It's always interesting how certain terms related to finances come about. From the title of this article, you may have been bracing yourself for another warning about how many people gain a significant amount of weight during the holiday season, complete with tips on how you can avoid the holiday munchies. Or perhaps you were looking forward to in-depth analysis of the competitive aspects of the sugary pastry industry, together with company analysis of Krispy Kreme, Dunkin' Brands, and Tim Horton's. If so, you'll probably be disappointed.
However, there's a serious problem facing senior citizens who take prescription medicines. The prescription-drug plans governed under Medicare Part D that began to take effect last year gave seniors a number of options to assist them with obtaining coverage for their medicines. Yet the provisions of Medicare Part D include a tricky rule under which such coverage may end if a person's prescription-drug costs exceed a certain level. Although coverage then resumes at a higher spending level, seniors under many prescription-drug plans are solely responsible for coming up with the money to pay for their prescriptions in the meantime. The gap between where coverage ends and where it resumes again is known as the doughnut hole.
Mapping the doughnut hole
To determine the true extent of the doughnut hole, you have to go back to the statute and accompanying regulations that established the prescription-drug benefit. The general description for how standard prescription-drug coverage works can be found in Section 1860D-2 of the Social Security Act. In essence, the law calls for a deductible of $250 that the senior must pay before coverage takes effect. After the initial $250 deductible, the prescription-drug plan must provide for 75% of the cost of prescription drugs up to the initial coverage limit, which is $2,250 for 2006. The law then states that to prevent high out-of-pocket expenditures, a prescription-drug plan must cover 95% of costs above another limit known as the out-of-pocket threshold. However, for 2006, this higher threshold is $3,600. In 2007, the deductible amount rises to $265, the initial coverage limit is increased to $2,400, and the out-of-pocket threshold goes up to $3,850.
Translated from legalese to English, this basically means that for seniors who choose a plan that has standard prescription-drug coverage, they will pay the first $250 for prescription drugs from their own pocket. On the next $2,000, they will pay $500, and the plan will pay $1,500. Above $2,250, seniors will pay the entire cost of their prescription drugs until their total value exceeds $5,100, at which point the seniors will have paid $3,600 from their own pocket. Above that level, the plan will pay the vast majority of all prescription-drug costs.
It's the gap from $2,250 to $5,100 that constitutes the doughnut hole. For seniors who spend more than $200 each month on prescription drugs, the doughnut hole will require them to come up with substantial contributions on their own behalf to cover their drug costs. For some seniors, prescription-drug plans will end up paying less than 30% of the cost of their prescription drugs annually.
Filling the doughnut hole
Needless to say, the doughnut hole and its financial burden comes as a shock to some seniors. Given the hype over the passage of Medicare Part D, many seniors expect more comprehensive coverage than they actually get under the statute.
There are, however, several ways that seniors can try to lessen the impact of the doughnut hole on their prescription-drug expenses. First, some pharmacies, including Brooks Eckerd and CVS
Second, drug companies themselves offer prescription drugs directly to patients who need assistance. For instance, Schering Plough
Finally, seniors have the option of using mail-order or Internet-based pharmacies that often provide discounts over standard local pharmacies. Some of these companies are located in Canada and have created a political uproar about whether it's appropriate to allow Americans to import low-cost prescription drugs. Customs officials have even seized shipments of drugs from Canada, although some public officials from northern states that border Canada have condemned the federal government for denying seniors their most affordable option to meet their medical needs.
Although these methods can provide some cost savings for seniors facing lack of coverage in the doughnut hole, seniors have to be careful in evaluating the effect of participating in these programs on their Medicare benefits. For instance, purchases of prescription drugs under pharmacy discount cards may not qualify as out-of-pocket expenses as calculated by Medicare. As a result, seniors using these cards may never escape the doughnut hole even though their actual expenses exceed Medicare's out-of-pocket limit. Unfortunately, for seniors whose prescription drug needs aren't completely predictable, calculating whether they would be better off using one program or another can be impossible.
Since the Medicare Part D coverage took effect, there have been several attempts to pass legislation that would eliminate the doughnut hole. However, given that some are already worried about the costs of the current prescription-drug coverage and their effect on the financial condition of Medicare generally, even the change in power in Congress may not lead to a permanent solution in the near future.
Medicare Part D provides valuable benefits for seniors. However, because the doughnut hole is a gap in coverage by prescription-drug plans, seniors must be prepared to deal with the costs associated with it. Though help is available for some, many have little choice but to set aside their own limited funds to buy their drugs.
Paying for medical care and prescriptions is just one of the worries facing today's retirees. For advice and help with the ever-changing resources for retired seniors, take a look at Rule Your Retirement. This newsletter focuses on helping people plan for and achieve their retirement dreams, as well as keeping people on the right path after they retire. See for yourself how Rule Your Retirement can help you with a 30-day trial.
Fool contributor Dan Caplinger has so far avoided the need for prescription drugs, although he owns shares of Merck, which is a former Income Investor pick. The Fool's disclosure policy keeps you covered.