OBJECTIVES: Estimate out-of-pocket pharmacy expenditures for elderly retirees with employer-sponsored coverage, under the standard Medicare drug plans that began on January 1, 2006. METHODS: Data came from the Medstat MarketScan Medicare Database, for 2004. Data included all medical and pharmacy claims for 1,220,902 seniors enrolled in retiree plans offered by large employers. (About 30% of non-institutionalized Medicare enrollees have retiree coverage.) Payments covered by the Medicare program and by private insurance were included. Analyses focused on 30,681 patients with diagnoses of depression, anxiety disorder, or schizophrenia in 2004. We estimated the out-of-pocket payments that would have been incurred by these beneficiaries, if the Medicare drug law had been in effect during 2004. We also estimated how long it may take to enter the “donut hole” where coverage stops (i.e., that period during which total pharmacy expenditures range from $2251 to $5100). RESULTS: Mean total pharmacy payments for these mental health patients were higher than payments for other patients with retiree coverage ($4491 for depression patients, $3364 for anxiety patients, and $5321 for schizophrenia patients, versus $2587 for the average Medicare beneficiary). The average mental health patient filled over 50 prescriptions for all medical problems. More than 30% would have entered the donut hole. Schizophrenia patients would have entered after about 4 months (in April). Depression patients would fall into the donut hole after about 6 months, while anxiety patients would enter after about 9 months, on average. Average out-of-pocket pharmacy payments under the new law would have ranged from $1858 for anxiety patients to $2407 for schizophrenia patients. CONCLUSIONS: Most patients with these psychiatric conditions will face high out of pocket costs, and will be faced with a donut hole of no coverage. Implications for adherence to pharmacotherapy and overall health should be considered by doctors and policy makers.