Perspectives

The Donut Hole as a Catalyst

What Medicare Part D Can Teach Us About Smarter Health Benefit Design

One of the most underappreciated behavioral design levers in healthcare may be something many beneficiaries have come to dread: the Medicare Part D “donut hole.” Often viewed purely as a financial burden, the donut hole—where consumers temporarily bear more of the cost—has also proven to be a powerful behavior-shaping mechanism. For years, it has directly influenced how seniors consume care, evaluate prescriptions, and engage in price-conscious decision-making. Now, it’s time to ask: What if we applied this same behavioral economics principle to employer-sponsored health plans?

And more importantly, what if we paired it with guaranteed, shoppable pricing for entire episodes of care?

The Behavioral Impact of the Donut Hole in Medicare Part D

Medicare’s Part D donut hole is a coverage gap that kicks in after a beneficiary’s total drug costs exceed an initial threshold. In this gap, the consumer is exposed to a larger share of the costs before catastrophic coverage begins. Studies have shown that during this phase:

• Prescription utilization drops, particularly for brand-name drugs.
• Generic substitution increases markedly.
• Consumers begin shopping and comparing more actively—even changing pharmacies.
• Many defer discretionary medication until they exit the donut hole, often reevaluating clinical necessity.

This is behavioral economics in action: cost-awareness rises when financial exposure is real and the consumer has skin in the game.

Applying the Donut Hole to Traditional Insurance: The Oxbridge Health Approach

In most traditional health plans, however, there is no moment of pause, no economic signal, and no behavioral trigger that makes consumers truly shop. Deductibles and coinsurance are often misunderstood, and fragmented billing hides true costs.

Oxbridge Health’s Episode Advantage program changes that by applying the logic of the donut hole to bundled, complete episodes of care.

Here’s how:

• Consumers are presented with guaranteed, all-in prices for episodes of care (e.g., knee replacement, maternity, asthma management).
• If the consumer chooses a lower-cost provider or care group, they may share in savings.
• Thresholds are embedded: If a consumer chooses a provider above a predefined value benchmark, the plan may limit reimbursement or require greater out-of-pocket exposure.
• This mirrors the donut hole—consumers become more attentive to value because they now have something to lose or gain.

Why This Matters for Employers

For employers, this approach yields immediate and sustained advantages:

• Trend mitigation: By embedding “donut hole-style” design into episodes of care, employers create natural price ceilings and behavioral nudges that steer employees to high-value care.
• Consumer engagement: Employees become discerning shoppers when the prices are transparent and the incentives are aligned.
• Sustainable cost control: Just as the donut hole slowed Medicare Part D spending growth, this approach prevents uncontrolled cost acceleration by putting friction in the right place—at the point of decision.

Parallels in Other Industries

This idea isn’t unique to healthcare. In fact, some of the most familiar business models use similar mechanisms:

• Airline travel: Basic economy tickets offer limited benefits, but consumers can “upgrade” for additional costs—once you reach a threshold, benefits resume (priority boarding, baggage).
• Auto insurance: High-deductible plans shift early exposure to the consumer. After hitting the deductible, coverage kicks in fully.
• Loyalty programs: Customers hit a spending threshold, then enjoy perks (rebates, upgrades, cashback), which resumes after hitting the next tier.

These models drive rational choice and trade-offs—consumers are empowered but not left without protection.

The Strategic Takeaway

The donut hole is not just a cost-shifting mechanism—it’s a behavioral design tool. By smartly integrating a version of it into shoppable, transparent episodes of care, employers can unlock the same consumer discipline that Medicare inadvertently triggered in seniors.

Oxbridge Health’s Episode Advantage is designed precisely for this purpose: to make care truly shoppable, to embed behavioral nudges, and to restore consumer agency—all while managing cost trend without resorting to denial of care or network narrowing.

In a world where transparency and consumerism are finally meeting benefit design, the donut hole may hold more promise than anyone imagined.