What Is a Medicare Donut Hole (Part D Coverage Gap)?

The Medicare donut hole refers to the Part D coverage gap, a coverage phase in the Medicare prescription drug plan. It follows the initial coverage period and begins when you and your plan spend a total of $5,030 on drugs in 2024.

The donut hole technically closed in 2020 thanks to provisions from the Affordable Care Act, so Medicare beneficiaries pay less for drugs in the coverage gap than they previously had to. However, the coverage gap still exists as a coverage phase under Medicare, and you may pay more for your medications than during the initial coverage phase, depending on the structure of your plan benefits.

The Medicare Part D coverage gap will be officially eliminated on January 1, 2025, when provisions from the Inflation Reduction Act regarding maximum out-of-pocket spending take effect.

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The Medicare "donut hole" is a phase in the Medicare Part D benefit structure where the beneficiary may temporarily pay higher out-of-pocket costs for prescription drugs. However, since the donut hole technically closed in 2020, out-of-pocket expenses during the coverage gap are similar to what you pay during the initial coverage period. Previously, Medicare beneficiaries had to pay 100% of drug costs while in the coverage gap.

The so-called coverage gap begins when you reach a certain spending limit on covered drugs (including payments by both you and your plan), which is $5,030 in 2024. This coverage phase continues until you meet the catastrophic coverage threshold ($8,000 for 2024).

During the coverage gap, Medicare beneficiaries pay up to 25% of the cost of generic and brand-name drugs, which may be slightly more than what they paid during the initial coverage period, depending on their benefit structure.

• Brand-Name Medications in the Donut Hole During the coverage gap phase, Medicare beneficiaries pay no more than 25% of the cost of covered brand-name prescription drugs and 25% of the dispensing fee (usually $1–$3). The manufacturer covers 70% of the drug cost, and your plan covers the remaining 5%. Payments made by the beneficiary and the manufacturer (95% of the drug cost) count towards the out-of-pocket spending to help beneficiaries move towards catastrophic coverage faster, where costs are entirely covered.

• Generic Medications in the Donut Hole For generic medications, which are cheaper than brand-name drugs, only the beneficiary's payment (25% of the cost) is counted towards out-of-pocket spending in the donut hole as there's no manufacturer discount. Medicare contributions (75% of the cost) are not counted towards the out-of-pocket total, so reaching the catastrophic coverage threshold can take longer.

While the coverage gap is still considered a distinct phase in Medicare Part D coverage, beneficiaries no longer experience a total gap in coverage thanks to the Affordable Care Act. What you pay during the coverage gap and any manufacturer payments for brand-name drugs are counted toward your out-of-pocket limit. Once the limit is reached, you begin catastrophic coverage, where your plan completely covers costs for prescription drugs.

Opting for generic drugs while in the donut hole may mean that it takes longer to reach the catastrophic coverage phase, but you'll still pay less for your prescriptions overall.

The Medicare donut hole is the coverage phase of Medicare Part D that follows the deductible phase and initial coverage period. Each phase is marked by distinct cost-sharing measures. Recent changes from the Affordable Care Act and Inflation Reduction Act have significantly lowered costs for beneficiaries after reaching the donut hole.

1. Deductible Phase: If your plan has a deductible, you'll begin the year by paying 100% of the cost of covered prescription drugs. The maximum annual deductible for Medicare Part D in 2024 is $545.

2. Initial Coverage Phase: Once you hit your deductible (or if your plan doesn't have a deductible), you enter the initial coverage phase. During this phase, you'll pay copayments and co-insurance depending on your plan's benefits. This stage lasts until the total expenditure on covered drugs, both by you and your plan, reaches $5,030.

3. Reaching the Donut Hole: This phase begins when the combined spending on covered drugs by you and your Medicare Part D plan hits the $5,030 mark. The donut hole no longer represents a full coverage gap like it used to before 2020, but it is still a distinct phase in Medicare Part D coverage. You'll pay no more than 25% of the cost of brand-name and generic drugs, which may be similar to what you paid during the initial coverage phase. During this phase, your payments and manufacturer payments towards drug costs count toward your out-of-pocket spending, but payments by your plan do not.

4. Catastrophic Coverage: Once your out-of-pocket costs hit the $8,000 threshold for 2024, you move out of the donut hole and into the catastrophic coverage phase. The Inflation Reduction Act has eliminated the previous 5% co-insurance requirement, meaning that your drug costs are completely covered for the remainder of the year.

MoneyGeek has compiled a list of frequently asked questions to clarify key aspects of the Medicare donut hole.