When Medicare Part D was unveiled, it provided millions of seniors with much-needed health insurance coverage for prescription drugs. Unfortunately, the program was structured in such a way that left a significant gap in coverage, which has been dubbed the "donut hole."

Health care reform addresses the donut hole in several ways. Eligible seniors who find themselves in the coverage gap received a $250 rebate checks in 2010, and 2011 ushered in on-going change designed to close the donut hole altogether.

What is the donut hole?

What does it mean to fall into the donut hole? Most standard Part D plans follow a standard structure, which has four phases:

  1. Deductible: You pay 100 percent of drug costs until the deductible is met ($310 in 2011)
  2. Initial coverage: You pay 25 percent of total prescription drug costs up to an initial coverage limit ($2,840 in 2011)
  3. Donut hole: You pay 50 percent of covered brand name drugs and 93 percent of generics up to an out-of-pocket threshold ($4,550 in 2011).
  4. Catastrophic coverage: You pay the greater part of 5 percent of the drug cost, or $2.50 for covered generics and $6.30 for covered brands.

How health reform closes the coverage gap

So what's different? Prior to 2011, most standard Medicare Part D plans had an initial coverage limit of $2,800. Once your total prescription drug cost reached that amount, you had to pay for 100 percent of the out-of-pocket medication costs until catastrophic coverage kicked in. Now, people who reach the current initial coverage limit receive a 50 percent discount on covered brand name prescriptions and a 7 percent Medicare generic drug subsidy, which are usually automatically applied by the pharmacy.

Discounts for brand name and generic prescriptions will continue until 2020. At that time, the donut hole will be closed, and health insurance plans will be limited to charging seniors 25 percent of the price of medication.