How Does the Medicare Part D Donut Hole Work?

Medicare Part D provides prescription drug coverage. This program is structured with different stages of coverage, which determine how much beneficiaries pay for their prescriptions throughout the year. Understanding these phases is important, particularly with recent changes that have reshaped the benefit structure for 2025, including the elimination of what was commonly known as the “donut hole” or coverage gap.

The Phases of Part D Coverage

Medicare Part D coverage in 2025 operates through three distinct phases: the deductible phase, the initial coverage phase, and the catastrophic coverage phase. This streamlined structure aims to simplify prescription drug costs for beneficiaries. Each phase involves different cost-sharing arrangements between the beneficiary, the Part D plan, drug manufacturers, and Medicare itself.

The first stage is the deductible phase, where beneficiaries are generally responsible for the full cost of their covered prescription drugs up to a certain amount. For 2025, the standard deductible for Part D plans is $590. Some plans may offer a lower or even a zero-dollar deductible, though this might be accompanied by a higher monthly premium.

Once the deductible is met, beneficiaries enter the initial coverage phase. During this period, the Part D plan begins to share the cost of covered drugs. Beneficiaries typically pay 25% of their prescription drug costs. The Part D plan generally pays 65% of the costs for applicable drugs, and drug manufacturers contribute 10% through a new Manufacturer Discount Program.

The final stage is the catastrophic coverage phase, which beneficiaries reach after their out-of-pocket spending hits a specific threshold. In this phase, beneficiaries pay nothing for covered medications for the remainder of the calendar year. The costs are then covered by the Part D plan, drug manufacturers, and Medicare, with the plan paying 60%, manufacturers paying 20% for applicable drugs, and Medicare covering the remaining 20%.

Reaching the Catastrophic Coverage Phase

Entry into the catastrophic coverage phase is triggered when a beneficiary’s accumulated out-of-pocket spending on covered drugs reaches a specific annual threshold. For 2025, this threshold is set at $2,000. This means that once the sum of what the beneficiary has paid for their deductible, copayments, and coinsurance reaches $2,000, they transition directly into catastrophic coverage.

This new, lower out-of-pocket maximum simplifies the benefit structure by effectively eliminating the previous coverage gap, often called the “donut hole.” Previously, beneficiaries faced a temporary limit on what their drug plan would pay, leading to higher out-of-pocket costs in that phase. Now, the initial coverage phase extends until the $2,000 out-of-pocket cap is met.

The calculation of this out-of-pocket threshold is based on the true out-of-pocket (TrOOP) costs. These include payments made by the beneficiary for their deductible and their copayments or coinsurance during the initial coverage phase. Manufacturer discounts on covered medications no longer count towards a beneficiary’s out-of-pocket spending for reaching this threshold.

Your Costs in Initial Coverage

With the elimination of the distinct coverage gap phase for 2025, beneficiaries now experience more consistent cost-sharing from the deductible phase directly into the initial coverage phase, until they reach the out-of-pocket maximum. While in the initial coverage phase, beneficiaries are responsible for 25% of the cost of their covered prescription drugs. This applies to both brand-name and generic medications.

This structure means that beneficiaries continue to pay a consistent percentage of their drug costs until their total out-of-pocket spending reaches the $2,000 threshold. The previous complexities associated with varying discounts for brand-name versus generic drugs within the former coverage gap are no longer applicable in the same way.

This revised approach aims to provide greater predictability in prescription drug expenses throughout the year. The cost-sharing percentages remain consistent until the annual out-of-pocket limit is reached, rather than shifting dramatically as they did when entering the former coverage gap.

Moving Beyond the Catastrophic Coverage Phase

After reaching the annual out-of-pocket threshold of $2,000, beneficiaries automatically transition into the catastrophic coverage phase. In this phase, beneficiaries have no further out-of-pocket costs for covered prescription drugs for the remainder of the calendar year. This represents a significant financial protection, particularly for individuals with high prescription drug expenses.

The payments that contribute to this $2,000 out-of-pocket threshold are those made by the beneficiary, as detailed previously. Payments by the Part D plan or manufacturer discounts do not count.

Once the catastrophic coverage phase is entered, the financial responsibility for covered drugs shifts primarily to the Part D plan, drug manufacturers, and Medicare. This means beneficiaries can continue to receive their necessary medications without incurring additional costs, providing substantial relief and predictability in their healthcare budgeting.