Beginning in January 2025, there will be a $2,000 cap on annual out-of-pocket costs of prescription drugs on all Medicare Part D plans (and all Medicare Advantage plans that include Part D prescription drug coverage).
That’s a big deal. The current upper limit is roughly $3,500. The exact ceiling depends upon the precise plan that you have, which drugs you take, and how much your copays and coinsurance are.
Not long ago, as recently as December 2023, the maximum out-of-pocket for prescription drugs was far, far greater than that.
But beginning on 1/1/24, a component of the Inflation Reduction Act (enacted in 2022) eliminated the longstanding 5% coinsurance on prescription drugs over and above the upper threshold of the “Donut Hole” (anything above $8,000 in 2024). That removed a potentially financially crippling aspect of the “Catastrophic Coverage” payment tier, which up until then included the possibility of devastatingly high out-of-pocket costs — up through the end of 2023, it was a theoretically infinite dollar amount.
Confused yet? (Yeah, me too. This stuff is complicated.)
Maybe it will help if we look back several decades — back to the beginning — and try to untangle it all.
In June 1965, when I was 12 years old, there was no Medicare. It didn’t exist yet. Only about 60% of all Americans 65 or older had any health insurance coverage at all. The other 40% couldn’t afford it. If they became seriously ill, they spent as much money as they could on medical care — and then, if their money ran out, they put their affairs in order and waited for the end to come.
A decade earlier than that, Dwight D Eisenhower was the first president to press Congress to enact health insurance coverage for seniors. That was in 1956. But Congress was adamantly opposed, and held firm, and nothing happened.
Nine years later, on July 30th, 1965, after a determined push from President Lyndon B. Johnson, Congress finally enacted Medicare under Title XVIII of the Social Security Act. Suddenly, for the first time in our country’s history, most people 65 and older had broad, substantial health insurance coverage.
The name “Medicare” already existed, by the way. It was the name of a federal program that provided health insurance coverage to members of the military and their families. However, “Medicare” also seemed like a good name for this new program for seniors, so that name was co-opted. The first 2 enrollees in our new national Medicare program for people 65 and older were former President Harry S Truman and his wife, Bess Truman.
There were just two parts to Medicare in 1965. Medicare Part A covered hospitalizations. Medicare Part B covered doctors plus any drugs that were administered by medical professionals while you were in the hospital. (There were also a handful of other things that Parts A & B covered, but hospitalization, doctors, and drugs administered in the hospital comprised the lion’s share of the coverage.)
Back in 1965, and for a long time thereafter, there was no Medicare Part C or Part D — they didn’t exist yet — meaning there was no coverage for prescription drugs you took at home. You simply paid 100% of the cost yourself (if you could afford it).
And that’s pretty much how it stayed, for the next 40 years or so.
(During those intervening 4 decades, there were several other changes, though. Coverage expanded to include younger people with ALS — Amyotrophic Lateral Sclerosis, commonly known as “Lou Gehrig’s Disease” — plus other permanently disabled younger people, people receiving hospice care, and anyone with end-stage renal disease. Medicare Part C was also created back in the 1970s, although not much happened with it until the 21st century, when Medicare Advantage Plans — which essentially “bundle together” the otherwise separate coverages under Parts A, B, and D into one single plan — became enormously popular.)
The first really sweeping change since 1965, though, came about when President George W Bush pushed for Medicare to begin covering prescription drugs, under the Medicare Prescription Drug Modernization Act, which Congress passed into law in December 2003. Two years later, Medicare Part D — prescription drug coverage — finally took effect, in January 2006.
Medicare Part D was far from perfect in its early days — butstill, it was a whole lot better than nothing.
Here’s how it worked.
In early 2006, Medicare Part D had 4 different tiers of coverage for prescription drugs. Each tier had a different cost-sharing arrangement.
The bottom tier was your annual deductible. That is, you had to pay for the first $250 each year out-of-pocket before your prescription drug coverage kicked in. (A small percentage of higher priced Medicare Part D plans did not have any annual deductible at all — but they made up for that by charging much higher monthly premiums.)
Above that bottom tier was the next layer, called the “Initial Coverage” tier. In that second-from-the-bottom tier — from $250 up to $750 — your insurance paid 75% of the cost, and you paid 25%.
Above that — from $750 up to $3,600 — was the third tier, commonly referred to as the “Donut Hole.” The “Donut Hole” was a largegap in coverage. That is, once you crossed over the $750 threshold, you had to pay 100% of the cost of your prescription drugs yourself throughout the entire “Donut Hole” up until (and if) you reached $3,600.
The fourth and final (uppermost) layer was called the “Catastrophic Coverage” tier — anything above $3,600. If you hit $3,600, your insurance paid 95% of the cost from that point on, and you paid the remaining 5%. No one wanted to ever find themselves in the “Catastrophic Coverage” tier, of course. But if you did, it was a whole heck of a lot better to be paying only 5%, and not 100%, like you were paying in the “Donut Hole.”
