Do All Medicare Plans Have a Donut Hole?
Not all Medicare plans include the prescription drug coverage gap. Understand how the 'donut hole' works and its impact on your costs.
Medicare Part D helps manage prescription medication costs. Historically, the “coverage gap” or “donut hole” caused confusion and increased out-of-pocket costs for beneficiaries. However, legislative changes taking effect in 2025 will simplify prescription drug coverage and introduce a new annual limit on out-of-pocket spending, fundamentally altering how these costs are managed.
Understanding the Medicare Part D Coverage Stages
Beginning in 2025, the structure of Medicare Part D prescription drug coverage will consist of three primary phases. These phases determine how much a beneficiary pays for their medications throughout the year.
The first phase is the annual deductible stage. During this period, beneficiaries are generally responsible for paying the full cost of their covered prescription drugs until a specific amount is met. For 2025, the standard deductible for Part D plans is set at $590.
After the deductible is satisfied, beneficiaries enter the initial coverage stage. In this phase, both the beneficiary and the plan share the cost of covered prescription drugs. Typically, the beneficiary pays 25% of the drug cost, while the Part D plan covers 65% of applicable drugs, and the drug manufacturer contributes 10% through a discount program. This cost-sharing continues until the beneficiary’s accumulated out-of-pocket spending reaches a specific threshold.
The third phase for 2025 is catastrophic coverage. This stage begins once a beneficiary’s out-of-pocket costs for covered prescription drugs reach $2,000. A significant change for 2025 is that once this threshold is met, individuals will pay nothing for covered Part D drugs for the remainder of the calendar year. This new $2,000 out-of-pocket cap is a direct result of the Inflation Reduction Act of 2022.
Medicare Plans with Drug Coverage
Not all Medicare plans include prescription drug coverage. Understanding which types of Medicare plans incorporate drug benefits helps clarify how the cost phases apply to an individual’s coverage.
Original Medicare, which comprises Part A (hospital insurance) and Part B (medical insurance), does not provide coverage for most outpatient prescription drugs. Consequently, individuals enrolled only in Original Medicare do not encounter the drug coverage phases, including the former “donut hole” or the new simplified structure. To obtain prescription drug coverage, beneficiaries with Original Medicare must enroll in a separate Part D plan.
Medicare Part D plans are standalone prescription drug plans offered by private insurance companies approved by Medicare. These plans work in conjunction with Original Medicare to provide prescription drug benefits. Since these plans specifically cover medications, they incorporate the deductible, initial coverage, and catastrophic coverage phases, including the $2,000 out-of-pocket cap implemented for 2025.
Medicare Advantage Plans, also known as Part C, are an alternative to Original Medicare offered by private companies. Many Medicare Advantage plans, referred to as Medicare Advantage Prescription Drug (MAPD) plans, combine Part A, Part B, and prescription drug coverage into a single plan. If a Medicare Advantage plan includes prescription drug coverage, it must adhere to the same Part D benefit structure, including the $2,000 out-of-pocket cap for covered drugs starting in 2025.
Impact of the New Benefit Design and Associated Costs
The Medicare Part D benefit design has undergone substantial changes for 2025, primarily stemming from the Inflation Reduction Act of 2022. These modifications are intended to simplify the benefit structure and provide greater financial relief for beneficiaries with high prescription drug costs.
A significant outcome of this legislation is the elimination of the traditional “coverage gap,” often referred to as the “donut hole.” Starting in 2025, the previous “coverage gap” phase is formally removed from the Part D benefit structure. This means beneficiaries will no longer face a period where they pay a higher percentage of their drug costs after exiting the initial coverage limit. Instead, once the deductible is met, beneficiaries remain in the initial coverage phase until their out-of-pocket spending reaches the new annual cap.
The new annual out-of-pocket spending cap of $2,000 for covered Part D drugs is a central feature. This cap includes any amounts paid towards the deductible, copayments, and coinsurance. Once a beneficiary’s combined out-of-pocket spending for covered medications reaches this $2,000 limit, they will pay nothing for their covered Part D drugs for the remainder of the calendar year. This provides a clear ceiling on annual drug expenses, offering greater predictability in healthcare budgeting.
During the initial coverage phase, beneficiaries are responsible for 25% of their prescription drug costs. For brand-name drugs, a manufacturer discount program contributes 10% of the cost, which also counts towards the beneficiary’s out-of-pocket spending accumulation towards the $2,000 cap.
Key Factors Influencing Prescription Drug Costs
Several elements can influence an individual’s experience with Medicare Part D costs. Understanding these factors can help beneficiaries manage their prescription drug expenses.
Annual thresholds play a significant role in determining how much a person pays throughout the year. The standard annual deductible for Part D plans in 2025 is $590, meaning beneficiaries pay 100% of their drug costs up to this amount before their plan begins to contribute. The new $2,000 out-of-pocket spending cap for covered Part D drugs for 2025 establishes the maximum amount an individual will pay in a calendar year. These thresholds are subject to annual adjustments.
The types of drugs a beneficiary takes also affect their spending. Higher-cost medications, particularly brand-name drugs, will naturally lead to reaching the deductible and the $2,000 out-of-pocket cap more rapidly than lower-cost generic alternatives. Choosing generic drugs when available can help manage overall expenses, even with the new cap in place.
A crucial factor that significantly alters the cost-sharing experience is qualifying for the Low-Income Subsidy (LIS), often referred to as “Extra Help.” Beneficiaries who meet specific income and resource limits, generally up to 150% of the Federal Poverty Level, are eligible for this subsidy. Individuals who receive Extra Help do not experience the standard Part D coverage phases in the same way; their prescription drug costs are substantially reduced, often resulting in no monthly premiums, no annual deductible, and very low copayments for covered medications. For 2025, those with Extra Help will pay no more than $4.90 for each generic drug and $12.15 for each brand-name drug.