How Long Is the Medicare Donut Hole? What Replaced It?

Medicare Part D provides prescription drug coverage, helping individuals manage medication costs. Over time, the structure of this coverage has evolved, particularly concerning a phase previously known as the “coverage gap” or “donut hole.” This phase historically required beneficiaries to pay a higher share of their drug costs after reaching a certain spending threshold. Understanding the current framework of Medicare Part D coverage is important for anticipating prescription drug expenses and navigating the benefit structure.

Medicare Part D Coverage Phases

Medicare Part D prescription drug plans operate through a series of defined coverage phases, each dictating how drug costs are shared between the beneficiary, the plan, and other entities. For 2025, the benefit structure has been simplified to three primary phases. These phases include the deductible, initial coverage, and catastrophic coverage.

The deductible period is the first phase, where individuals pay 100% of their prescription drug costs until a set amount is met. In 2025, the standard deductible for Part D plans is $590, though some plans may offer a lower or even zero deductible. Once the deductible is satisfied, beneficiaries transition into the initial coverage phase.

During the initial coverage phase, beneficiaries typically pay a portion of their drug costs, usually in the form of copayments or coinsurance. For 2025, beneficiaries generally pay 25% of their prescription drug costs during this phase. The Part D plan covers 65% of the cost, and for applicable brand-name drugs, the manufacturer contributes a 10% discount. This phase continues until the beneficiary’s out-of-pocket spending on covered drugs reaches a specific annual limit.

The final phase is catastrophic coverage, which is reached once a beneficiary’s out-of-pocket spending for covered drugs hits a predetermined threshold. Starting in 2025, this annual out-of-pocket limit is set at $2,000. Once this $2,000 cap is met, beneficiaries pay $0 for their covered prescription drugs for the remainder of the calendar year.

How Spending Counts Towards Exiting the Coverage Gap

Understanding what contributions count towards a beneficiary’s True Out-of-Pocket (TrOOP) spending is important for tracking progress through the Medicare Part D benefit phases. TrOOP refers to the amount of money an individual or certain third parties spend on covered prescription drugs, which ultimately determines when they reach the catastrophic coverage phase.

Several specific types of payments contribute to an individual’s TrOOP. These include the annual deductible paid by the beneficiary. Co-payments and coinsurance incurred during the initial coverage phase also count towards TrOOP. Furthermore, any amounts paid directly by the beneficiary for covered drugs contribute to this total.

The manufacturer discount provided on brand-name drugs, particularly during the initial coverage phase, also contributes to TrOOP. Payments made on a beneficiary’s behalf by certain programs, such as State Pharmaceutical Assistance Programs or AIDS Drug Assistance Programs, are included in TrOOP calculations. Additionally, for 2025, payments for previously excluded supplemental benefits provided by Part D sponsors and Employer Group Waiver Plans now count towards TrOOP.

However, not all payments associated with prescription drug coverage contribute to TrOOP. Monthly Part D premiums, for instance, do not count towards this out-of-pocket threshold. Similarly, the cost of drugs not covered by the Part D plan does not contribute to TrOOP accumulation. The new Manufacturer Discount Program’s contribution, which replaces the previous Coverage Gap Discount Program, is also excluded from the beneficiary’s TrOOP. Knowing these distinctions helps beneficiaries anticipate when they will reach the $2,000 out-of-pocket limit and transition to $0 cost-sharing for the remainder of the year.

The Evolving Coverage Gap

The concept of the Medicare Part D coverage gap, often called the “donut hole,” has undergone significant changes over time, particularly due to legislative reforms. Originally, this phase required beneficiaries to pay a much larger share of their drug costs after initial coverage limits were met but before catastrophic coverage began. This structure created a period of substantial financial vulnerability for many individuals.

The Affordable Care Act (ACA) introduced provisions designed to gradually reduce the burden of the coverage gap. These changes aimed to “close” the donut hole by increasing the discounts and subsidies available within this phase. For example, the ACA gradually increased the manufacturer discount on brand-name drugs and introduced a government subsidy for generic drugs within the gap.

A more transformative change occurred with the Inflation Reduction Act (IRA), which, effective January 1, 2025, effectively eliminated the coverage gap phase. Instead, the Part D benefit structure now flows directly from the deductible phase to the initial coverage phase, and then to catastrophic coverage once the annual out-of-pocket spending limit is met.

Under the new structure for 2025, beneficiaries will continue to pay 25% of their drug costs in the initial coverage phase, with manufacturer discounts applied to brand-name drugs. The most significant change is the new $2,000 annual out-of-pocket cap. Once this cap is reached, beneficiaries pay nothing for their covered prescription drugs for the remainder of the plan year. This change provides a clear financial ceiling for drug costs, offering greater predictability and protection for individuals with high prescription expenses.