Medicare Part D is the part of Medicare that covers your prescription drugs. This coverage is available either through a standalone prescription drug plan or a Medicare Advantage (Part C) plan. These plans renew and reset annually, on January 1.

So, what is this "donut hole" term you keep hearing being thrown around? The donut hole is one of the four phases of Medicare Part D. What many don't realize is that the Part D program is not funded by premiums. Instead, it is funded mostly through the Medicare program.

In order to keep the Part D program sustainable, Medicare had to find a way to convince beneficiaries to choose generic drugs over brand-name drugs. That's why Medicare created the donut hole, also known as the coverage gap.

When the donut hole (or coverage gap) was first created, beneficiaries had to pay 100% of the cost of their medication. In order to avoid the donut hole, beneficiaries would switch to the generic version of their brand-name medications.

Yet, there isn't a generic version available for all medications. Thus, beneficiaries who couldn't find a generic version could be put in a financial bind once they reached the donut hole. Thankfully, legislation has stepped in and reduced the amount that the beneficiary must cover from 100% to 25%.

Now that you know why the donut hole was created, let's go over the four phases of Medicare Part D.

Phase 1: Deductible Phase
• Part D plans come with an annual deductible
• You pay the full cost of medications until the annual deductible amount is reached
• It's possible that the deductible won't apply to you if you're taking generic medications or tier 1 and 2 medications
• However, if you take brand-name medications that are tier 3 or higher, you will likely have to pay the full cost of your medication until you reach the plan's deductible amount

Phase 2: Initial Coverage Phase
• You only have to pay a set coinsurance or copay set by your drug plan
• How much you pay in coinsurance and copays will depend on what tier your prescription fall within
• Tiers vary from one drug plan to another – you can find these tiers in your plan's drug formulary 
• Most beneficiaries stay in this phase until their plan renews the following year (~85%)

Phase 3: Donut Hole (Coverage Gap) Phase
• Most people do not ever reach this phase
• You fall in the coverage gap (donut hole) after a certain spending amount reaches a set threshold
• The total amount includes both what you pay for your medication and what your insurance pays for the medication
• While in the donut hole, you will have to pay 25% of the full cost of your medications (both generic and brand-name)
• While in the donut hole, what counts towards your True Out-of-Pocket cost includes the amount paid towards your deductible, any copays/coinsurance paid while in the initial coverage phase, the full cost of brand name drugs while in the coverage gap, and the amount paid for generic drugs while in this phase

Phase 4: Catastrophic Coverage Phase
• When your True Out-of-Pocket cost (TROOP) reaches a certain amount, you reach this phase
• While in this phase, your costs for medications usually go down
• In the catastrophic coverage phase, you only pay around 5% of the cost of your medication

Now that you understand the four phases of Part D, it's important to know that these plans change annually. So, during the annual enrollment period (from October 15 through December 7), you'll want to compare all the plans in your area to make sure you're saving the most money possible.

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