Goodbye Coverage Gap — Medicare’s New $2,000 Medication Cost Limit

Beginning January 1, 2025, Medicare beneficiaries will experience a significant transformation in prescription drug coverage, effectively eliminating the well-known coverage gap, also called the “doughnut hole.” This reform, driven by the Inflation Reduction Act (IRA), will cap out-of-pocket drug costs at $2,000, a change that promises to offer considerable relief to millions of Americans facing high medication costs.

Evolution of the Coverage Gap

Medicare Part D, introduced in 2006, initially established a coverage gap in which beneficiaries were required to cover the full cost of their prescription drugs. This situation became a significant economic burden for many, leading some to abandon their necessary treatments.

As noted by Alex Beene, a financial education instructor at the University of Tennessee at Martin, “the coverage gap was a significant burden for many beneficiaries, often leading to noncompliance with their medication regimens.”

In 2012, changes began to be implemented to partially alleviate this burden. Discounts were introduced during the coverage gap, starting with a 50% discount on brand name drugs and a 14% discount on generic drugs. Although these discounts improved the financial situation of the beneficiaries, they did not eliminate the gap completely.

By 2020, although the gap had not been completely closed, beneficiaries were only required to pay 25% of the cost of medications rather than larger sums.

Innovations for Medicare Under the Inflation Reduction Act

The Inflation Reduction Act represents an important milestone in the evolution of Medicare drug coverage. Starting January 1, 2024, the law will eliminate the 5% coinsurance requirement in the catastrophic coverage phase, limiting out-of-pocket costs to between $3,300 and $3,500.

This adjustment will provide significant financial relief to those with high drug costs. The most relevant change, however, will materialize on January 1, 2025, when the out-of-pocket limit for Medicare Part D beneficiaries will be set at $2,000.

“This new limit represents a historic change in Medicare drug coverage,” said Jason Slead, Director of Communications for the Montana Department of Revenue. “Beneficiaries will now have a clear limit on their annual drug expenses, offering substantial protection against high drug costs.”

Key Aspects of the $2,000 Limit

1. Automatic Application: The new $2,000 limit will automatically apply to all beneficiaries with Medicare Part D coverage. According to the Kaiser Family Foundation (KFF), “75% of seniors do not know about this new law or are unsure of its details.” This means that beneficiaries will not need to complete any additional procedures to benefit from this change.
2. Applicable Coverage: The limit will apply to all drugs covered by Medicare Part D. This coverage may be through stand-alone Part D plans, Medicare Advantage plans with Part D coverage, or Federal Employee Health Benefit (FEHB) plans.
3. Coverage Restrictions: The limit will only apply to drugs included in the plan’s formulary. The drugs must be approved by the FDA and not excluded by the Social Security Act. Plans must cover drugs in six protected classes, such as immunosuppressants, antiretrovirals, antidepressants, antipsychotics, anticonvulsants, and antineoplastics, and at least two drugs in each other class. Non-covered medications must be paid for at full retail price by the beneficiary.
4. Part B Exclusion: The limit does not apply to drugs covered by Medicare Part B, which are typically administered in a clinical setting or used with durable medical equipment. However, the IRA also addresses these medications through the Inflation Rebate Program, which seeks to reduce the cost of medications that increase faster than inflation. According to the Department of Health and Human Services, “some beneficiaries could save between $1 and $4,593 per day.”
5. Annual Indexing: The $2,000 limit will be adjusted each year in line with inflation, ensuring the limit remains relevant in the current economic climate.
6. New Payment Plan: A new Medicare Prescription Drug Payment Plan will be introduced, allowing beneficiaries who reach the $2,000 limit to pay the remaining costs in monthly installments. This option, similar to a payment plan, will be available to eligible beneficiaries starting in 2025. The Centers for Medicare & Medicaid Services is working out the details and insurers will provide more information in the coming months.
7. End of the Coverage Gap: With the implementation of the $2,000 limit, Medicare Part D will have three payment phases:
   • Deductible Phase: In 2025, the deductible will be $590, and plans will be able to charge up to this amount.
   • Initial Coverage: Beneficiaries will pay 25% of the cost of their medications until they reach the $2,000 threshold.
   • Catastrophic Coverage: Once the limit is reached, beneficiaries will not have to pay additional costs for the remainder of the calendar year.

Potential Challenges

Despite promising improvements, a KFF analysis suggests that the $2,000 limit may not benefit all beneficiaries equally. Eliminating the 5% coinsurance in the catastrophic phase could lead to higher premiums or higher copays in some plans.

“Plans may impose additional restrictions or exclude more expensive medications,” Beene warned. Beneficiaries should stay tuned during the open enrollment period, October 15 to December 7, to ensure they choose the plan that best meets their needs.