What Is the Medicare Part D Doughnut Hole?
Demystify the Medicare Part D "doughnut hole." Understand how this coverage phase impacts your prescription drug costs and how it has evolved.
The Medicare Part D “doughnut hole,” or coverage gap, represented a temporary limit on what a prescription drug plan would cover for medications. This structure meant that after a certain amount of drug spending, beneficiaries temporarily paid a higher percentage of their prescription drug costs until they reached a higher spending threshold. However, due to recent legislative changes, this coverage gap phase has been eliminated as of January 1, 2025, significantly altering the structure of Medicare Part D prescription drug benefits.
Understanding Medicare Part D Coverage Phases
Medicare Part D prescription drug coverage operates through distinct phases that beneficiaries typically move through annually, based on their total drug spending. For 2025, the benefit structure has been simplified to three primary phases: the deductible phase, the initial coverage phase, and the catastrophic coverage phase.
During the deductible phase, beneficiaries pay 100% of their prescription drug costs until a set deductible amount is met. In 2025, the standard deductible for Part D plans is $590, though some plans may offer a lower or even a zero-dollar deductible. Once the deductible is satisfied, a beneficiary transitions into the initial coverage phase.
In the initial coverage phase, the Part D plan begins to cover a portion of drug costs, and the beneficiary pays a co-payment or co-insurance. For 2025, beneficiaries typically pay 25% of their prescription drug costs during this phase. This phase continues until the beneficiary’s out-of-pocket spending on covered drugs reaches a specific annual cap. Upon reaching this cap, beneficiaries move directly into the catastrophic coverage phase.
Financial Responsibility in the Coverage Gap
Historically, after the initial coverage phase and before reaching catastrophic coverage, Medicare Part D beneficiaries entered a period known as the coverage gap, or “doughnut hole.” During this phase, beneficiaries paid a higher percentage of drug costs. For instance, before 2011, beneficiaries were responsible for 100% of their drug costs in this gap.
Over time, legislative changes gradually reduced the beneficiary’s responsibility in this gap. By 2020, the amount beneficiaries paid for both brand-name and generic drugs while in the coverage gap was reduced to 25% of the drug’s cost. Manufacturer discounts played a significant role, with drug manufacturers providing a substantial discount on brand-name drugs, which also counted towards the beneficiary’s out-of-pocket costs. This specific phase no longer exists as of January 1, 2025, due to the redesign of the Part D benefit.
Reaching Catastrophic Coverage
Beneficiaries progress into the catastrophic coverage phase once their True Out-of-Pocket (TrOOP) costs reach a specific threshold. For 2025, this threshold is $2,000. TrOOP costs encompass the amounts a beneficiary has paid for covered prescription drugs, including their deductible, co-payments, and co-insurance incurred during the initial coverage phase. Certain payments made on a beneficiary’s behalf, such as those from qualified State Pharmaceutical Assistance Programs or the Extra Help program, also count towards TrOOP.
Manufacturer discounts on brand-name drugs, particularly those applied in the initial coverage phase, also contribute to a beneficiary’s TrOOP accumulation. Once the $2,000 TrOOP limit is met, beneficiaries enter the catastrophic coverage phase and pay no further out-of-pocket costs for covered prescription drugs for the remainder of the calendar year.
Historical Changes to the Coverage Gap
The Medicare Part D coverage gap originated with the Medicare Modernization Act of 2003. This gap was intended to manage program costs but resulted in significant out-of-pocket expenses for many beneficiaries. The Affordable Care Act (ACA) of 2010 began the process of gradually closing this gap, introducing provisions that progressively reduced the beneficiary’s share of costs. Further changes, most notably from the Inflation Reduction Act (IRA) of 2022, have completely eliminated the coverage gap phase as of January 1, 2025. The IRA simplified the Part D benefit structure and introduced a new annual out-of-pocket spending cap, ensuring beneficiaries face no further costs once that limit is reached.