The Medicare coverage gap, often called the “donut hole,” is a phase in Medicare Part D prescription drug coverage where you historically had to pay a much larger share of your drug costs. It kicked in after your total drug spending hit a certain threshold and lasted until you qualified for catastrophic coverage. Starting in 2025, the coverage gap has been eliminated entirely, replaced by a simpler benefit structure with a $2,000 annual cap on out-of-pocket drug spending.
How Part D Coverage Phases Worked
Medicare Part D has always been structured in phases, each with different cost-sharing rules. Before 2025, there were four phases. First, the deductible phase, where you paid 100% of your drug costs until hitting a set amount. In 2024, that deductible was $545. Second, the initial coverage phase, where you typically paid 25% of drug costs while your plan covered most of the rest. This phase lasted until combined spending (yours and your plan’s) reached $5,030 in 2024.
The third phase was the coverage gap. Once that $5,030 threshold was crossed, you entered the donut hole. The fourth phase, catastrophic coverage, began after your personal out-of-pocket costs hit a higher limit, at which point your costs dropped sharply.
What Happened Inside the Donut Hole
When the coverage gap was first created under the Medicare Modernization Act in 2006, beneficiaries in this phase paid 100% of their drug costs. It was a significant financial cliff, especially for people on expensive medications. The Affordable Care Act gradually closed this gap over more than a decade, requiring pharmaceutical manufacturers to provide discounts on brand-name drugs (eventually reaching 70% of the negotiated price) and increasing the plan’s share of generic drug costs.
By 2020, the gap was considered “closed” in the sense that beneficiaries paid only 25% for both brand-name and generic drugs while in the donut hole, the same coinsurance rate as in the initial coverage phase. But calling it “closed” was somewhat misleading. The coverage gap still existed as a distinct phase of the benefit because it affected how costs were calculated and who was paying behind the scenes (manufacturers, plans, and the government each covered different shares). For beneficiaries on high-cost medications, the math still added up to thousands of dollars a year.
The 2025 Redesign
The Inflation Reduction Act, signed in 2022, overhauled Part D benefits in stages. The most significant change took effect in 2025: the coverage gap phase was eliminated completely. Part D now has three phases instead of four.
- Deductible: You pay 100% of drug costs until reaching $590 in 2025.
- Initial coverage: You pay 25% coinsurance, with your plan and drug manufacturers splitting the rest. This phase continues until your out-of-pocket spending reaches $2,000.
- Catastrophic coverage: You pay nothing for covered Part D drugs for the remainder of the calendar year.
That $2,000 annual out-of-pocket cap is the headline number. Before this change, there was no hard cap on what beneficiaries could spend. Someone taking specialty medications for conditions like cancer or multiple sclerosis could easily face $5,000 to $10,000 or more in annual drug costs. The new cap means once you’ve spent $2,000 out of pocket, your covered prescriptions are free for the rest of the year. For 2026, that threshold rises slightly to $2,100.
Who Was Hit Hardest by the Gap
The coverage gap disproportionately affected people taking multiple brand-name medications or specialty drugs. A single month of a biologic medication could push someone through the initial coverage phase and deep into the donut hole within the first few months of the year. People with chronic conditions like rheumatoid arthritis, hepatitis C, or cancer were particularly vulnerable, sometimes facing difficult choices about whether to fill prescriptions or skip doses to manage costs.
The new $2,000 cap also comes with an option to spread payments across the year through the Medicare Prescription Payment Plan, which lets you pay your out-of-pocket costs in monthly installments rather than facing large bills at the pharmacy counter when you first fill expensive prescriptions early in the year.
Who Was Already Protected
Not everyone experienced the coverage gap, even when it existed. Beneficiaries who qualify for “Extra Help” (also called the Low Income Subsidy) pay dramatically reduced costs throughout all phases of Part D. Under Extra Help, you pay no deductible and no more than roughly $5 for generics and $13 for brand-name drugs per prescription. You qualify automatically if you receive full Medicaid coverage, Supplemental Security Income, or help from your state paying Part B premiums through a Medicare Savings Program. Others with limited income and resources can apply.
Some Medicare Advantage plans and employer-sponsored retiree plans also offered supplemental drug coverage that filled in part or all of the gap before it was eliminated. If you had one of these enhanced plans, you may not have noticed the donut hole at all.
What Counts Toward the $2,000 Cap
Not every dollar you spend on prescriptions counts toward your annual out-of-pocket limit. Your deductible payments and your 25% coinsurance during the initial coverage phase count. Manufacturer discounts applied on your behalf also count toward the threshold, which means you reach catastrophic coverage faster than your actual cash spending alone would suggest. Payments made through the Extra Help program, state pharmaceutical assistance programs, and certain other third-party arrangements also count.
What doesn’t count: your monthly Part D premium, costs for drugs not on your plan’s formulary, and any amount you pay at a pharmacy that isn’t a participating pharmacy in your plan’s network. If you’re trying to track where you stand, your plan sends an Explanation of Benefits after each prescription that shows your cumulative out-of-pocket spending for the year.