the consumers’ responsibility unless you meet low income guidelines and then you may qualify for assisted financial premium relief.  There are various private insurance companies which offer this service and they vary in their coverage.  It is important for the consumer to explore and research the available programs to select the one which best fits their individual needs (CMS, 2012).

Drug dispensing and coverage of prescription medication are based on a formulary list of certain medications (CMS, 2012).  Each private insurance provider offers a list of medications considered to be covered by each particular insurance provider.   Each program varies on what medications are offered on their formulary.  The covered drugs are listed as the private insurance company’s specific formulary and the consumer has to find the best formulary for their particular health status and medication coverage package (Q1 Medicare, 2012).  This best package consists of finding the best suited formulary which provides the medication the consumer is prescribed.

The deductible for Medicare Part-D increased in 2012 to $320.00 and the consumer must pay the deductable before their coverage starts (Q1 Medicare, 2012).  Once the deductable is paid, Medicare Part-D insurance covers 75 percent of the cost of the medication and the consumer pays 25 percent until the Medicare Part-D participant reaches an out of pocket expense of $2610.00.  Therefore the consumer reaches the coverage gap known as the donut hole after spending $2930.00 (deductable plus the capitation out of pocket expense).  Once the donut hole or coverage gap is reached the cost of the consumer’s prescription becomes 100 percent the consumer’s responsibility.  The premium cost continues during the donut period.  Premium costs do not calculate into the out of pocket expense for the Medicare Part-D participant (Q1 Medicare).

The coverage gap continues until the consumer reaches a maximum out of pocket expense of $4,700.00 including deductibles, co-pays, and coverage gap expense for prescription drugs.  This does not include any money spent for premiums for the actual Medicare Part-D coverage.   When the top limit is met the consumer then enters into the catastrophic phase of Medicare Part –D coverage.  During the catastrophic phase the consumer pays 5 percent co-pay for their prescription drugs until the end of the year (Q1 Medicare, 2012).  January each year a new coverage year begins and the cycle then repeats based on new annual deductibles and premium rates.

How is the donut hole planned to close?

With the Health Care Reform some relief has been provided for the Medicare Part-D recipient with a plan to completely close the donut hole by 2020 (Q1 Medicare, 2012).  In 2012 there will be a 50 percent discount on brand name drugs included on the plans drug formulary.  Generic drugs will be provided at a 14 percent discount to the consumer.  These discounts are formulated between the pharmaceutical companies, private insurance companies offering Medicare Part- D, and Medicare to bring the cost savings back to the consumer.  This shift in the cost responsibility will happen over time until the 2020 deadline for the complete closure of coverage gap currently found in Medicare Part-D.

The speculation, according to Q1 Medicare (2012), is the number of private insurance companies offering Medicare Part- D coverage will decline.  The decrease in participating private insurance companies is thought to be a result of the cost shift to the insurance company from the consumer for discounted drug prices.  The transfer in cost will completely close the coverage gap and close the dark hole of Medicare Part-D called the donut hole. 

The calculated change for brand name drugs planned will change the consumer’s responsibility of cost.  The cost for the consumer will decrease by 7 percent which started in 2011 and will reach a 25% maximum by the year 2020 (Q1Medicare).  The shift in cost responsibility starts by the consumer saving 7 percent annually until the complete shift of the insurance company paying 75 percent and the consumer will be paying 25 percent of the cost of the prescription medication.  Currently during the donut- hole period the consumer pays 100 percent for the drugs.  The pharmaceutical companies are providing drugs on their formulary at a discounted cost and the private insurance companies are sharing some of the cost savings burden.  According to a news release regarding Medicare Part-D,  premiums for participation will not rise in 2012 (U.S. Department of Health and Human Services, 2011).  There were no statements or a guarantee regarding future premium cost and Q1 Medicare (2012) speculates some of the cost sharing will be found in premium increases over time.


Hidden costs of discount plans and savings

What is meant by hidden costs?  Hidden costs are found when discounted dollars saved by the consumer for medication is distributed back into your premium cost for pharmacological insurance (Consumer Report on Health, 2012).  According to Consumer Report on Health, discounts are often used to entice usage of the higher cost drugs and when the discount ends the cost returns to the consumer.  For example the cost of the medication is $200.00, the co-pay is $50.00 and a discount coupon is utilized. Your out-of-pocket cost decreases, however the insurance company stills pays $150.00 for the drug from the pharmaceutical company.  The insurance company then rolls the discounted co-pay, paid by the consumer which is a financial loss to the insurance provided, into premium costs to account for lost revenue (Consumer Report on Health).

Discounts often look good in the beginning, but in the end the cost is often recovered by the provider in other areas.  The recovery occurs through either higher cost to the consumer after the discount period expires or is rolled into premiums and cost-shared throughout all members of the insurance provider.  Often, discounts can be deceiving. 

The current 50 percent discount on drugs provided to Medicare Part-D recipients during the donut hole appears to be a straight forward discount.  The question is can we really rely on not having the pharmaceutical companies cost-share the savings to either non-Medicare Part –D consumers or back to the Medicare Part-D recipient through other costs.

