Getting Out of the Donut Hole: How the New Drug Cap Works

Medicare Part D helps manage the costs of prescription medications. Historically, this coverage included a period known as the “donut hole” or coverage gap, where beneficiaries were responsible for a larger share of their drug expenses. Starting in 2025, however, the Medicare Part D benefit structure has undergone substantial changes, eliminating this coverage gap. This article clarifies the new phases of Part D coverage and explains the new annual out-of-pocket spending cap.

Understanding the Medicare Part D Coverage Phases

Beginning January 1, 2025, the Medicare Part D prescription drug benefit is simplified into three distinct phases. These phases determine how much a beneficiary pays for covered prescription drugs throughout the calendar year. The structure aims to provide greater predictability and financial protection for individuals.

The first phase is the deductible period, where beneficiaries pay 100% of their prescription drug costs until a set deductible is met. For 2025, the standard deductible for Part D plans is $590. Once this deductible is satisfied, individuals transition into the next phase of coverage.

Following the deductible, beneficiaries enter the initial coverage phase. In this period, the Part D plan begins to share costs, and the beneficiary typically pays 25% of their prescription drug expenses. This phase continues until the beneficiary’s total out-of-pocket spending on covered drugs reaches a specific limit.

The significant change for 2025 is the elimination of the traditional “coverage gap” or “donut hole” phase. Instead, once out-of-pocket costs reach $2,000, beneficiaries immediately move into the catastrophic coverage phase, where their costs are substantially reduced. This new structure means beneficiaries will not experience a period of increased cost-sharing.

Counting Towards the Annual Out-of-Pocket Cap

This cap, set at $2,000 for 2025, is determined by what Medicare defines as True Out-of-Pocket (TrOOP) costs. TrOOP represents the total amount a beneficiary, or others on their behalf, must spend on covered prescription drugs before reaching the catastrophic coverage phase.

Several types of payments count towards this $2,000 TrOOP limit. This includes the annual deductible paid by the beneficiary. Also, any co-payments and co-insurance amounts paid during the initial coverage phase directly contribute to the TrOOP total. Amounts paid by certain programs or other individuals on the beneficiary’s behalf, such as state pharmaceutical assistance programs or most charities, also count towards the TrOOP threshold.

Not all prescription drug-related expenses contribute to the TrOOP calculation. Monthly plan premiums for Part D coverage are not included in TrOOP costs. The cost of drugs not covered by the Part D plan’s formulary, or pharmacy dispensing fees, also do not count towards the out-of-pocket cap.

Reaching the Catastrophic Coverage Phase

This phase is triggered once an individual’s accumulated True Out-of-Pocket (TrOOP) costs reach the annual cap of $2,000 for 2025. This threshold represents the total amount spent by the beneficiary and qualifying third parties on covered prescription medications.

Upon reaching this $2,000 out-of-pocket limit, beneficiaries transition into the catastrophic coverage phase. Once in this phase, beneficiaries pay $0 for all covered prescription drugs for the remainder of the calendar year. This change provides a definitive end to out-of-pocket spending on prescription drugs for those with high costs.

The costs of medications in the catastrophic phase are then primarily covered by the Part D plan, drug manufacturers, and Medicare. This shift in responsibility after the $2,000 cap ensures financial protection, preventing unlimited out-of-pocket expenses.

Annual Reset of the Coverage Gap

Each calendar year, the Medicare Part D coverage cycle undergoes a complete reset. On January 1st, all beneficiaries begin anew in the deductible phase, regardless of where they ended the previous year. This means that accumulated spending towards the out-of-pocket cap resets, and individuals once again start contributing towards their deductible and initial coverage costs.

The financial thresholds for each phase of Part D coverage, including the deductible and the annual out-of-pocket cap, are typically adjusted on an annual basis.

This annual reset means that reaching the catastrophic coverage phase is an achievement for that specific year, not a permanent status. While the new $2,000 out-of-pocket cap provides significant financial predictability, the cycle of cost-sharing begins afresh at the start of every new year.