Understanding the Medicare Part D Coverage Gap

The donut hole, or coverage gap, has long been one of the most controversial parts of the Medicare Part D prescription drug benefit. It affects how much you will pay for your drugs over the course of the year.

The good news is that the Affordable Care Act (ACA) closed the donut hole as of 2020, after several years of slowly shrinking it. The donut hole closed in 2019 for brand-name drugs (a year early, thanks to the Bipartisan Budget Act of 2018), and in 2020 for generic drugs.

However, because of the way Medicare Part D plans are designed, the donut hole concept still plays an important role in how much people have to pay for their medications. This article will explain how all of this works, and what you need to know about your Medicare drug coverage after your drug costs reach various levels.

If you're enrolled in a Medicare Part D plan, you now pay a maximum of 25% of the cost of your drugs once you meet your plan's deductible (if you have one).

Some plans are designed with copays that amount to less than 25% of the cost of the medication, but after the deductible is met, Part D plans cannot impose cost-sharing that exceeds 25% of the cost of the medication.

How the Donut Hole Worked Before 2020

Before the ACA closed the donut hole, it caused some Medicare beneficiaries to pay significantly higher costs for their medications after they had reached a certain level of spending on drugs during the year. Those higher costs would continue until the person reached another threshold, after which the costs would decrease again.

When Part D plans first became available in 2006, beneficiaries paid 100% of their drug costs while they were in this spending window (known as the coverage gap, or more commonly, as the "donut hole").

In other words, they would pay a deductible, and then the Part D plan would pay a significant amount of their drug costs—but only until their spending got high enough to enter the donut hole.

At that point, the enrollee would start paying 100% of their drug costs and would have to continue to do so until they reached what's known as the catastrophic coverage level. The enrollee's costs would drop at that point, although they never drop to $0 since Medicare Part D does not have an upper cap on total out-of-pocket costs. (That will change in 2024, due to the Inflation Reduction Act, which puts a long-awaited cap on drug costs for Medicare beneficiaries.)

Section 3301 of the Affordable Care Act, which was enacted in 2010, began to gradually reduce the percentage of drug costs that Part D enrollees had to pay while they were in the donut hole.

By 2020, it had dropped to 25%, which is the same as how a "standard" Part D plan covers drug costs during the initial coverage window (after the deductible, but before the donut hole starts). So on a standard plan, the enrollee now pays the deductible, then pays 25% of the cost of drugs all the way to the catastrophic coverage limit, with no change during the donut hole.

The Donut Hole Is Still Relevant Even Though It's "Closed"

But most Part D plans don't use the standard plan design. They tend to utilize copays during the initial coverage period, instead of having enrollees pay 25% of the cost of their medications. These copays often amount to less than 25% of the cost of a drug, which means that a person's drug costs can still increase once they reach the spending threshold where the initial coverage level ends and the donut hole begins.

So although the donut hole is now "closed," beneficiaries still have to pay a portion of their drug costs while in the donut hole, and it might be a larger portion than they were paying during the initial coverage period (i.e., after the deductible and before the donut hole).

How the Donut Hole Works in 2024

Each year, the federal government sets a maximum deductible for Part D plans, and establishes the dollar amounts for the thresholds where the donut hole starts and ends. Here's how those numbers work in 2023 (note that all of these amounts are indexed each year, so they tend to increase over time):

• Deductible: If you're enrolled in a Medicare prescription drug plan, you may have to pay up to the first $545 of your drug costs, depending on your plan. This is known as the deductible. Some plans don't have a deductible, or have a smaller deductible, but no Part D plan can have a deductible in excess of this amount.
• Initial coverage level: During the initial coverage phase (after the deductible is met, assuming the plan has a deductible), you pay a copayment or coinsurance, and your Part D drug plan pays its share for each covered drug until your combined amount (including your deductible) reaches $5,030 in 2024. The total retail cost of the drugs, not just what you or your Part D plan pays, counts toward the $5,030 amount.
• Entering the donut hole: Once you and your Part D drug plan have spent $5,030 for covered drugs in 2024, you will be in the donut hole. Prior to 2011, you would have had to pay the full cost of your prescription drugs at this point. But now that the ACA has closed the donut hole, you'll pay 25% of the cost of your drugs while in the donut hole. Again, the donut hole is "closed" because 25% of the cost is the same as what you'd pay in the initial coverage level with a standard plan design. But since most plans don't have standard designs, it's very likely that 25% of the cost of your drugs (while you're in the donut hole) is going to amount to more than you were paying before you entered the donut hole.
• Leaving the donut hole: The donut hole continues until your total out-of-pocket cost reaches $8,000 in 2024. This annual out-of-pocket spending amount includes your yearly deductible, copayment, and coinsurance amounts, and it also includes the manufacturer's discount on the drugs that you get while in the coverage gap. This means that although you only pay 25% of the cost of your medications while in the donut hole, 95% of the cost of your brand-name drugs will be counted towards getting you to the $8,000 level where you'll get out of the donut hole and enter the catastrophic coverage level. But for generic drugs, only the 25% that you pay will count towards getting your spending to that $8,000 level where you'll leave the donut hole, since there's no manufacturer discount for those drugs.
• Catastrophic coverage level: When your drug spending (including the manufacturer's discount) reaches $8,000 in 2024, the coverage gap ends, and your drug plan pays for all drug costs for the remainder of the year. Prior to 2024, you would be required to pay a small copayment or 5% of the cost for medications, whichever was greater. However, the Inflation Reduction Act. has eliminated any cost-sharing during the catastrophic phase of coverage starting in 2024. This is an important change, as 5% of the cost can still be a significant amount each month if the patient needs high-cost medications. (Note that Catastrophic coverage under Medicare Part D isn't the same thing as catastrophic health insurance.)

