The Medicare gap, commonly called the “donut hole,” is a phase 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 ends once your out-of-pocket costs hit a higher threshold. The good news: major changes that took effect in 2025 have essentially eliminated this gap for most people, replacing it with a hard $2,000 annual cap on what you pay out of pocket for prescriptions.
How Part D Coverage Works in Phases
Medicare Part D isn’t a flat benefit. It moves through distinct stages over the course of each calendar year, and what you pay changes at each stage. Understanding these phases is the key to understanding the gap.
First comes the deductible phase. You pay the full cost of your prescriptions until you hit your plan’s annual deductible. In 2024, the standard deductible was $545. Not every plan charges a deductible, but many do.
Next is the initial coverage phase. Once you’ve met your deductible, your plan starts sharing costs with you. You typically pay a copay or coinsurance (often around 25%) for each prescription, and your plan covers the rest. In 2024, this phase lasted until your total drug costs (what you paid plus what your plan paid) reached $5,030.
After that, in the old system, you entered the coverage gap, the donut hole. And beyond the gap lay catastrophic coverage, where your costs dropped dramatically.
What the Coverage Gap Actually Looked Like
Before 2025, crossing the initial coverage limit meant entering a stretch where your plan contributed far less toward your prescriptions. For years, this was a genuine financial shock. When Part D launched in 2006, people in the gap paid 100% of their drug costs out of pocket.
The Affordable Care Act began closing this gap gradually. Drug manufacturers were required to provide a 70% discount on brand-name medications for people in the donut hole, and the plan covered a growing share of generic drug costs. By 2020, people in the gap were paying roughly 25% of the cost for both brand-name and generic drugs, the same percentage as in the initial coverage phase. But here’s the catch: even though you were paying 25%, the way spending was counted toward exiting the gap meant you could still rack up significant costs before reaching catastrophic coverage. In 2024, the out-of-pocket threshold to exit the gap was $8,000.
The 2025 Overhaul
The Inflation Reduction Act, signed in 2022, restructured Part D benefits starting January 1, 2025. The most significant change: the coverage gap phase no longer exists. The new benefit design has just three phases: deductible, initial coverage, and catastrophic coverage. There is no donut hole in between.
Even more importantly, the annual out-of-pocket cap dropped from $8,000 to $2,000. Once you’ve spent $2,000 on covered prescriptions in a calendar year, you pay nothing for the rest of that year. That’s a dramatic reduction from what people faced even a few years earlier. Plans also now offer the option to spread your out-of-pocket costs across monthly payments throughout the year, so you don’t have to absorb a large bill all at once.
The old Coverage Gap Discount Program, which required manufacturers to give 70% discounts on brand-name drugs in the gap, has been replaced by a new Manufacturer Discount Program. Under this new system, manufacturers contribute 10% of the negotiated drug price before you hit the out-of-pocket cap, and 20% after. These manufacturer contributions, combined with larger plan payments, are what make the lower $2,000 cap possible without shifting the full burden to taxpayers.
Don’t Confuse the Gap With Medigap
The term “Medicare gap” sometimes leads people to information about Medigap plans, which are a completely different thing. Medigap (also called Medicare Supplement Insurance) is private insurance that helps cover out-of-pocket costs from Original Medicare Parts A and B, like hospital copays and doctor visit coinsurance. Medigap plans sold after 2005 do not include any prescription drug coverage. If you want drug coverage, you need a separate Part D plan. Medigap fills gaps in medical coverage; the “donut hole” was a gap in drug coverage. They’re unrelated benefits.
Extra Help for Low-Income Beneficiaries
If your income and savings are limited, a program called Extra Help (also known as the Low-Income Subsidy) can eliminate most or all of your Part D costs. With Extra Help, you pay no premium, no deductible, and only small copays for each prescription: up to $5.10 for generics and $12.65 for brand-name drugs in 2026. Once your total drug costs reach $2,100, you pay $0 for the rest of the year.
If you qualify for full Medicaid coverage through the Qualified Medicare Beneficiary program, your copays are capped even lower, at no more than $4.90 per drug. Medicare automatically enrolls Extra Help recipients in a Part D plan if they don’t already have one, so you don’t have to navigate enrollment on your own. Eligibility is based on income and resources, and you can apply through Social Security’s website or your local Social Security office.
What This Means for Your Costs Now
If you’re enrolling in Part D in 2025 or later, the coverage gap is no longer something you need to worry about. The $2,000 annual cap means your prescription spending has a firm ceiling. That said, a few practical things are still worth knowing.
Your plan’s formulary (its list of covered drugs) still determines which medications qualify for coverage. Drugs not on the formulary don’t count toward your out-of-pocket cap. Switching to a generic or preferred brand when available can keep your costs low during the initial coverage phase and help you stay well under the $2,000 limit. And if you’re on expensive specialty medications, the monthly payment option can prevent a situation where you hit $2,000 in January and face a large upfront bill.
Part D plans vary in their premiums, deductibles, copay structures, and covered drugs. Comparing plans during open enrollment (October 15 through December 7 each year) is the single most effective way to minimize what you spend on prescriptions. Medicare’s Plan Finder tool at medicare.gov lets you enter your specific medications and see estimated annual costs under each available plan in your area.