How Does the Donut Hole Work With Medicare?

Medicare Part D provides prescription drug coverage to help manage the substantial costs associated with medications. This component of Medicare is offered through private insurance companies approved by Medicare, offering various plans with different costs and covered drugs. Understanding how these plans structure costs is important for beneficiaries navigating their healthcare expenses.

Understanding Medicare Part D Coverage Phases

Medicare Part D plans organize prescription drug costs into distinct phases, determining how much a beneficiary pays throughout the year. For 2025, the structure of these phases has been simplified to enhance predictability and reduce financial burdens for enrollees. The traditional coverage gap, often referred to as the “donut hole,” has been eliminated as of January 1, 2025, due to provisions of the Inflation Reduction Act.

The first phase is the annual deductible period, during which beneficiaries typically pay the full cost of their covered prescription medications. The standard deductible for Medicare Part D plans in 2025 is $590, though some plans may offer a lower or even a zero-dollar deductible. Once the deductible amount has been met, beneficiaries then transition into the initial coverage phase.

In the initial coverage phase, both the plan and the beneficiary share the cost of covered prescription drugs. During this period, beneficiaries generally pay 25% of their prescription drug costs, often in the form of copayments or coinsurance. The Part D plan typically covers the remaining 65% of costs for applicable drugs, with drug manufacturers contributing 10%. This phase continues until the beneficiary’s accumulated out-of-pocket spending reaches a specific threshold.

The Coverage Gap Defined

Prior to 2025, Medicare Part D included a distinct phase known as the “coverage gap,” commonly referred to as the “donut hole.” This phase represented a temporary limit on what the Part D plan would pay for prescription drugs. Beneficiaries would enter this gap once the total cost of their drugs, including what they and their plan had paid, reached a certain limit in the initial coverage phase. Historically, during the coverage gap, beneficiaries were responsible for a significantly larger percentage of their drug costs than in the initial coverage phase. This shift in cost-sharing led to unexpected and substantial out-of-pocket expenses for individuals with high prescription drug needs.

Discounts Within the Coverage Gap

While the coverage gap presented a period of increased beneficiary responsibility, certain discounts were in place to help mitigate these costs and facilitate progression toward the next phase of coverage. These discounts applied specifically to brand-name and generic drugs purchased while in the gap. However, these specific discount structures related to the coverage gap were eliminated with the changes to Medicare Part D in 2025.

Historically, for brand-name drugs purchased within the coverage gap, beneficiaries typically paid 25% of the retail price. The remaining 75% was covered through a combination of a manufacturer discount, which typically accounted for 70% of the cost, and the Part D plan covering 5%. This manufacturer discount counted towards the beneficiary’s out-of-pocket spending, helping them move more quickly through the coverage gap.

For generic drugs in the coverage gap, beneficiaries were also responsible for 25% of the cost. The Part D plan covered the remaining 75% of the generic drug cost. Unlike brand-name drugs, there was no manufacturer discount for generic drugs in this phase, meaning only the beneficiary’s actual out-of-pocket payment counted toward exiting the gap.

Reaching Catastrophic Coverage

With the significant changes introduced in 2025, the path to catastrophic coverage has been streamlined, enhancing financial protection for beneficiaries. After navigating the deductible and initial coverage phases, beneficiaries now transition directly into catastrophic coverage once their out-of-pocket spending reaches a defined annual limit.

For 2025, once a beneficiary’s out-of-pocket costs for covered prescription drugs reach $2,000, they enter the catastrophic coverage phase. This $2,000 cap includes amounts paid towards the deductible, copayments, and coinsurance from the initial coverage phase. Upon reaching this threshold, beneficiaries pay nothing for their covered medications for the remainder of the calendar year.

In this catastrophic phase, the financial responsibility shifts significantly, with the Part D plan covering 60% of drug costs, drug manufacturers contributing 20%, and Medicare covering the remaining 20%. This structure ensures that once the $2,000 out-of-pocket limit is met, individuals face no further costs for their covered prescription drugs, providing substantial financial relief and predictability.