When Does the Medicare Donut Hole Go Away?
Learn when and how the Medicare Part D "donut hole" is going away, and what it means for your prescription drug costs.
Medicare Part D is a federal program that helps beneficiaries manage prescription medication costs. Effective in 2006, it addresses a significant financial concern for many seniors. This article clarifies the current status and upcoming changes related to the “donut hole,” formally known as the Medicare Part D coverage gap.
Understanding the Medicare Part D Coverage Gap
The Medicare Part D coverage gap, commonly referred to as the “donut hole,” historically represented a period in prescription drug coverage where beneficiaries faced a temporary change in their cost-sharing responsibilities. This gap occurred after a beneficiary and their drug plan had spent a certain amount on covered medications during the initial coverage phase, but before reaching the catastrophic coverage level. When Part D was first implemented in 2006, beneficiaries in this gap were often responsible for 100% of their drug costs.
This structure meant that once a beneficiary’s spending reached a predetermined limit, their out-of-pocket expenses for medications would significantly increase. For instance, in 2024, a beneficiary entered the coverage gap after a combined spending of $5,030 on covered drugs. During this phase, individuals would pay a higher percentage of their drug costs until their total out-of-pocket spending, including their deductible, copayments, and coinsurance, reached a specific threshold, which was $8,000 in 2024. The original Part D benefit design included four distinct phases: a deductible period, an initial coverage period, the coverage gap, and finally, catastrophic coverage.
Legislation Addressing the Coverage Gap
The journey toward addressing the Medicare Part D coverage gap began with the Affordable Care Act (ACA), enacted in 2010. The ACA initiated a gradual process to “close” the donut hole by progressively reducing the percentage of drug costs beneficiaries were required to pay while in this phase. Through a series of gradual reductions, the ACA aimed for beneficiaries to pay 25% of their drug costs in the coverage gap by 2020, effectively aligning it with the cost-sharing experienced in the initial coverage phase for many plans. While this significantly lessened the financial impact compared to the original 100% responsibility, the concept of the coverage gap still influenced how costs were calculated and how beneficiaries progressed through their annual drug spending.
A more definitive step toward eliminating the coverage gap came with the Inflation Reduction Act (IRA) of 2022. This comprehensive legislation introduced significant changes to Medicare Part D, aiming to further reduce out-of-pocket costs for beneficiaries. A key provision of the IRA is the complete elimination of the coverage gap phase beginning January 1, 2025. The IRA also introduced a new annual out-of-pocket spending cap for prescription drugs, set at $2,000 for 2025. This change simplifies the Part D benefit structure, moving towards a more predictable and financially manageable system for individuals.
Current and Future Beneficiary Cost Sharing
In 2024, before the full implementation of the Inflation Reduction Act’s changes, beneficiaries who entered the Part D coverage gap continued to pay 25% of the cost for both brand-name and generic drugs. This 25% coinsurance applied after the initial coverage limit was met and continued until the beneficiary’s total out-of-pocket spending reached the catastrophic threshold, which was $8,000 in 2024. The IRA already brought a change in 2024 by eliminating the 5% coinsurance requirement in the catastrophic coverage phase, meaning that once the $8,000 out-of-pocket threshold was reached, beneficiaries paid nothing for covered drugs for the remainder of the year.
The new design simplifies Part D into three main phases: a deductible period, an initial coverage period, and a catastrophic coverage phase. During the initial coverage phase, beneficiaries will typically pay 25% coinsurance for their covered prescription drugs. This cost-sharing continues until their cumulative out-of-pocket spending, including any deductible, reaches the $2,000 cap.
Once the $2,000 out-of-pocket cap is met, beneficiaries will pay $0 for all covered medications for the remainder of the calendar year. The standard deductible for Part D plans in 2025 is set at $590, though some plans may offer a lower or zero deductible. This $2,000 cap will be adjusted annually for inflation in subsequent years, increasing to $2,100 in 2026. These changes represent a substantial financial protection, particularly for individuals with high prescription drug costs. Additionally, a Medicare Prescription Payment Plan will be available in 2025, allowing beneficiaries to spread their out-of-pocket drug costs throughout the year in monthly installments, rather than paying them all at once.