Acquired coverage gap: Meaning, Criticisms & Real-World Uses

What Is Acquired Coverage Gap?

The acquired coverage gap, often colloquially known as the "donut hole," was a temporary phase in Medicare Part D prescription drug coverage where beneficiaries were historically responsible for a higher percentage of their medication costs. This concept falls under the broader category of Health Insurance, specifically related to government-sponsored healthcare programs. For those enrolled in Medicare Part D plans, the acquired coverage gap represented a period between the initial coverage phase and the catastrophic coverage phase, during which the financial burden for Prescription Drug Costs shifted significantly to the beneficiary. While it was a significant feature of Part D for many years, legislative changes have gradually phased out the acquired coverage gap, leading to its elimination for most beneficiaries as of January 1, 2025.

History and Origin

The concept of the acquired coverage gap originated with the design of Medicare Part D, which was enacted as part of the Medicare Modernization Act of 2003 and went into effect on January 1, 2006. Policymakers included this gap to help manage the projected costs of the new prescription drug benefit. Initially, after beneficiaries and their plans had together spent a certain amount on covered drugs (beyond any Deductible), enrollees were responsible for 100% of their drug costs until they reached a higher "out-of-pocket" spending threshold, at which point catastrophic coverage began.,¹⁵

Public concern over the financial strain caused by the acquired coverage gap led to significant legislative action. The Affordable Care Act (ACA), passed in 2010, initiated a gradual process to "close" the donut hole. This involved increasing discounts from drug manufacturers on brand-name drugs and increasing plan liability for both brand-name and Generic Drugs within the gap.¹⁴ This phased approach aimed to progressively reduce the percentage beneficiaries paid in the gap, with the ultimate goal of beneficiaries paying no more than 25% of the cost for covered drugs in the coverage gap by 2020.¹³ Further provisions, including those from the Inflation Reduction Act, have led to the complete elimination of the acquired coverage gap for beneficiaries starting in 2025.¹²,¹¹

Key Takeaways

The acquired coverage gap, or "donut hole," was a phase in Medicare Part D where beneficiaries paid a higher share of prescription drug costs.
It was an original feature of the Medicare Part D program, established by the Medicare Modernization Act of 2003.
The Affordable Care Act (ACA) began a process to gradually close the gap, reducing the out-of-pocket responsibility for beneficiaries.
As of January 1, 2025, the acquired coverage gap has been eliminated, meaning beneficiaries will pay a capped amount before reaching catastrophic coverage.
This change aims to reduce the financial burden on individuals with high prescription drug expenses.

Interpreting the Acquired Coverage Gap

Historically, understanding the acquired coverage gap involved recognizing the distinct phases of Medicare Part D coverage. After a beneficiary met their annual Deductible, they entered the initial coverage phase, where they paid a Co-payment or Coinsurance and the plan covered the rest. Once the total cost of drugs (including amounts paid by the beneficiary and the plan) reached a specific limit, the beneficiary entered the acquired coverage gap. During this gap, the beneficiary's share of costs increased significantly.

For instance, prior to the ACA's changes, beneficiaries were responsible for 100% of their drug costs in the gap. The ACA gradually reduced this, ensuring beneficiaries paid 25% for both Brand-name Drugs and generic drugs in the gap by 2020. The critical point of interpretation was always the specific thresholds and cost-sharing percentages for a given year and plan. With the elimination of the acquired coverage gap in 2025, beneficiaries will experience a simplified structure: after their deductible, they pay cost-sharing until their Out-of-Pocket Maximum is met, at which point catastrophic coverage begins with no further cost-sharing.¹⁰

Hypothetical Example

Consider a hypothetical Medicare Part D beneficiary, Mrs. Evans, in 2024 (before the elimination of the acquired coverage gap).

Deductible Phase: Mrs. Evans has a $545 deductible. She pays 100% of her prescription costs until this amount is met.
Initial Coverage Phase: After paying her deductible, Mrs. Evans's plan covers most of the costs, and she pays a co-payment (e.g., 25%) for her medications. This phase continues until the total combined spending by Mrs. Evans and her plan reaches $5,030.⁹
Acquired Coverage Gap (Donut Hole): Once the total spending hit $5,030, Mrs. Evans entered the acquired coverage gap. For brand-name drugs, she was responsible for 25% of the cost, with manufacturers providing a 70% discount and her plan covering 5%. For generic drugs, she paid 25%, and her plan covered 75%.⁸ This continued until her true out-of-pocket spending (including her deductible, co-payments, and the amounts she paid in the gap) reached $8,000.
Catastrophic Coverage Phase: After reaching the $8,000 Out-of-Pocket Maximum, Mrs. Evans entered the catastrophic coverage phase, where her costs significantly decreased.

