The Medicare Part D coverage gap is a phase of prescription drug spending where you’ve used enough medication to exhaust your initial coverage but haven’t yet qualified for catastrophic coverage. It used to be called the “donut hole” because it created a gap in the middle of your benefit where you paid significantly more out of pocket. The gap still technically exists in 2024, but major changes under the Inflation Reduction Act have reshaped how it works, and starting in 2025, the entire Part D benefit structure has been simplified with a hard $2,000 annual cap on out-of-pocket drug spending.
How Part D Spending Phases Work
Medicare Part D has historically been divided into four phases, each with different cost-sharing rules. Understanding these phases is essential because your out-of-pocket costs change dramatically as you move through them.
The first phase is the deductible. You pay 100% of your drug costs until you hit the deductible amount ($590 in 2024). Some plans waive the deductible entirely or waive it for certain drugs like generics. The second phase is initial coverage, where you pay 25% of drug costs and your plan picks up the other 75%. This continues until your total drug spending (what you and your plan have paid combined) reaches $5,030 in 2024.
Once you cross that $5,030 threshold, you enter the coverage gap. In this phase, you continue paying 25% of the cost for both brand-name and generic drugs. That might sound identical to the initial coverage phase, and in terms of your percentage, it is. But behind the scenes, the math changes in ways that affect how quickly you reach the next phase. Drug manufacturers contribute a discount on brand-name medications, and those manufacturer payments count toward your out-of-pocket threshold.
The final phase is catastrophic coverage, which in 2024 kicks in after you’ve accumulated $8,000 in true out-of-pocket costs. Once there, your costs drop sharply.
Why the Gap Used to Be So Expensive
The coverage gap earned its “donut hole” nickname because, for years, people in this phase were responsible for a much larger share of their drug costs. Before Congress began closing the gap through the Affordable Care Act, enrollees in the gap paid close to full price for their medications. That created a painful situation: you’d already spent thousands on drugs, then suddenly your coverage seemed to vanish right when you needed it most.
The gap was gradually closed over several years. Brand-name drug cost sharing in the gap dropped from 100% down to 25% by 2019, thanks in part to manufacturer discounts. Generic drug cost sharing followed a similar path, falling from higher percentages (44% in 2018, 37% in 2019) down to 25% by 2020. So while the coverage gap phase still exists as a distinct stage, the price you pay in it now matches what you pay during the initial coverage phase: 25% coinsurance.
What Counts Toward Your Out-of-Pocket Limit
Medicare uses a calculation called “true out-of-pocket costs” (TrOOP) to determine when you move from the coverage gap into catastrophic coverage. Not everything you spend on medications counts toward this threshold, and knowing what’s included can prevent surprises.
Costs that count toward your limit include your deductible payments, your coinsurance or copays during the initial coverage and gap phases, and manufacturer discounts on brand-name drugs (even though you don’t pay those yourself). This last point is important because it means people taking expensive brand-name medications can move through the gap faster than the sticker price of their drugs might suggest.
Several types of spending do not count toward your out-of-pocket limit:
- Monthly premiums for your Part D plan
- Drugs not on your plan’s formulary or not covered by Part D at all
- Over-the-counter medications and most vitamins, even if your plan suggests them
- Drugs purchased outside the U.S.
- Payments made by other insurance, including Medicaid, TRICARE, VA benefits, employer or union retiree coverage, and workers’ compensation
- Patient assistance programs operating outside the Part D benefit
This means if you’re getting help paying for drugs through a government program or employer plan, those payments won’t push you closer to catastrophic coverage.
The 2025 Redesign Changes Everything
The Inflation Reduction Act fundamentally restructured Part D starting in 2025. The most significant change: a hard $2,000 annual cap on out-of-pocket drug spending. Once you’ve paid $2,000 in a calendar year, you owe nothing more for covered Part D drugs for the rest of that year.
The benefit now has three phases instead of four. You move through the deductible (up to $590), then into initial coverage where you pay 25% coinsurance, and once your out-of-pocket spending hits $2,000, you enter catastrophic coverage with zero cost sharing for the remainder of the year. The coverage gap as a separate phase is effectively gone.
Behind the scenes, drug manufacturers now participate in a formal Discount Program. During the initial coverage phase, manufacturers cover 10% of the cost of applicable brand-name drugs while your plan covers 65%. In the catastrophic phase, manufacturers pay 20%, your plan pays 60%, and Medicare covers 20% through reinsurance. You pay nothing. These manufacturer contributions do not count toward your $2,000 out-of-pocket limit under the 2025 rules.
Who Was Most Affected by the Gap
The coverage gap historically hit people with moderate to high drug spending the hardest. If you took one or two inexpensive generics, you might never leave the initial coverage phase in a given year. But people managing chronic conditions like cancer, rheumatoid arthritis, hepatitis C, or multiple sclerosis, where a single drug can cost thousands per month, could blow through initial coverage within the first few months of the year and spend months in the gap.
The $2,000 cap in 2025 is most meaningful for these high-cost patients. Someone previously spending $5,000 or $10,000 out of pocket annually now saves thousands of dollars a year. Medicare also offers the option to spread that $2,000 across monthly payments throughout the year rather than paying it all upfront when you fill expensive prescriptions early in the calendar year, which helps with budgeting.
How to Track Your Spending Phase
Your Part D plan sends you an Explanation of Benefits after each prescription purchase. This document shows your total drug costs, what you’ve paid, what your plan has paid, and where you currently stand relative to each spending threshold. You can also log into your Medicare.gov account or call your plan directly to find out which phase you’re in at any point during the year.
If your spending resets and you’re unsure whether a particular cost counted toward your limit, check whether the drug is on your plan’s formulary and whether the pharmacy that filled it is in your plan’s network. Out-of-network pharmacy costs or non-formulary drugs generally won’t count toward your out-of-pocket threshold, which could delay your progression to catastrophic coverage.