What Is the Doughnut Hole in Insurance?

The term “doughnut hole” in insurance refers to a specific feature of Medicare Part D, which provides prescription drug coverage. It represents a temporary limit on what a Medicare Part D plan will cover for medications, creating a period where beneficiaries traditionally paid a higher percentage of their drug costs. This concept has undergone significant changes in recent years, particularly in 2025, aiming to reduce the financial burden on individuals.

Understanding Medicare Part D Coverage Stages

Medicare Part D prescription drug coverage involves distinct phases that a beneficiary progresses through over a calendar year. Historically, there were four stages, but recent legislative changes have simplified this structure for 2025. Understanding these stages clarifies how prescription drug costs are managed throughout the year.

The first stage is the deductible phase, where the beneficiary is responsible for 100% of their covered prescription drug costs until a set amount is met. For 2025, the standard deductible for Medicare Part D plans is $590. Once the deductible is satisfied, individuals transition into the initial coverage phase.

During the initial coverage phase, the beneficiary pays a portion of the drug cost through coinsurance or a copayment, while the plan covers the remaining amount. For 2025, beneficiaries pay 25% coinsurance for their covered prescription drugs. This phase continues until the beneficiary’s total out-of-pocket spending, which includes the deductible, copayments, and coinsurance, reaches a specific annual limit.

As of 2025, the traditional “coverage gap” or “doughnut hole” phase has been eliminated. Instead, the 25% coinsurance from the initial coverage phase continues. Once a beneficiary’s out-of-pocket spending reaches a new annual cap, they immediately enter the catastrophic coverage phase.

The final stage is catastrophic coverage, which begins once a beneficiary’s out-of-pocket spending for covered Part D drugs reaches a specific threshold. For 2025, this threshold is set at $2,000. After reaching this limit, beneficiaries pay nothing for covered prescription drugs for the remainder of the calendar year.

The Coverage Gap Explained

The “doughnut hole,” or coverage gap, referred to a period in Medicare Part D where a beneficiary’s prescription drug costs temporarily increased significantly. Starting in 2025, this gap has been fundamentally altered, effectively eliminating it as a distinct period of high cost-sharing. This means the previous structure where beneficiaries paid a high percentage of costs in the gap no longer applies.

With the gap eliminated, beneficiaries continue to pay 25% coinsurance for covered generic and brand-name drugs after their deductible is met. This 25% cost-sharing applies until their total out-of-pocket spending on covered medications reaches the annual cap of $2,000. This cap includes payments made by the beneficiary for their deductible, copayments, and coinsurance.

Manufacturer discounts on brand-name drugs also contribute to reaching this $2,000 out-of-pocket spending cap. Monthly premiums paid for the Part D plan do not count towards this threshold. Once the $2,000 out-of-pocket cap is satisfied, the beneficiary pays nothing for covered Part D drugs for the remainder of the year, entering the catastrophic coverage phase.

Assistance and Evolution of the Coverage Gap

The structure of the Medicare Part D coverage gap has evolved significantly due to the Inflation Reduction Act (IRA) of 2022. This legislation aimed to reduce out-of-pocket drug costs for Medicare beneficiaries, leading to the effective elimination of the traditional “doughnut hole” in 2025. Under the IRA, the annual out-of-pocket spending for covered Part D drugs is capped at $2,000, ensuring beneficiaries have a predictable limit on their costs.

For individuals with limited income and resources, the Low-Income Subsidy (LIS), also known as Extra Help, provides substantial financial assistance with Medicare Part D costs. This federal program helps qualified beneficiaries with premiums, deductibles, and copayments. Eligibility for Extra Help is based on income up to 150% of the Federal Poverty Level and specific resource limits.

Beneficiaries who qualify for Extra Help pay no premiums or deductibles for their Part D plan. Their out-of-pocket drug costs are significantly reduced, with fixed low copayments, such as $4.90 for covered generic drugs and $12.15 for covered brand-name drugs in 2025.

Manufacturer discounts also play a role in reducing beneficiary costs within the Part D structure. These discounts, particularly for brand-name drugs, contribute to the beneficiary’s out-of-pocket spending, helping them reach the annual $2,000 cap faster.

Beyond federal programs, some states offer State Pharmaceutical Assistance Programs (SPAPs) that can provide additional help with prescription drug costs. These state-run initiatives often provide “wraparound” coverage, assisting with expenses that Medicare Part D does not fully cover. The specific eligibility requirements and benefits of SPAPs vary by state.