The donut hole is a gap in Medicare Part D prescription drug coverage where you temporarily pay more for your medications. It kicks in after you and your plan have spent a certain amount on drugs in a calendar year, and it lasts until your out-of-pocket spending hits a higher threshold. The good news: the Inflation Reduction Act has dramatically changed how this works, and starting in 2025, the coverage gap phase was eliminated entirely, replaced by a hard $2,000 annual cap on out-of-pocket drug costs.
To understand the donut hole, you need to understand that Part D isn’t one flat benefit. It moves through distinct stages, each with different cost-sharing rules, and the dollar amounts shift each calendar year.
The Four Stages of Part D Coverage
Medicare Part D is structured as a series of spending thresholds. You pass through each stage in order over the course of a year, and the amount you pay changes at each one.
- Deductible stage: You pay the full cost of your drugs until you hit your plan’s deductible. No plan can set a deductible higher than $615 in 2026, though many plans set it lower or waive it for certain drugs.
- Initial coverage stage: After you meet your deductible, your plan starts sharing costs. You typically pay 25% of the price for both generic and brand-name drugs. This stage lasts until your total out-of-pocket spending on covered drugs reaches a set threshold (for 2026, that’s $2,100).
- Coverage gap (the donut hole): This was the stage where your cost-sharing increased significantly. In the original Part D design from 2006, you paid 100% of drug costs in this phase. Over the years, that was gradually reduced to 25%. As of 2025, this stage no longer exists.
- Catastrophic coverage stage: Once your out-of-pocket spending crosses the annual limit, you enter catastrophic coverage. Starting in 2024, you pay nothing in this phase for covered Part D drugs for the rest of the calendar year.
How the Donut Hole Worked Before 2025
For years, the coverage gap was the most frustrating part of Part D. Here’s the scenario that caught people off guard: you’d fill prescriptions through the early months of the year, your plan would cover most of the cost, and everything felt manageable. Then sometime around mid-year, your combined spending crossed a threshold and you entered the gap. Suddenly your share of the bill jumped.
In 2024, the gap began once total drug costs (what you and your plan paid combined) exceeded a set amount. While in the gap, you paid 25% of the cost for both brand-name and generic drugs. For brand-name drugs, the manufacturer was required to provide a discount that covered a large share of the remaining cost. For generics, your plan covered more of the difference. Either way, you were paying more than you were during the initial coverage stage, and for people on expensive medications, those costs added up fast.
What made the donut hole especially confusing was the concept of “true out-of-pocket costs,” or TrOOP. Not every dollar spent on drugs counted toward escaping the gap. Your monthly premiums didn’t count. Drugs not on your plan’s formulary didn’t count. But certain payments made on your behalf, like manufacturer discounts on brand-name drugs, did count toward pushing you through to catastrophic coverage. In 2024, you needed to accumulate $8,000 in TrOOP costs before reaching the catastrophic phase.
What Counts Toward Your Out-of-Pocket Limit
The rules for what counts toward your spending threshold are specific. Payments that count include your deductible, your copays and coinsurance during the initial coverage period, anything you pay during the coverage gap for covered drugs, manufacturer discounts, and payments made by family members, friends, or most charities on your behalf. Payments from Medicare’s Extra Help program, state pharmacy assistance programs, and health savings or flexible spending accounts also count.
Payments that don’t count include your monthly Part D premium, the portion your drug plan pays, drugs purchased outside the U.S., over-the-counter medications, drugs not covered by your plan, and payments reimbursed by employer or union group health plans. If you fill a prescription at an out-of-network pharmacy without following your plan’s out-of-network rules, that spending won’t count either.
This distinction matters because it determines how quickly you move through the coverage stages. Someone taking an expensive brand-name drug with a large manufacturer discount could exit the gap faster than someone on several moderately priced generics, even if both were spending similar amounts out of their own pockets.
What Changed in 2025
The Inflation Reduction Act restructured Part D in phases. In 2024, the first major change arrived: once you reached the catastrophic phase, you owed zero in coinsurance or copays for the rest of the year. Previously, you still paid 5% of drug costs in that phase, which could be devastating for people on specialty medications costing thousands per month.
In 2025, the overhaul went further. The coverage gap phase was eliminated. Part D enrollees now have their annual out-of-pocket drug costs capped at $2,000, a figure that will rise each year based on the growth rate of per capita Part D spending. Once you hit that cap, you pay nothing more for covered drugs for the rest of the year.
There’s also a new option to spread your out-of-pocket costs across monthly payments over the year, rather than absorbing large expenses in the months you happen to fill costly prescriptions. This smooths out the financial hit for people who previously faced hundreds of dollars in a single pharmacy visit.
Behind the scenes, the economics shifted too. A new Manufacturer Discount Program replaced the old coverage gap discount program. Drug manufacturers are now required to provide discounts during both the initial coverage phase and the catastrophic phase. Government reinsurance in the catastrophic phase dropped from 80% to 20% for brand-name drugs and biologicals, and from 80% to 40% for generics, pushing more of the cost onto manufacturers and plans rather than taxpayers.
How Extra Help Changes the Picture
If your income and resources are limited, Medicare’s Extra Help program (also called the low-income subsidy) can dramatically reduce what you pay at every stage. In 2026, people who qualify pay no premium, no deductible, and no more than $5.10 for each generic drug or $12.65 for each brand-name drug. Once total drug costs, including payments made on your behalf through the program, reach $2,100, you pay $0 for covered drugs the rest of the year.
Extra Help payments also count toward TrOOP, which means qualifying for the program effectively eliminates any meaningful exposure to higher costs at any stage. For people near the income cutoff, it’s worth checking eligibility each year since the thresholds adjust annually.
What This Means Going Forward
If you’re on Medicare Part D in 2025 or later, the donut hole is no longer something you’ll experience. The coverage stages still exist in a simplified form: you pay your deductible, then 25% coinsurance during initial coverage, and once your out-of-pocket spending hits $2,000, you’re done paying for covered drugs that year. The old anxiety of watching your spending creep toward the gap, wondering when your costs would spike, is largely a thing of the past.
For 2026, the maximum deductible is $615, the initial coverage period runs until you’ve spent $2,100 out of pocket, and after that you owe nothing. Plans vary in how they structure copays for different drug tiers, so comparing plans during open enrollment still matters. A plan with a lower deductible or better coverage for your specific medications can save you hundreds of dollars before you ever approach the spending cap.