Ep. 250 – Closing the Gap Strategies for Coping with Medicare’s Doughnut Hole in Retirement


In this Episode of the Secure Your Retirement Podcast, Radon and Murs have Shawn Southard, our in-house Medicare expert, talk about Medicare’s doughnut hole. Medicare’s doughnut hole is a temporary limit on what a Medicare drug plan will pay towards the course of the drug.

Listen in to learn about the importance of enrolling into a prescription drug plan at the right time to avoid paying penalties. You will also learn about the four stages of how Medicare Part D works, plus strategies you can take yourself to avoid the doughnut hole.

In this episode, find out:

  • Doughnut hole – a temporary limit on what a Medicare drug plan will pay towards the course of the drug.
  • The history of the prescription drug side of Medicare (Part D) and the importance of enrolling in a prescription drug plan.
  • The four stages of how Medicare Part D works – the deductible, initial coverage, coverage gap, and catastrophic coverage.
  • How the Inflation Reduction Act of 2022 will benefit Medicare beneficiaries moving forward.
  • The strategies available to help you avoid the doughnut hole if the government doesn’t fix it.

Tweetable Quotes:

  • “When it comes time to get on Medicare, you want to make sure that even if you don’t need it right away, you do enroll into a prescription drug plan to avoid any penalties.”– Murs Tariq
  • “If you do not enroll into a prescription drug plan when you are first eligible to do so when you turn sixty-five or retire and get into Medicare, there’s a late enrolment penalty of 1% per month for every month you’re not enrolled in a drug plan when you’re supposed to be.”– Shawn Southard


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To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil: Welcome to Secure Your Retirement podcast. We are excited. We’re back on this topic of Medicare. We’ve got Shawn Southard, who’s our in-house Medicare specialist who just helps us around that area. He’s focused with Medicare. And today, we are not going to talk about a topic that necessarily make you hungry because we’re going to talk about donut hole, but we’re talking about a donut hole in this idea of Medicare. And we’re going to kind of break it down for you because we’ve had some clients that we’ve talked to who are a part of this. And so I don’t know, Shawn, when I hear donut hole, I immediately just start thinking about donuts. So could you tell us in the context of Medicare, give us a really easy way to understand conceptually what is a donut hole?


Shawn Southard: Sure, absolutely. And just to kind of reference back to that, Homer Simpson, he probably should be listening to this as well, right? Because he loves donuts. But anyhow, the donor hole very simply is related to Medicare prescription drug plans, part D prescription drug plans, and the drug plans that are contained in Medicare Advantage plans. And basically what the donor hole is, it’s actually referring to what’s called the coverage state or the coverage gap stage in a Medicare drug plan. And it’s basically the temporary limit on what the drug plan is going to pay towards the costs of the drugs, very simply stated.


Murs Tariq: Actually, I had a conversation with the client and he said, “Hey, I know you have this Medicare person now, and we continue year over year to run into this donut hole thing, and it’s driving us crazy because costs on some of our prescriptions and we’re trying to figure out how do we navigate this donut hole better.” So I think Shawn, for everyone listening, I think first to understand the donut hole, we got to first walk through, well, what is the drug side of Medicare? So take us through that on prescription drug plans and then we’ll get into the donut hole, how you actually end up in it, and then maybe some solutions around, or are things that may be coming in the future.


Shawn Southard: Sure, absolutely. It’d be my pleasure. So trying to understand all this, we need to go back in history a little bit, have a historical perspective about it. So Medicare was started in 1966, January 1 in 1966, and up to 2003, there was no prescription drug coverage help in original Medicare for Medicare beneficiaries. So in 2003, Congress passed an act called the Medicare Prescription Drug Improvement Modernization Act.


Radon Stancil: Oh, that’s a real simple name.


