Key Takeaways
In 2025, the Part D “Donut Hole” will be eliminated and a $2,000 per year out-of-pocket spending cap will be instituted.
These changes are good news for the participants, but you’ll want to shop around. If you’re sixty-five or older, don’t miss the enrollment period from October 15 to December 7.
Medicare can be complex, especially if you’re new to the program. We’re happy to assist or connect you with a trusted insurance professional.
As many of you know, significant changes to Medicare Part D drug benefits will be in effect next year. Enrollment doesn’t start until mid-October. But if you or someone close to you is over sixty-five, you don’t want to wait until the last minute to review your Part D drug coverage and look around for the best deal.
The biggest change for 2025 will be the elimination of the Part D “Donut Hole” and the institution of a $2,000 per year out-of-pocket spending cap. This amount will be adjusted each year starting in 2025 based on the growth- rate of per capita Part D costs. This will be a major cost-saver for anyone taking expensive prescriptions.
Before 2024, there was no out-of-pocket max for drug coverage so, for seniors on expensive drugs (for example the blood thinner Eliquis) participants could end up paying $6,000+ a year out-of-pocket even if they had the best Part D drug coverage.
What Is The Donut Hole?
The Donut Hole, or 'Coverage Gap,' applies to Part D and Medicare Advantage plans with drug coverage. For 2024, you enter the Donut Hole when you and your insurance plan pay a combined $5,030 towards your drugs (replaced by a $2,000 cap in 2025). During this stage, you pay 25% of the cost of your covered drugs until your out-of-pocket costs reach $8,000 in 2024. However, with the Donut Hole eliminated next year, you will no longer pay any out-of-pocket expenses for prescriptions once you’ve reached the $2,000 out-of-pocket maximum.
What Are The Four Coverage Stages For Medicare Part D?
Before the recent legislative changes, the four stages of Part D coverage required you to cover different amounts of drug costs. These phases are (a) the deductible, (2) the initial coverage phase, (3) the Donut Hole, and then (4) the catastrophic phase.
Let’s take them one at a time:
Phase 1: Deductible. At the start of the year, you must pay for the full cost of your drug’s out-of-pocket obligation until you meet your plan’s annual deductible (if it has one). In 2024, the highest plan deductible is $545, but many plans offer lower deductibles.
Phase 2: Initial coverage phase. After you’ve met your plan’s deductible, your insurance
coverage kicks in and starts to pay for some (or all) of the costs for your covered drugs. However, you may still need to cover a portion of out-of-pocket expenses, determined by your plan through co-pays or coinsurance. The initial coverage phase ends when the total drug cost paid by you and the drug plan reaches the combined limit of $5,030 in 2024. The limit is indexed for inflation so it will increase commensurately each year.
2025 will be the final phase for plans with the donut hole and catastrophic coverage eliminated. Starting next year, the $5,030 combined limit for the initial coverage phase will be replaced by a $2,000 out-of-pocket spending limit. Unlike the combined limit, the maximum out-of-pocket will be based on your share of drug expenses only (costs paid by the insurance company will not count towards this new limit.)
Phase 3: Donut Hole. Once the combined spending limit of the initial coverage phase is reached, you must pay 25% of the cost of your prescriptions. This continues until you’ve spent $8,000.
Phase 4: Catastrophic coverage. In 2024 the catastrophic coverage phase was eliminated. That means participants have no further out-of-pocket costs in 2024 once they’ve hit the Donut hole limit. Previously, once you reached the catastrophic phase, you were responsible for paying 5% of the costs of your prescriptions -- with no maximum limit.
Other Changes To The Medicare Prescriptions Drug Plan
Also in 2025, Part D enrollees will have the option of spreading out their out-of-pocket costs over the year rather than face higher out-of-pocket costs in any given month -- including the deductible phase. If individuals with costly medications anticipate reaching the $2,000 maximum, they can pay the $2,000 in equal monthly installments instead. Further, starting in 2026 Medicare will be allowed to negotiate with drug manufacturers for lower preferred pricing. However, they are limited to a select number of drugs they can negotiate a year. In 2026 negotiations will apply to ten drugs, increase to fifteen per year from 2027 through 2028, then expand to twenty drugs per year starting in 2029.
These changes are good news for Part D participants but will likely make things more expensive for insurance companies. In response, many insurance companies are expected to update their policy benefits and clients should be on the lookout for them during open enrollment.
As we go to press, we don't know what the plans will look like next year, but most of them are expected to change their benefit coverage in response to this legislation. This is a good year to pay attention to the Plan D changes and shop for the best plan during open enrollment (October 15th through December 7th).
You can go to www.medicare.gov and shop around for plans. Unlike many government
websites, Medicare.gov is user-friendly and helpful. Just input the drugs you take (or expect to take) and the site will find the best coverage for your drugs, your premium, your expected out-of-pocket costs, and the most economical options.
Some of our clients work with Medicare Part D insurance brokers which could help look for plans on your behalf. If you’re new to Medicare or aren't comfortable shopping around alone, we’re happy to put you in touch with the brokers we work with. We can also help choose the right options for you.
Since it's common for people not to review their options annually, I want everyone to be informed of these changes before enrollment starts. Your Part D plan keeps track of how much money you have spent out-of-pocket for covered drugs and your progression through coverage periods—and this information should appear in your monthly statements.
Conclusion
Major changes are happening to Medicare so it’s worth shopping around for the best coverage and options. Don’t wait until the last minute. Again, we’re happy to help you at no additional charge or refer you to the insurance brokers we work with. You can rest assured that if you’re a Novi client, we will have included any large projected out-of-pocket medical costs into your financial plan.
Devin Starr, CFP® Associate Wealth Advisor at Novi Wealth
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