What Does the Coverage Gap Mean in Medicare Part D?

The term “coverage gap” in Medicare Part D refers to a temporary phase in prescription drug coverage where beneficiaries historically paid a higher percentage of their medication costs. Often called the “donut hole,” this period of reduced coverage occurred after initial benefits were exhausted but before catastrophic coverage began. Due to the Inflation Reduction Act, the Medicare Part D coverage gap is eliminated starting January 1, 2025. This change simplifies the prescription drug benefit structure and reduces out-of-pocket costs for many beneficiaries.

Understanding the Coverage Gap (Historical Context)

Historically, the Medicare Part D “coverage gap” was a specific period in a beneficiary’s annual drug spending. This phase, also known as the “donut hole,” represented a gap in coverage where the beneficiary was responsible for a larger portion of their prescription drug costs. It occurred after the initial coverage limit was reached but before out-of-pocket spending qualified them for catastrophic coverage.

The coverage gap was a design feature of the standard Medicare Part D benefit. It represented a temporary limit on what a Medicare Part D plan would pay for prescription drugs. While beneficiaries received discounts during this phase, their financial responsibility was considerably higher than in the initial coverage period. As of January 1, 2025, this coverage gap has been eliminated.

How Medicare Part D Works (New 2025 Structure)

The Medicare Part D program for 2025 features a simplified three-phase structure for prescription drug coverage, a change resulting from the Inflation Reduction Act. These phases determine how much a beneficiary pays for covered prescription medications throughout the plan year. This redesign aims to provide more predictable costs and greater financial protection.

The first phase is the Deductible Phase. During this period, beneficiaries pay 100% of their covered prescription drug costs until they meet their plan’s deductible. For 2025, the standard deductible for Part D plans is capped at $590, though some plans may offer a lower or zero-dollar deductible.

After the deductible is satisfied, beneficiaries enter the Initial Coverage Phase. In this phase, beneficiaries pay 25% of the cost for their covered prescription drugs, usually through copayments or coinsurance. The Part D plan pays 65% of the cost, and for brand-name drugs, the manufacturer covers the remaining 10% through a new Manufacturer Discount Program. This phase continues until the beneficiary’s accumulated out-of-pocket spending reaches a specific threshold.

The Initial Coverage Phase now directly leads into the Catastrophic Coverage Phase. This phase concludes when a beneficiary’s true out-of-pocket (TrOOP) costs reach $2,000 for the year. Once this $2,000 cap is met, beneficiaries pay $0 for covered Part D drugs for the remainder of the calendar year. In this final phase, the Part D plan pays 60% of the drug costs, drug manufacturers contribute 20% for applicable drugs, and Medicare covers the remaining 20% (for applicable drugs) or 40% (for other covered drugs).

Costs Within the Former Coverage Gap

With the elimination of the coverage gap for 2025, beneficiaries will no longer encounter the specific cost-sharing percentages previously associated with this phase. In prior years, once a beneficiary reached the coverage gap, they paid a discounted amount, typically 25% for both brand-name and generic drugs. This payment structure meant that even with discounts, beneficiaries still faced significant out-of-pocket expenses during this period.

Starting in 2025, after meeting their initial deductible and progressing through the Initial Coverage Phase, beneficiaries transition directly to the Catastrophic Coverage Phase once their true out-of-pocket (TrOOP) costs reach the annual cap of $2,000. Once this $2,000 threshold is met, the beneficiary’s cost-sharing for covered prescription drugs becomes zero for the rest of the plan year. TrOOP costs include amounts paid by the beneficiary, such as deductibles, copayments, and coinsurance, as well as payments made on their behalf by certain assistance programs.

Assistance Programs and Strategies

One significant resource is the “Extra Help” program, also known as the Low-Income Subsidy (LIS), offered by Medicare. This program assists individuals with limited income and resources by reducing or eliminating their Part D premiums, deductibles, and copayments. For 2025, to qualify for Extra Help, a single person must have an income less than $23,475 and resources less than $17,600, while married couples must have an income less than $31,725 and resources less than $35,130. Those who qualify for Extra Help pay no more than $4.90 for generic drugs and $12.15 for brand-name drugs in 2025.

Some pharmaceutical manufacturers offer patient assistance programs for specific high-cost drugs. These programs can provide financial support or free medications to eligible individuals, helping to lower out-of-pocket spending. Beneficiaries may research these programs directly with drug manufacturers or through patient advocacy organizations.

Reviewing Medicare Part D plans annually during the Open Enrollment Period is a strategy for managing costs. This period runs from October 15 to December 7 each year, allowing beneficiaries to compare plans, assess their formularies (list of covered drugs), and evaluate cost-sharing structures for the upcoming year. Choosing a plan that best aligns with current medication needs and financial situations can lead to substantial savings.