The “donut hole” in Medicare is a coverage gap in Part D prescription drug plans where you temporarily pay a larger share of your drug costs. It kicks in after your total drug spending hits a certain threshold each year, and it lasts until your out-of-pocket costs climb high enough to trigger catastrophic coverage. The donut hole has been a source of financial stress for Medicare beneficiaries since Part D launched in 2006, but major changes under the Inflation Reduction Act have reshaped it significantly, and as of 2025, the coverage gap phase has been officially eliminated.
How Part D Coverage Works in Phases
Medicare Part D drug coverage moves through a series of phases each calendar year, and understanding these phases is key to understanding the donut hole. In 2024, there were four distinct phases: the deductible, initial coverage, coverage gap (the donut hole), and catastrophic coverage. Each phase changes how much you pay versus how much your plan covers.
You start each year in the deductible phase, paying the full cost of your prescriptions until you meet your plan’s deductible. Once that’s met, you enter initial coverage, where you and your plan share costs through copays or coinsurance. This is the phase where most people spend the bulk of their year. But once total drug costs (what you and your plan have paid combined) reach the initial coverage limit, you cross into the coverage gap.
The critical detail: progression through the first two phases is based on total gross drug costs, meaning everything spent on your prescriptions counts, whether you paid it or your plan did. But once you’re in the donut hole, what matters shifts to “true out-of-pocket” spending, a narrower calculation that only counts certain payments toward the next threshold.
What the Donut Hole Actually Cost You
When the donut hole was first created, beneficiaries were responsible for 100% of their drug costs during the gap. That was the original design of the Part D benefit, and it left many people with serious sticker shock partway through the year.
Over time, legislation gradually closed that gap. By 2024, people in the coverage gap paid 25% of total drug costs for both brand-name and generic medications. For brand-name drugs, the remaining 75% was split between drug manufacturers (who provided a 70% discount) and the Part D plan (which covered 5%). For generics, the plan covered the full 75% since manufacturers weren’t required to discount those.
While 25% sounds manageable, the math gets painful fast for people on expensive medications. Someone taking a specialty drug that costs $3,000 a month would still owe $750 per fill during the gap. For people on fixed incomes, that kind of spending can force difficult choices between medications and other necessities.
True Out-of-Pocket Costs: What Counts
One of the more confusing aspects of the donut hole is the concept of “true out-of-pocket” costs, often abbreviated TrOOP. This is the running total Medicare uses to determine when you’ve spent enough to exit the coverage gap and enter catastrophic coverage. Not everything you spend on drugs counts toward TrOOP.
Your deductible payments, copays, and coinsurance all count. The manufacturer discounts on brand-name drugs also count toward your TrOOP total, which is a significant boost. Payments from certain assistance programs count too, including the Low Income Subsidy (also called Extra Help), state pharmacy assistance programs, Indian Health Service programs, and AIDS Drug Assistance Programs. However, your monthly Part D premiums do not count toward TrOOP, and neither do payments from most private supplemental insurance.
In 2024, once your true out-of-pocket spending reached $8,000, you moved into catastrophic coverage, where your costs dropped to zero for the rest of the year. That $8,000 cap was itself a new protection introduced by the Inflation Reduction Act; previously, beneficiaries still owed small copays even in catastrophic coverage with no limit on total spending.
The 2025 Overhaul
Starting January 1, 2025, the Inflation Reduction Act eliminated the coverage gap phase entirely. The donut hole, as a distinct part of Part D’s benefit structure, no longer exists. In its place, the law introduced a hard cap of $2,000 on annual out-of-pocket drug spending for all Part D enrollees. Once you hit that limit, you pay nothing more for covered prescriptions for the rest of the year.
That’s a dramatic drop from the $8,000 threshold in 2024, and an even bigger change from pre-2024 years when there was no firm cap at all. The redesigned benefit also replaced the old Coverage Gap Discount Program, where manufacturers provided discounts only during the gap, with a new Manufacturer Discount Program that requires pharmaceutical companies to provide discounts across multiple phases of coverage, including the initial coverage and catastrophic phases.
Medicare also introduced a payment smoothing option called the Medicare Prescription Payment Plan, which lets you spread your out-of-pocket drug costs across monthly installments throughout the year rather than paying large lump sums at the pharmacy counter. This doesn’t reduce what you owe, but it prevents the cash flow crunch that hit hardest when people entered the donut hole and faced sudden cost increases.
Extra Help for Lower-Income Beneficiaries
If your income and resources are limited, the Extra Help program (formally the Low Income Subsidy) can dramatically reduce what you pay at every phase of Part D coverage, effectively making the donut hole irrelevant. Qualifying beneficiaries pay no premium, no deductible, and only small copays for each prescription: roughly $5 for generics and about $13 for brand-name drugs. Once total drug costs reach a set threshold (around $2,100), copays drop to zero for the rest of the year.
Eligibility is based on income and assets, and you can apply through Social Security. Even if you aren’t sure you qualify, it’s worth checking. Many eligible beneficiaries never apply simply because they don’t know the program exists.
What This Means Going Forward
If you’re currently on Medicare Part D, the practical takeaway is straightforward: the donut hole is gone. You will not pay more than $2,000 out of pocket for prescription drugs in any calendar year starting in 2025. That ceiling applies regardless of how expensive your medications are or how many you take.
For people who previously rationed medications or skipped doses during the coverage gap to manage costs, this is a meaningful change. The $2,000 cap provides a predictable maximum, which makes it far easier to budget for drug costs in retirement. If you’re comparing Part D plans during open enrollment, the cap applies to all standard Part D plans, so the main differences to watch for are which drugs each plan covers, which pharmacies are in network, and what you’ll pay before hitting the cap.