Shawn Southard: That’s a real simple name. So basically that created Part D plans and they went into effect in 2006. So finally for the last 18 years, Medicare beneficiaries have had something to help them with their prescription drugs while they’re in Medicare. So that’s wonderful. Something that people should realize out there, are Medicare beneficiaries that we work with and that we know, and hopefully those that will meet as well moving forward, there is something called a late enrollment penalty in Part D that people don’t really like that, but Congress and Medicare, they wanted to make sure that people took it seriously, that they did enroll into a prescription drug plan once they were available. So if you do not enroll into a prescription drug plan when you are first eligible to do so, when you turn 65 or when you retire, and then you get into Medicare, there is a late enrollment penalty of 1% per month for every month that you’re not enrolled in a drug plan when you’re supposed to be.


  And then that penalty kind of ticks into the background and then adds up. And then when you enroll eventually into a drug plan, you’re going to have that penalty monthly for as long as you enrolled in a drug plan, which is usually the rest of the person’s life. And that penalty, whatever it ends up being, whether it’s 5%, 10%, 30%, it’s based against the national average of drug plan premiums in Medicare, which in 2004 is $34.70. So that’s the late enrollment penalty. So Medicare really wants people to take it seriously. Medicare beneficiaries that once you get into Medicare, that you do enroll into a prescription drug plan so you’ll have something there to help you with your prescription drugs if you do have to take them.


Radon Stancil: Excellent.


Murs Tariq: So quick, fast tip there for anyone listening, if you missed it, you don’t want to miss it and you don’t want to get assessed with the penalty. So when it comes time for Medicare and you’re getting on Medicare, right Shawn, we want to make sure that even if you don’t need it right away, that you do enroll for a drug plan to avoid any penalties.


Shawn Southard: Absolutely. If you don’t take any prescription drugs, even so, you need to get into a drug plan so you don’t have a penalty being assessed against you in the background. So definitely get into one and the strategy there as we always talk, we love to strategize here, is if you don’t take any prescription drugs, find a drug plan that has a zero premium or a low premium, who cares what the deductible is at this point because you’re not taking any prescription drugs if there is a deductible. So just get into one for now.


Radon Stancil: Excellent. That’s a good point. So we know that with all aspects of Medicare, it doesn’t ever just as simply say, “This is how you do it,” or, “This is the element of it.” I know with Medicare Part A and then you got Part B and then Part C. So now we’re talking really now about this prescription part of things Part D. So could you break down, I know you talk about the four stages of the Part D. Could you talk us through what that means? What are the four elements or four stages of how Part D works?


Shawn Southard: Absolutely. So when you get into a prescription drug plans, there’s four stages of them, and these apply to either a standalone Part D drug plan or a drug plan that is bundled inside a Medicare Advantage plan. That’s basically what it is. It’s a Part D Medicare drug plan that’s been bundled in there. So they both work the same, both have four stages. The first stage is the deductible stage. So if the plan does have a deductible, you’re going to be in that stage first when you first get started. Some plans do not have a deductible, and many of the plans in Med Advantage do not have a deductible. So those folks, when they do start getting prescriptions filled, are going to move to the second phase, which is called the initial coverage stage. But if those have a deductible, they do have to meet the deductible first, and that basically means that you’re paying a hundred percent of the cost of the drug out of pocket, whatever that may be, up to your deductible amount.


  The max deductible in 2024 is $545. So if you do have one, it can be up to that amount. Once that’s met, or if you have a zero deductible, you go into the second phase, the initial coverage stage, and that’s where you’re going to be. Your plan is going to kick in a little bit and help you with the cost of your drugs, approximately 75% they’re going to cover. You’re going to cover approximately 25% of the cost with your copays and your co-insurance. The copays and the co-insurance are going to correlate to what tier your drug is on in the drug plan. And there’s five tiers in Medicare drug plans. Think of them as steps 1, 2, 3, 4, 5. The fifth step is the highest. The first tier is the lowest step there. Tier one drugs are your preferred generics. And those generally on most Medicare drug plans have a zero copay, somewhere between zero and $2 or $3 somewhere there.