As of January 1, 2025, this scenario simplifies dramatically. Mrs. Evans will pay her deductible, then cost-sharing until her out-of-pocket spending reaches $2,000, at which point she will pay nothing for covered medications for the rest of the year.⁷

Practical Applications

The changes to and eventual elimination of the acquired coverage gap have significant practical applications for Medicare beneficiaries and the broader healthcare landscape. For individuals, these changes aim to provide more predictable Benefits and reduce the financial burden, particularly for those with chronic conditions requiring expensive medications. This can lead to improved medication adherence, as beneficiaries are less likely to abandon prescriptions due to high costs once they enter a gap.

From a regulatory perspective, the phased closing and elimination of the gap reflect a policy shift towards greater affordability in prescription drug coverage under Medicare Part D. It impacts the financial models of private insurance plans that administer Part D, influencing how they structure Premiums and cost-sharing, and how they negotiate with pharmaceutical manufacturers. The elimination of the donut hole also simplifies the overall structure of Medicare Part D, making it easier for beneficiaries to understand their financial responsibilities. Starting in 2025, Medicare Part D enrollees will benefit from a new $2,000 cap on out-of-pocket prescription drug costs, which includes deductibles, copays, and coinsurance, but not premiums.⁶ Furthermore, an optional Medicare Prescription Payment Plan allows beneficiaries to pay out-of-pocket costs in monthly installments.⁵ This helps manage cash flow for those with high drug expenses.

Limitations and Criticisms

The original design of the acquired coverage gap faced considerable criticism, primarily due to the financial strain it placed on Medicare beneficiaries. Many individuals, especially those with chronic illnesses, found themselves bearing 100% of their Prescription Drug Costs during this period, often referred to as the "donut hole." This sudden increase in out-of-pocket expenses led to concerns about medication adherence, as some beneficiaries might reduce or stop taking necessary drugs to avoid high costs, potentially leading to worse health outcomes.⁴ The complexity of the Medicare Part D benefit structure, including the initial coverage limit, the acquired coverage gap, and the transition to Catastrophic Coverage, also proved challenging for beneficiaries to understand and navigate. While the Affordable Care Act addressed these criticisms by gradually closing the gap, the fact that it existed for so long highlighted a significant limitation in the program's initial design regarding equitable access to affordable medication.

Acquired Coverage Gap vs. Catastrophic Coverage

The acquired coverage gap and Catastrophic Coverage are two distinct phases within the Medicare Part D prescription drug benefit structure. The key difference lies in the beneficiary's financial responsibility. Historically, the acquired coverage gap was a period after the initial coverage phase where beneficiaries faced a significant increase in their out-of-pocket costs for prescription drugs. In contrast, catastrophic coverage is the phase that begins after a beneficiary has accumulated a high amount of out-of-pocket spending, signaling that they have met their annual Out-of-Pocket Maximum. Once in catastrophic coverage, the beneficiary's financial responsibility for covered drugs drastically decreases, often to a very small co-payment or coinsurance, or, as of 2024, to no cost-sharing for Part D beneficiaries receiving Extra Help (low-income Subsidies). The progression typically moved from deductible, to initial coverage, through the acquired coverage gap (if reached), and finally to catastrophic coverage. With the elimination of the acquired coverage gap in 2025, the transition is now directly from the initial coverage phase (after the deductible is met) to catastrophic coverage once the annual out-of-pocket cap is reached.

FAQs

Q: What was the purpose of the Medicare Part D coverage gap?
A: The Medicare Part D coverage gap, also known as the "donut hole," was initially designed to help control the overall costs of the Medicare prescription drug program when it was introduced in 2006. It created a period where beneficiaries had a higher financial responsibility for their medication costs.

Q: Is the Medicare Part D coverage gap still in effect?
A: No, the Medicare Part D coverage gap has been gradually closing due to the Affordable Care Act and subsequent legislation. As of January 1, 2025, the acquired coverage gap is eliminated, and beneficiaries will not pay anything for covered medications after reaching a $2,000 annual Out-of-Pocket Maximum.³,²

Q: How did the "donut hole" impact beneficiaries?
A: For many years, the "donut hole" meant that beneficiaries faced a significant increase in their Prescription Drug Costs after their initial coverage limit was met. This often led to financial hardship and, in some cases, caused individuals to ration or stop taking necessary medications.

Q: What replaced the acquired coverage gap?
A: With the elimination of the acquired coverage gap in 2025, the Medicare Part D benefit structure simplifies. After meeting their Deductible, beneficiaries pay a set co-payment or coinsurance until their total out-of-pocket spending for covered drugs reaches an annual cap, currently set at $2,000 for 2025. Once this cap is met, beneficiaries pay nothing for covered medications for the remainder of the year, effectively entering the catastrophic coverage phase directly.¹