The Medicare coverage gap, commonly called the donut hole, was historically a phase within Medicare Part D where your prescription drug cost-sharing increased significantly. Thanks to the Inflation Reduction Act (IRA), the donut hole has been effectively eliminated starting in 2025, and in 2026 beneficiaries continue to benefit from a simplified Part D structure with a hard annual out-of-pocket cap.
What the Donut Hole Was
Under the old Part D structure, the donut hole was the third of four cost-sharing stages. After you and your plan collectively spent a set amount on covered prescriptions during the initial coverage phase, you entered the coverage gap, where your cost-sharing increased. You had to spend your way through the gap before reaching catastrophic coverage.
The old four-stage structure looked like this:
- Deductible stage: You covered the full cost until your deductible was met
- Initial coverage stage: You paid copays or coinsurance while your plan picked up the remainder
- Coverage gap (donut hole): Your cost-sharing structure shifted, and you paid 25% of drug costs
- Catastrophic coverage: You paid small copays or 5% coinsurance for the rest of the year
How the Inflation Reduction Act Changed Everything
The Inflation Reduction Act of 2022 restructured the Part D benefit to eliminate the coverage gap and impose a hard cap on annual out-of-pocket drug spending. Starting in 2025, and continuing in 2026, the Part D benefit now operates under a simplified three-phase structure:
- Deductible phase: You pay the full cost of your drugs until you meet the deductible (up to $615 in 2026). Many plans set a lower deductible or waive it for certain drug tiers.
- Initial coverage phase: You pay 25% coinsurance while the plan covers the rest. This phase continues until your true out-of-pocket spending reaches $2,100.
- Catastrophic phase: Once you hit the $2,100 annual out-of-pocket cap, you pay $0 for covered prescriptions for the remainder of the year.
There is no longer a coverage gap or donut hole between the initial coverage phase and catastrophic coverage. The old thresholds — such as the $5,030 initial coverage limit and the $8,000 catastrophic spending requirement — no longer apply.
What Counts Toward the $2,100 Cap
Expenses that count toward the annual out-of-pocket cap include:
- Your annual deductible payments
- Copays and coinsurance paid during the initial coverage phase
Expenses that do not count include:
- Monthly premium payments
- Costs for drugs not listed on your plan's formulary
- Charges for drugs obtained at out-of-network pharmacies (unless your plan allows it)
Medicare Prescription Payment Plan
In addition to the out-of-pocket cap, the IRA introduced the Medicare Prescription Payment Plan, which lets you spread your annual out-of-pocket prescription costs into monthly installments, interest-free. This option is available through all Part D plans and Medicare Advantage plans with drug coverage. Contact your plan to enroll if you prefer predictable monthly expenses.
Tips for Managing Your Part D Costs
Even with the donut hole eliminated, these strategies can help reduce your prescription spending:
- Request generics: Lower-cost alternatives keep your out-of-pocket spending down
- Choose preferred pharmacies: In-network pharmacies provide better pricing
- Apply for Extra Help: Beneficiaries with low incomes may qualify for subsidies that further reduce drug costs
- Shop your plan each year: Switching plans may reduce your overall drug costs
- Speak with your doctor: Alternative therapies or patient assistance programs could be available
The elimination of the donut hole is one of the most significant Medicare reforms in recent years, providing beneficiaries with a clear and predictable ceiling on their annual prescription drug expenses.