  It’s very, very reasonable cost for the copays. So many, many people in the prescription drug plans and Medicare are not really paying much for copays because a lot of their drugs are preferred generics or generics and they’re on low tiers. But depending upon what your drug is or your drugs are, they may be on higher tiers and you’re going to be paying more in copays and co-insurance as you go through the initial coverage stage. The initial cover stage goes from $546 after your deductible is met all the way up to $5,030. So if you are co-sharing and co-paying up to that amount, once you go over $5,030, the next dollar, now you’re in the coverage gap stage, which is known on the streets as the donut hole. This is the coverage gap stage.


Radon Stancil: The Medicare streets. You made that sound like-


Shawn Southard: On the street, this is the street and the street cred. Yeah, it’s a colloquialism, right? That’s what people call it. It’s a donut hole, but it’s really technically the coverage gap stage in a Medicare drug plan. And in this stage, really goes up to in 2024, the coverage gap is from $5,031 to $8,000. So if you do a quick math here, it’s really $2,969. That’s the difference. Okay, so you’re going to be in this coverage gap for $2,969. And when you’re in this stage, this is how it works. Trying to keep it simple. You’re going to have brand name drugs and you’re going to have generic drugs. Some people take a little bit of both, or sometimes they just take only brand name because there’s not a generic available, which can obviously raise the cost of things. So in the coverage stage, the brand name drugs, you’re not going to pay any more than 25% of the cost of the drug.


  However, the full cost of the drug will go towards what’s called TROOP, your true out-of-pocket maximum on your drug plan, which is good because that’s going to get you out of that gap coverage gap even sooner and get you to the last stage, which is the catastrophic stage. So for an example, you may have the manufacturer of the drug is going to pay, they’re going to give you a discount in the coverage gap stage of 70%. Okay? And you may only end up having to pay, well, you’re going to pay no more than 25%, right? So 70% plus 25% is 95%, and then your plan pays 5%. So 95% of the cost of that drug is going to go towards getting you out of the coverage gap, getting you out of the donut hole, which is wonderful. It’s not wonderful that you’re in the coverage gap, but it’s wonderful that you’re going to get out a lot sooner because of that.


  So that’s how brand name drugs are handled when you’re in the coverage gap, the manufacturer is going to give you a 70% discount, but that discount does go towards getting you out of the coverage gap even quicker. Dispensing fees are also included in here. The pharmacy charges the dispensing fee for drugs. The manufacturer will pay 70% of the dispensing fee, so that also helps get you out of the gap sooner. Dispensing fees sometimes are $1, $2, $2.75. It all depends on the drug and so forth. And then finally, generic drugs, basically you’re going to pay 25%, no more than 25% of the drug, but nothing that… The manufacturer’s not going to pay any discounts for you in the generic stage. So 25% is going to go towards getting you out of the donut hole, and then eventually if you end up spending more than $8,000, $8,001 or more, you’re out of the coverage gap totally.


  You’re out of the donor hole and in 2024, you pay zero towards any drugs from that point forward, but you do reset at the end of the year unfortunately, you do go back to zero, so you could start all over again.


Murs Tariq: Yeah. So someone that usually when you’re on certain medications, you’re on them for life or for a significant period of time. Rarely is it a one year and done. So kind of what you’re saying, if someone gets in the donut hole and it’s more of a chronic type of solution, then they’re consistently getting in the donut hole every single year. At least that’s what I heard from the client that I talked to on the phone. So I had the opportunity just the other day to listen to Shawn, this is a 15-minute podcast, and 15 minutes can already probably just rack your brain a little bit of what goes into making proper Medicare decisions. And all we’re doing right now is talking about one aspect of the many aspects of Medicare.


  But I got to listen to him for about an hour and a half yesterday in one of his educational workshops, and talk about someone that’s passionate about Medicare that knows everything about Medicare. But you did bring up one thing that I think is somewhat promising. You talked about the Inflation Reduction Act of 2022 that Biden just signed in, and there’s all kinds of things that people think about when you hear Inflation Reduction Act and whether or not it actually is going to help reduce inflation or not. But you’ve mentioned a key piece that’s going to apply to this Medicare Part D donut hole situation that people are going into. Can you tell us a little bit about that and why it’s promising?


