The Health Insurance Donut Hole and What Replaced It
Understand the evolving structure of Medicare Part D prescription drug costs, navigating initial phases, the coverage gap, and catastrophic protection.
The “donut hole” in health insurance refers to a period within Medicare Part D prescription drug plans where beneficiaries historically paid a higher percentage of their medication costs. This phase, formally known as the coverage gap, was a concern for many individuals requiring costly prescriptions. The structure of Medicare Part D has undergone substantial changes, particularly starting in 2025, which have eliminated this specific coverage gap. This change is a direct result of the Inflation Reduction Act of 2022. These modifications aim to simplify the prescription drug benefit and reduce out-of-pocket expenses for beneficiaries.
The Initial Coverage Phases
Medicare Part D prescription drug coverage begins with a deductible phase, where the beneficiary is responsible for a set amount of their drug costs before their plan starts to contribute. For 2025, the standard deductible for Part D plans is $590, though some plans may offer a lower or even a zero-dollar deductible. Once this deductible is satisfied, beneficiaries transition into the initial coverage phase.
In this initial coverage phase, the costs of prescription medications are shared between the beneficiary and the Part D plan. Typically, beneficiaries pay a coinsurance amount, which is a percentage of the drug’s cost, while the plan covers the remainder. For 2025, beneficiaries in this phase will generally pay 25% of their prescription drug costs. The Part D plan will cover 65% of the costs, and for applicable brand-name drugs, the manufacturer will contribute 10% through a new Manufacturer Discount Program. This phase continues until the beneficiary’s out-of-pocket spending reaches a specific annual threshold, which then leads directly into the catastrophic coverage phase.
Entering the Coverage Gap
Historically, after the initial coverage phase, beneficiaries would enter what was widely known as the “donut hole” or coverage gap. This phase was triggered when the combined total retail cost of drugs paid by both the beneficiary and their plan reached a certain limit. Within this former coverage gap, beneficiaries were responsible for a higher percentage of their prescription drug costs, typically 25% for both brand-name and generic medications. Manufacturer discounts for brand-name drugs played a role in this phase, with these discounts also counting towards the spending needed to exit the gap.
Exiting the Coverage Gap
After satisfying their deductible and progressing through the initial coverage phase, beneficiaries will enter the catastrophic coverage phase once their true out-of-pocket (TrOOP) costs reach a specific annual threshold. For 2025, this out-of-pocket spending cap is set at $2,000. This amount includes the beneficiary’s payments for their deductible, copayments, and coinsurance.
Upon reaching this $2,000 out-of-pocket threshold, beneficiaries enter the catastrophic coverage phase and will pay nothing for covered prescription drugs for the remainder of the calendar year. All these coverage phases—the deductible, initial coverage, and catastrophic coverage—reset at the beginning of each calendar year, requiring beneficiaries to restart their progress toward the out-of-pocket cap.