The donut hole, officially called the coverage gap, is a phase in Medicare Part D prescription drug coverage where you historically paid a much larger share of your drug costs. It kicks in after you and your plan have spent a certain amount on covered drugs in a year, and it ends once your out-of-pocket spending hits a higher threshold. As of 2025, the donut hole has been eliminated and replaced with a hard $2,000 annual cap on out-of-pocket drug costs.
Understanding what the donut hole was and how Part D works now matters if you’re on Medicare or approaching enrollment age, because the structure of prescription drug coverage has changed significantly in a short period.
How Part D Coverage Phases Work
Medicare Part D has always been structured in phases. First, you pay a deductible out of pocket. Then you enter the initial coverage period, where you and your plan split costs through copays or coinsurance. In the original Part D design from 2006, once total drug spending (yours plus your plan’s) hit a set limit, you fell into the coverage gap. During this gap, you were responsible for a much larger percentage of your drug costs, sometimes 100%. You stayed in the gap until your personal out-of-pocket spending reached a higher threshold, at which point catastrophic coverage kicked in and your costs dropped dramatically.
This gap earned the nickname “donut hole” because of its shape on paper: you had coverage, then a hole with little or no coverage, then coverage again. For people taking expensive medications, the gap could mean thousands of dollars in unexpected costs each year.
How the Donut Hole Shrank Over Time
The Affordable Care Act in 2010 began a gradual process of closing the coverage gap. Drug manufacturers were required to provide discounts on brand-name medications purchased during the gap, and the percentage you paid decreased a little each year. By 2020, the gap had technically “closed” in the sense that beneficiaries paid 25% of drug costs for both brand-name and generic medications while in the coverage gap, the same percentage they paid during the initial coverage period. But 25% of an expensive specialty drug is still a lot of money, and the coverage gap phase still existed as a structural part of the benefit.
Those manufacturer discounts played an important role even beyond reducing your immediate costs. The discounts counted toward your true out-of-pocket (TrOOP) spending total, which is the number Medicare uses to determine when you move from the gap into catastrophic coverage. So even though the manufacturer, not you, was paying that portion, it helped push you through the gap faster.
What Changed in 2025
The Inflation Reduction Act of 2022 brought the most significant overhaul of Part D since the program’s creation. Starting January 1, 2025, the coverage gap phase was eliminated entirely. In its place, Part D now has a firm $2,000 annual cap on out-of-pocket drug costs. Once you hit that amount, you pay nothing more for covered prescriptions for the rest of the year. This cap will rise slightly each year, indexed to the growth rate of per capita Part D costs (it’s $2,100 in 2026).
The old manufacturer discount program that applied specifically to the coverage gap ended on December 31, 2024. It was replaced by a new Manufacturer Discount Program that works differently. Drug manufacturers now provide a 10% discount on brand-name drugs during the initial coverage period and a 20% discount during the catastrophic phase. Part D plans themselves absorb a much larger share of costs above the cap, paying 60% for both brand-name and generic drugs, up from 15% under the old design.
For beneficiaries, the practical effect is straightforward: your maximum annual exposure for prescription drugs is now $2,000, period. There’s no confusing middle phase where your costs suddenly spike.
Spreading Costs Throughout the Year
One challenge with expensive medications is that you might blow through the $2,000 cap in the first few months of the year, creating a large bill early on even though you owe nothing later. Starting in 2025, Medicare introduced the Medicare Prescription Payment Plan, which lets you spread your out-of-pocket costs evenly across the remaining months of the year instead of paying them all at once.
Here’s how it works in practice. Say your out-of-pocket drug costs run $525 per month. If you enroll in the payment plan in January, your first month’s bill would be roughly $175 (your $2,000 cap divided by 12 months). The following months, the plan recalculates by adding your new costs to your remaining balance and dividing by the months left. By around April in this example, you’d reach the annual cap, and your monthly payments would simply cover what you already owe with no new costs added. You’d pay roughly $190 per month for the rest of the year until the balance is cleared.
This option is especially useful if you take specialty medications or multiple brand-name drugs that would otherwise force you to pay hundreds or thousands of dollars in a single pharmacy visit.
What Counts Toward the Cap
Not every dollar you spend on prescriptions counts toward the $2,000 out-of-pocket limit. Only certain payments qualify as “true out-of-pocket” costs:
- Your deductible for Part D covered drugs
- Copays and coinsurance you pay during the initial coverage period
- Manufacturer discounts on brand-name drugs (these count even though you don’t pay them directly)
Payments only count if the drugs are on your plan’s formulary (or approved through an exception or appeal) and purchased at a network pharmacy or through your plan’s out-of-network policy. If you buy a drug that isn’t covered and hasn’t been approved through the exceptions process, that spending doesn’t count toward your cap.
Extra Help for Lower Incomes
If your income and assets fall below certain limits, you may qualify for Medicare’s Extra Help program (also called the Low-Income Subsidy), which covers most or all of your Part D costs. For 2026, the income limit is $23,940 for an individual or $32,460 for a married couple, with resource limits of $18,090 and $36,100 respectively. Resources include savings and investments but generally exclude your home and car.
If you qualify for Extra Help, the donut hole was never really your problem in the first place, since the program eliminated or drastically reduced cost-sharing in all phases. But the new $2,000 cap provides a similar safety net for people whose income is too high for Extra Help but who still struggle with drug costs.
Does This Apply to All Health Insurance?
The donut hole is specific to Medicare Part D. If you have employer-sponsored insurance, a Marketplace plan, or Medicaid, your prescription drug coverage works differently and doesn’t have a coverage gap. Those plans typically use a formulary with tiered copays and may have a separate out-of-pocket maximum that covers all medical and drug costs together.
If you’ve heard the term “donut hole” used more broadly, it’s almost always referring to Medicare Part D. The concept doesn’t exist in other types of health insurance in the United States.