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Rx Drug Plan



True Out Of Pocket Costs




All insurance companies offering Medicare Prescription Drug Plans must provide at least one plan which offers the government's MINIMUM standard benefits. They may, and most do, offer more comprehensive or "enhanced" coverage as a second plan offering.



Medicare sets the standard benefits and limits for each calendar year.

  1. Deductible - each year the maximum deductible is indexed and no plan may exceed that Deductible but may elect to not charge a Deductible.

  2. Initial Coverage Limit (ICL) - each year ICL is set by Medicare and applies to all drug plans whether stand-alone plan or plans contained within Medicare Advantage Plans. Between the Deductible or $0.0 if the plan does not have a Deductible, plans must pay at least 75% of the medication costs. Note that the ICL is the TOTAL cost of drugs, the plan's share AND the beneficiary's share. Few plans actually pay a flat 75%. Most have varying co-pays for generic, preferred brand name and non-preferred brand name drugs.

  3. Catastrophic Coverage Limit (CCL) - each year Medicare sets the CCL. Between the ICL and the CCL is the Gap or Doughnut Hole. The CCL is reached when the beneficiary's TRue Out Of Pocket (TROOP) costs equal the CCL. TROOP costs are defined by Medicare as the co-pays and deductibles. TROOP does NOT include plan premiums.

  4. Doughnut Hole/Gap Calculation - an individual beneficiary's Gap costs are NOT calculated by subtracting the ICL from the CCL because the ICL is TOTAL drug costs. To determine the total cost of the Gap, total TROOP costs up to but not exceeding the ICL are subtracted from the CCL.

  5. Formulary - a list of medications for an individual Medicare Prescription Drug Plan. Plans need only cover, pay benefits for, medications listed in their Formulary. However, Medicare mandates that any plan wishing to participate in the program must include certain medications in their Formulary. Among the required medications are those for the treatment of cancer, stroke and certain other significant illnesses.

An example of calculating you doughnut hole. Assume that there is a plan that does not charge a Deductible and actually pays 75% of drug costs up to ICL and that Medicare has set the ICL at $2,500 and the CCL at $4,000.

CCL $4,000 - (ICL $2,500 X 25% or $625) = $3,375

The beneficiary in this fictitious example would have a Doughnut Hole $3,375 deep! After this beneficiary paid $3,375 for her deductible and co-pays, she would have reached the CCL and would only pay 5%, sometimes less, for medications on the plan's Formulary.

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Jackie and Jim Spahr
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