On the other hand, if you were taking an enormously expensive prescription drug, and if it cost, let’s say, a million dollars, then that meant that you were on the hook for $50,000. Because, remember, there was no upper limit on the “Catastrophic Coverage” tier, at all. You paid 5% indefinitely.
Well, that certainly sounds horrible.
But that’s how it was back in 2006. Better than nothing, but still a long way from perfect.
Okay, now let’s fast-forward to the present day.
In 2024, we still have the same four tiers. The dollar amounts are significantly higher now, of course—due mostly to cumulative inflation over the past 18 years—but it’s essentially the same four-tiered structure.
The bottom tier — the annual deductible, assuming your plan has one — can now go as high as $545. So today, you might be paying the first $545 of your prescription drug costs each year before your insurance plan covers anything.
Above that bottom layer is the “Initial Coverage” tier, the same as in 2006. The “Initial Coverage” tier still begins with drug costs in excess of your annual deductible, but now this tier goes the whole way up to $5,030. The “Initial Coverage” tier still has the exact same cost-sharing arrangement that it had in 2006, though. That is, your insurance pays 75% of the cost, and you pay 25%.
But above that second tier, things have improved dramatically.
The “Donut Hole” — everything from $5,030 up to $8,000 (in 2024) — now has the same 25/75 cost-sharing as the “Initial Coverage” tier. You don’t have to pay 100% anymore. That change began when Congress passed the Affordable Care Act in 2010, and the cost-sharing gradually became more favorable. Over several years, “your share” steadily decreased, from the former 100% the whole way down to the current 25%, which it reached in 2020. Which means that if you found yourself in the once-dreaded “Donut Hole” in 2020 or any time thereafter (including 2024), you only had to pay 25% (not 100%) — the exact same 25% that you pay in the “Initial Coverage” tier.
As a result, those 2 tiers — the “Initial Coverage” tier and the “Donut Hole” — can now be thought of as effectively just one larger tier — a tier that goes from $545 the whole way up to $8,000 (because of the fact that the cost-sharing is now an identical 25/75 in both of those tiers).
2024 brought another big change.
Beginning on 1/1/24, the “Catastrophic Coverage” tier — anything above $8,000 (in 2024) — went from your insurance paying 95% (and you paying 5%) to your insurance now covering 100% of the cost.
Which means that the “Catastrophic Coverage” tier has now lost its ability to potentially impoverish people who have to take extremely expensive prescription drugs.
And in 2025, another new benefit will arrive.
Beginning on 1/1/25, there will be an annual maximum out-of-pocket limit of $2,000 on all Medicare Part D prescription drugs.
Your out-of-pocket total is the sum of your annual deductible and all of the copays and coinsurance that you’ve paid during the calendar year. Once that total reaches $2,000, your insurance will pay 100% of the cost of your prescription drug for the remainder of the year.
That, in turn, will truly eliminate the “Donut Hole” altogether — because the “Donut Hole” now has the exact same 25/75 cost-sharing arrangement as the “Initial Coverage” tier, and because you’ll always reach $2,000 in annual out-of-pocket costs before you reach the upper threshold of the “Donut Hole” ($8,000).
So let’s all wave goodbye — finally, and not all that fondly — to the once-dreaded “Donut Hole.”
And welcome the new $2,000 annual limit on out-of-pocket prescription drug costs.
There are, of course, a few caveats. (After all, this is the federal government that we’re talking about.)
- The $2,000 cap applies only to Medicare Part D prescription drugs. If you’re receiving drugs administered by a medical professional — in the hospital or anywhere else — those drugs will still fall under Medicare Part B, and not Medicare Part D. (Chemotherapy, for example, or other infusions)
- The $2,000 cap will typically go up a bit every year when it gets adjusted for inflation.
- The $2,000 cap applies only to covered medications — drugs that are included in your plan’s “formulary.” So, if your plan doesn’t cover a particular drug, then the $2,000 cap won’t apply to it, either.
The new $2,000 cap will kick in automatically. You will not have to sign up, enroll, or do anything at all to have it apply to you.
Okay, that sounds like a lot of good news, but . . . . who’s going to pay for all of this?
The short answer is that insurance companies and drug manufacturers will—although insurance companies will also undoubtedly attempt to increase premiums, copays, and coinsurance wherever they can to try to mitigate their new shortfall.
The end result will likely be twofold. Medicare recipients who rely on a large and costly amount of prescription drugs each year will almost certainly benefit from the new $2,000 cap. Meanwhile, for those Medicare recipients who use a relatively small number of prescription drugs, or none at all — myself, for example — the cost might increase a bit, as higher premiums and copays come into play.
Overall, though, we will collectively pay less for prescription drugs. And that’s a good thing, in my view.