According to Consumer Report on Health (2012) the cost recovery of drugs with an expiring patent happens of the front end of the market.  When the patent for the specific drug ends and a generic form of the same drugs is manufactured at a lower cost, the supply and demand of the brand name drug decreases.  Pharmaceutical companies capture the revenue loss in the five years prior to the expiration of the patent.  During the patent period generic forms of the drug are not permitted to be manufactured or distributed.  During the five year window according to Consumer Reports on Health the brand name drug cost is inflated to provide an off-set of revenue lost until the generic drugs become available.  The patent on brand names is given for the pharmaceutical producer of the drug to capture the cost of research and development and generic drugs are lower in cost.

Revenue verses Cost of Medicare Part-D

Revenue for the Medicare Part-D voluntary program comes from premiums paid by the qualified consumer, contributions from each particular State, and transfers from the general funds of the Treasury (CMS, 2011).  The premium revenue accounted for 10.5 percent of the required operation of the program and the general funds from the U.S. Treasury accounted for 83 percent in 2010.  The State contribution is directly related to the low-income participant and provides subsidies premium relief (CMS, 2011).  The individual States are currently responsible for 90 percent of the low-cost subsidies provided for qualifying Medicare recipient who meet certain financial requirements to have lower to no premiums for Medicare Part-D.  The State portion of relief is expected to decrease to over the next ten year according to CMS financial report for the fiscal year ending May of 2011.

Other revenue sources for Medicare Part-D are from interest on investments which is allocated related to assets held by the Part D account (CMS, 2011).  This account is expected to survive for a short period and has a low amount of assets and was negligible in 2010 by eight million dollars.  The revenues from interest on assets are not considered a strong source of income for the future of this program.


CMS (2012) speculates due to the 50 percent discount on medication during the donut hole or coverage gap period, less and less private insurance companies will offer a Medicare Part- D option.  This will decrease the options for those who qualify for Medicare Part-D.  The shift in benefits with the closing of the donut-hole will limited the amount different choices available to the consumer. As providers for Medicare Part-D decrease, options of different formularies also decrease, limiting the ability of the consumer to find the best fitting formulary for their prescription medications. It's best to talk to local, licensed Medicare agent to get the most accurate information related to Medicare Part D plans in your area.

A news release from United States Health and Human Services (HHS) on August of 2011 promises no increase in premiums for the year 2012.  CMS (2011) speculates some associated cost of savings will be distributed over enrollees by increasing premiums over time.  The news release also encourages the utilization of free preventive services to off-set rising cost of medications and active participation in wellness programs.  In June 2011 Medicare launched a program called Share the News which is a campaign to raise the awareness of preventative medicine and decrease lifestyle associated health risk.  The speculation according to CMS (2012) is to move toward healthy lifestyles and healthy behaviors in order to decrease the use of prescriptions drugs and healthcare illness dollars.  Decreases in disease will decrease usage of prescription drugs which will increase the cost margin of premium revenues if actual usage of drugs decreases related to healthy lifestyle.

Conclusion: Can America afford the changes offered by Healthcare Reform in regard to closing the not so sweet donut hole?

The hard facts provide us with the knowledge of cost associated with discount programs are often rolled into premiums of other consumers (Consumer Report on Health, 2012).  CMS (2012) speculates due to the discounted costs and decrease in reimbursement by 7 percent annually until the donut hole closes in 2020 will push many private insurance companies to withdrawal their participation in the Medicare Part-D plans. The decrease in participating providers will limit options for Medicare recipients to find the best formulary for their particular situation (Q1 Medicare, 2012).

According to the 2011 financial report of CMS, Medicare is running in a deficit and the National debt continues to rise.  Eighty percent of the revenue for the prescription drug plan is funded by the general U.S. Treasury.  Can America afford the prescription discounts and added coverage benefits of the Affordable Care Act?  The savings for the Medicare Part-D recipient will roll into premiums charged to the consumer and the contributions of the general fund of the U.S. Treasury.  Will the donut- hole close without breaking the American bank?  Speculations and the hard facts bring us to the conclusion we are afraid to say aloud.  Although the Medicare recipients need help with the cost related to prescription plans, the American public cannot fund the changes in a Nation with a growing National debt.


  1. Center for Medicare and Medicaid Services. (2011) Letter of transmittal. Retrieved from            Reports/ReportsTrustFunds/downloads/tr2011.pdf
  2. Center for Medicare and Medicaid Services. (2012). Medicare prescription drug benefit manual.   Retrieved from             PrescriptionDrugCovContra/downloads/Chapter6.pdf
  3. Donut Hole - Medicare Signups (2023) Medicare Dont Hole. Retrieved from
  4. Consumer Reports. (2012). Where high drug costs hide. On Health, 24 (9), 1, 4-5.
  5. Gionfriddo, P. (2010). Closing the medicare part D donut hole under health reform: A brief summary. Retrieved from h         ttp://      PBC2009/Content/Closing%20the%20Medicare%20Part%20D%20Donut%20Hole%20 Under%20Health%20Reform%281%29.pdf
  6. Q1 Medicare. (2012). Medicare part d. Retrieved from   utm_source= partd&utm_medium =textlink&utm_campaign=header
  7. United States Department of Health and Human Resources. (2011). Medicare prescription drug   premiums will not increase, more seniors receiving free preventive care, discounts in the          donut hole. News Release. Retrieved from