The coverage gap in Medicare, often called the “donut hole,” was a phase in Part D prescription drug coverage where you temporarily paid a much larger share of your drug costs. For nearly two decades, it was one of the most confusing and financially painful parts of Medicare. As of 2025, the coverage gap phase has been officially eliminated, replaced by a simpler benefit structure with a hard cap on what you spend each year.
Understanding how this change happened and what the current system looks like matters whether you’re newly enrolled or helping a parent navigate their drug costs.
How the Coverage Gap Originally Worked
When Congress created the Part D drug benefit in 2003, lawmakers wanted to provide prescription coverage but faced strict budget limits. Their solution was a benefit with a hole in the middle. You’d pay a deductible, then your plan would share costs with you during an “initial coverage” phase. But once your total drug spending hit a certain threshold, coverage essentially vanished. You paid 100% of your drug costs out of pocket until your spending climbed high enough to trigger “catastrophic coverage,” where the plan kicked back in.
This gap between the initial coverage limit and the catastrophic threshold was the donut hole. For people taking expensive medications, it could mean months of paying full price for prescriptions they relied on daily. The gap didn’t affect everyone equally. Enrollees with low drug costs never reached it, while those on multiple brand-name medications could fall into it within a few months each year.
How the Gap Was Gradually Closed
The Affordable Care Act in 2010 began phasing out the donut hole over a decade. Before that law, enrollees in the gap paid 100% of their drug costs. The ACA introduced manufacturer discounts on brand-name drugs and gradually reduced the coinsurance percentage enrollees owed. By 2019, brand-name drug manufacturers were required to provide a 70% discount on their products during the gap, and enrollees paid 25% coinsurance for brand-name drugs. Generic drugs took slightly longer to reach parity, dropping from 44% coinsurance in 2018 to 37% in 2019 and finally hitting 25% in 2020.
By 2020, the gap was “closed” in the sense that you paid 25% coinsurance throughout, the same rate as in the initial coverage phase. But the coverage gap still technically existed as a distinct stage of the benefit, and costs could still accumulate significantly before you reached catastrophic coverage.
What Changed in 2024 and 2025
The Inflation Reduction Act of 2022 brought the most significant Part D changes since the program began. These rolled out in two steps.
In 2024, Part D still had four phases: deductible, initial coverage, coverage gap, and catastrophic coverage. The catastrophic threshold was set at $8,000 in true out-of-pocket costs. But for the first time, once you reached catastrophic coverage, you owed nothing for the rest of the year. Previously, you still paid 5% coinsurance in that phase, which could be devastating for people on extremely expensive specialty drugs.
In 2025, the structure changed more fundamentally. The coverage gap phase was eliminated entirely. Part D now has three stages: a deductible (no more than $615 in 2026), an initial coverage phase where you pay 25% coinsurance, and catastrophic coverage where you pay $0. You move from initial coverage directly to catastrophic coverage once your out-of-pocket spending hits the annual cap, set at $2,000 in 2025 and indexed to inflation going forward (rising to $2,100 in 2026). No matter how expensive your medications are, your yearly out-of-pocket costs for covered Part D drugs are now capped.
What Counts Toward the Spending Cap
Not every dollar you spend on health care counts toward reaching that annual cap. Medicare uses a concept called “true out-of-pocket costs” (TrOOP) to determine when you’ve spent enough to move between benefit phases. Knowing what counts can prevent surprises.
Payments that count toward TrOOP include your deductible payments, your copayments or coinsurance for covered drugs, payments made by family members or friends on your behalf, assistance from state pharmacy programs, Medicare’s Extra Help subsidies, manufacturer discounts, and payments from most charities. Money from health savings accounts, flexible spending accounts, and medical savings accounts also counts.
Payments that do not count include your monthly plan premium, the portion of drug costs paid by your plan, drugs purchased outside the U.S., drugs not on your plan’s formulary (unless approved through an exception or appeal), over-the-counter medications, and most vitamins. Costs covered by certain government programs like Medicaid, TRICARE, Veterans Affairs benefits, or employer-sponsored retiree coverage also don’t count toward TrOOP.
The New Manufacturer Discount Program
When the coverage gap disappeared, so did the old Coverage Gap Discount Program that required drug makers to offer discounts only in that phase. It was replaced by the Manufacturer Discount Program, which spreads manufacturer contributions across the benefit. Brand-name drug manufacturers now provide a 10% discount during the initial coverage phase and a 20% discount during the catastrophic phase. This shifts more of the financial responsibility onto manufacturers and insurance plans, reducing the share that falls on enrollees.
Spreading Costs With the Payment Plan
Even with a $2,000 cap, a large prescription bill in January can be hard to absorb all at once. Starting in 2025, the Medicare Prescription Payment Plan lets you spread your out-of-pocket drug costs across the calendar year in monthly installments. Instead of paying the pharmacy directly, you receive a monthly bill from your drug plan. You still pay your plan premium separately, but this option prevents the kind of sticker shock that hits when you fill an expensive prescription early in the year before you’ve built up any spending toward the cap.
Extra Help for Lower-Income Enrollees
If your income and savings fall below certain limits, the Extra Help program (also called the low-income subsidy) can dramatically reduce what you pay. For 2026, individuals with income up to $23,940 and resources up to $18,090 may qualify, as may married couples with income up to $32,460 and resources up to $36,100.
With full Extra Help, you pay no premium, no deductible, and no more than $5.10 per generic or $12.65 per brand-name drug at participating pharmacies. Once your total drug costs, including payments made on your behalf through the program, reach $2,100 in 2026, you pay $0 for covered drugs the rest of the year. For enrollees who previously dreaded the coverage gap, Extra Help essentially made it invisible, and it continues to provide substantial savings under the new benefit structure.