Shawn Southard: Yeah, it’s really promising. That Act signed in 2022 last year. Some Medicare beneficiaries that may be listening to this podcast, one of the significant things happened last year in 2023 was in the catastrophic stage, they actually reduced it down to just 5%. You were going to pay no more than 5% of the cost of the drugs in the catastrophic stage. Now in 2024, the next step in the Reduction Act is now when you hit the $8,000, you pay zero, you no longer paying 5%, you’re paying zero now. And then in next year, in 2025, the next stage of the Reduction Act is they’re going to put a cap on the true out-of-pocket maximum. So it’s going to go from $8,000 down to $2000. Now we got to wait and see if that actually really does happen. It’s supposed to happen. We’ll have to wait and see, and I hope it does.


  But if it does, basically the most… The donut hole is going to shrink significantly because you’re only going to… Once you hit $2000, you’re going to be in catastrophic stage and you’ll be paying zero for your prescription drugs moving forward. So that is very significant and great hope for Medicare beneficiaries at this time. And then, as you probably heard in the news, because it’s been on the national news a few times, it’s been in news all over the place. The next step from there is in 2026, there’s 10 major drugs, brand name drugs that there’s no generics for right now, that the Medicare is negotiating with the pharmaceutical companies to drive down the costs of these drugs for Medicare beneficiaries. And federal judges, I’ve been following the case with some of the outlets that I look at, and federal judges, obviously, the drug companies have hired attorneys, and they’re really fighting this and saying that they put a lot of money in research and development, and they do and so forth, and this is not fair and blah, blah, blah, blah.


  But there’s a lot of federal judges that are ruling in favor of Medicare beneficiaries and saying that even so, we want to make sure that we can negotiate these prices downward. So that’s really great news for Medicare beneficiaries and costs for them.


Radon Stancil: So you’ve done a great job, I think, Shawn, of helping us understand what the donut hole is. Unfortunately, we don’t have a lot more time, but this is a question, just in a general question. If a person, let’s just say that we’re in the donut hole. We have these drugs that we’re taking, this donut hole problem going on. What if the government doesn’t fix it? Are there other strategies that a person can do? And I know we don’t have time to go into those strategies, so just letting us know, are there strategies that we could do or help to avoid this donut hole?


Shawn Southard: There are some strategies. Generics is obviously one, if they are available, talk to your doctor and really try to work out a strategy regimen with your doctor to get on generics, work with your pharmacist, become friends with your pharmacists, and ask them what they can do to help. Pharmacists can be very helpful in helping work with you and work with your doctor to find alternative generics and so forth. And then if you’re really struggling economically and so forth, which a lot of people in Medicare do and are having trouble with, you can always look to see if you qualify for extra help or low income subsidy. You would need to contact Medicare and see if you are eligible for those programs. And if you are, and you can get into those programs. Those programs, you will never go into the donut hole because you’re in those programs and your costs will be very, very significantly reduced.


Radon Stancil: Yeah. Well, this has been excellent. We appreciate it. I say this all the time, we’re excited to have you on the team because if you ask me any of these questions, I’m not qualified to answer them. So now I can go, just go talk to Shawn. And so that’s worked great. So a couple of things here that I want to close out with. Number one, we went through a lot of information. If you’re walking or you’re driving and you’re listening to this podcast, we don’t want you taking notes then. So you can go to our website, go to the blog page, and there’s a whole blog article written on this topic. So you can just go there, read the article. It has everything outlined the way Shawn just talked about it. The number two thing is if you’re saying, “Man, I need to talk to Shawn,” then simply call the office (919) 787-8866 and say, “I need Shawn’s help.”


  And they will get you on Shawn’s calendar or transfer you to him if he’s available, and he can walk you through these scenarios, help you think through all these different aspects of Medicare. So Shawn, thank you very much for taking some few minutes out of your day to come on and talk with our listeners. We certainly do appreciate it.


Shawn Southard: And I appreciate as well. It’s always a pleasure and a privilege to be here, and I appreciate it. Thank you.