Note: The expenses outlined above only include the cost of prescription medications. They do not include the monthly premium that you pay for the prescription drug plan.

Coverage Can Differ Depending on Your Plan

It's important to understand that your Part D prescription drug plan may differ from the standard Medicare plan only if the plan offers you a better benefit. For example, your plan can eliminate or lower the amount of the deductible, or can set your costs in the initial coverage level at something less than 25% of the total cost of the drug. But it cannot provide benefits that are less generous than the standard plan design.

Medicare Part D Examples

In order to better understand how much prescription drugs might cost you on Medicare D, here are some examples:

Charley Smith
Charley Smith takes three medications to treat his high blood pressure and high cholesterol. These medications cost about $1,300 in 2024. Charley enrolled in a Medicare prescription drug plan that has a low premium and offers the standard Medicare drug benefit, including a deductible and standard drug coverage in the donut hole.

This is what his prescription medications will cost in the plan he has selected:

• Charley will pay a deductible of $545.
• He will then pay 25% (coinsurance) of the remaining $755 cost of his medications ($1300 - $545 = $755). His additional out-of-pocket cost during this initial coverage period will be roughly $189. ($755 x 25% = $188.75).
• Since Charley did not reach the $5,030 initial coverage limit (i.e., the retail cost of his drugs was $1,300), he will not enter the donut hole.

Charley’s total estimated annual out-of-pocket prescription drug cost with his Medicare Part D plan will be $545 (deductible) + $189 (his 25% share of his drug costs) = $734 (plus his monthly premiums for the Medicare Part D plan).

Mary Jones
Mary Jones takes three medications to treat her type 2 diabetes, high blood pressure, and high cholesterol—all brand-name drugs. These medications cost about $5,500 in 2024. Mary joined a Medicare prescription drug plan that offers the standard Medicare drug benefit, including a deductible and standard coverage while in the donut hole.

This is what her prescription medications will cost in the plan she has selected:

• Mary will pay a deductible of $545.
• She will then pay 25% of the cost of her medications for the next $4,955 worth of drugs (that's the $5,030 cap minus the $545 deductible) until she reaches the coverage gap. Her additional out-of-pocket cost during this initial coverage period will be about $1,238 (since 25% of $4,955 is $1,238.75).
• Since Mary did reach $5,030 in drug spending (i.e., the retail cost of her medications was $5,500), she will enter the donut hole. Prior to 2011, Mary would have been responsible for 100% of her costs at this point. But in 2024, she'll only be responsible for 25% of her drug costs while in the donut hole. She'll remain in the donut hole until her total drug costs reach $8,000. This amount includes her $545 deductible, the $1,238 that she paid during the initial coverage level, plus 95% of the cost of her brand-name drugs while in the donut hole (even though she's only paying 25% of the cost). So she'll need to accumulate $6,217 in additional drug costs—while in the donut hole—in order to reach the catastrophic coverage level. But the majority of that will be covered by the 95% manufacturer discount that applies to brand-name drugs while the person is in the donut hole. Because the total cost of Mary's medications is only about $5,500 in 2024, she won't reach the catastrophic coverage level. Instead, she'll remain in the donut hole for the rest of the year.
  

Mary’s total estimated annual out-of-pocket prescription drug cost for the year with her Medicare Part D plan will be $545 (deductible) + $1,238 (her 25% share of her drug coverage before and during the donut hole) = $1,783 (plus her monthly premiums for the Medicare Part D plan).

Although the donut hole has closed for brand-name drugs (meaning that the enrollee pays just 25% of the cost while in the donut hole), the concept of the donut hole is still important in terms of getting out of the donut hole and shifting to catastrophic coverage where medications no longer require cost-sharing. If Mary were to be prescribed additional expensive medications during the year and her drug spending increased drastically, the upper threshold of the donut hole would provide financial protection.

Summary

Although the Affordable Care Act has "closed" the Medicare Part D donut hole, the donut hole is still important in terms of how an enrollee's drug costs are calculated. And because many Part D plans have non-standard benefits, enrollees often still find that their drug costs increase once they enter the donut hole.

It's always important to know how much you'll pay at the pharmacy if you need expensive medications—particularly if you need them on an ongoing basis. Fortunately, you can change your Part D coverage each year during the Medicare annual election period (October 15 to December 7), and you can use Medicare's plan comparison tool to see exactly how much your medications will cost under each available plan.

Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

1. Barnhart, Adam; Dieguez, Gabriela; Mike, David. Milliman. How will the Bipartisan Budget Act of 2018 impact Part D in 2019 and beyond? February 16, 2018.
2. U.S. House of Representatives. Inflation Reduction Act of 2022. Enacted August 16, 2022.
3. U .S. House of Representatives. Patient Protection and Affordable Care Act, Section 3301. Enacted March 23, 2010.
4. Medicare.gov. Costs in the Coverage Gap.
5. 65 Incorporated. The Medicare Donut Hole Is Closed: What Does That Mean?
6. Medicare.gov. Yearly Deductible for Drug Plans.
7. Medicare.gov. Catastrophic coverage.
8. Medicare.gov. Costs in the coverage gap.
9. Medicare Interactive. Phases of Part D Coverage.

By Michael Bihari, MD
Michael Bihari, MD, is a board-certified pediatrician, health educator, and medical writer, and president emeritus of the Community Health Center of Cape Cod.