The Medicare donut hole was a gap in prescription drug coverage that left millions of older Americans temporarily responsible for the full cost of their medications after exceeding an initial spending threshold each year. It existed because the architects of Medicare Part D in 2003 could not afford a seamless benefit within the budget Congress was willing to approve, so they carved out a middle zone of no coverage as a cost-saving measure. After nearly two decades of incremental reforms, the donut hole was effectively eliminated by the Inflation Reduction Act, which replaced it with a hard $2,000 annual cap on out-of-pocket drug spending starting in 2025.
Why the Coverage Gap Existed
When Congress created Medicare Part D through the Medicare Modernization Act of 2003, the goal was to give Medicare beneficiaries outpatient prescription drug coverage for the first time. The problem was cost. Providing uninterrupted coverage from the first dollar to catastrophic spending levels would have exceeded the roughly $400 billion budget Congress had set aside for the program over ten years. The compromise was a benefit structure with a hole in the middle: after a deductible, Medicare would cover a share of drug costs up to an initial coverage limit. Then coverage disappeared entirely until the beneficiary’s total spending reached a much higher catastrophic threshold, at which point Medicare kicked back in and covered most costs. That uncovered stretch in between became known as the donut hole.
The design was deliberate. Policymakers reasoned that keeping coverage at the front end (where nearly all beneficiaries spend) and the catastrophic end (where financial ruin looms) would protect the most people at the lowest federal cost. The gap fell on beneficiaries with moderate-to-high drug needs, people sick enough to rack up substantial pharmacy bills but not so sick that they blew through to catastrophic coverage. About a quarter of Part D enrollees reached the donut hole each year, while only around 5 percent spent enough to emerge from it into the catastrophic phase.1Health Affairs. The effects of the coverage gap on drug spending: a closer look at Medicare Part D The gap was never a design flaw that slipped through. It was the price of getting the benefit enacted at all.
How People Changed Their Behavior in the Gap
Once beneficiaries crossed into the donut hole and saw their out-of-pocket costs spike, many cut back on medications. The reductions were not random. People tended to drop expensive brand-name drugs first while clinging to cheaper generics. Use of high-cost drug classes like antipsychotics, asthma medications, and central nervous system drugs fell by roughly 8 to 18 percent in the gap, while lower-cost categories with strong generic availability, such as beta blockers and antidepressants, dropped by only 3 to 5 percent.2PubMed Central. Digesting the doughnut hole In other words, people made economically rational but medically risky choices, trimming the drugs that cost the most out of pocket rather than the ones they needed the least.
Beneficiaries who had no supplemental coverage in the gap reduced their overall drug use by about 14 percent, while those whose plans still covered generics cut back by only about 3 percent.1Health Affairs. The effects of the coverage gap on drug spending: a closer look at Medicare Part D The gap did not just reduce spending; it reshuffled it in ways that could undermine treatment. Economists studying the donut hole described it as a sharp kink in the effective price of drugs, where insurance generosity dropped suddenly and purchasing decisions shifted in response.3PubMed Central. The Response of Drug Expenditure to Non-Linear Contract Design: Evidence from Medicare Part D
The Toll on Chronic Disease Management
The donut hole hit people with chronic conditions particularly hard because their drug costs are steady and unavoidable. Diabetes offers the clearest example. Beneficiaries with diabetes who entered the gap with no supplemental coverage were significantly less likely to stay adherent to their medications compared with those who had full brand-and-generic coverage throughout.4PubMed. Part D coverage gap and adherence to diabetes medications That is a problem with real consequences: skipping diabetes medications leads to uncontrolled blood sugar, which leads to complications and hospitalizations.
Insulin users faced some of the steepest cost exposure. Because insulin is a brand-name biologic with few generic alternatives (at least historically), people using insulin in the donut hole were paying a large share of its full price out of pocket. Before reforms, beneficiaries in the gap were responsible for 35 percent of the plan’s cost for covered brand-name drugs until they hit the catastrophic threshold.5Oxford Academic (The Journal of Clinical Endocrinology & Metabolism). Addressing Insulin Access and Affordability: An Endocrine Society Position Statement For a drug that can cost thousands of dollars a year, 35 percent is not a manageable copay. The result was that some patients rationed doses, skipped refills, or switched to cheaper but less effective alternatives.
How the Gap Was Gradually Closed
The Affordable Care Act in 2010 began chipping away at the donut hole. The ACA included provisions that reduced cost sharing within the gap each year, with the goal of eventually closing it.6PubMed Central. Closing the Medicare Doughnut Hole: Changes in Prescription Drug Utilization and Out-of-Pocket Spending Among Medicare Beneficiaries With Part D Coverage After the Affordable Care Act Starting in 2011, beneficiaries received a 50 percent manufacturer discount on brand-name drugs purchased in the gap. Federal subsidies for generic drugs in the gap also increased year by year. By 2020, beneficiaries in the donut hole were paying 25 percent of drug costs for both brand-name and generic medications, the same coinsurance rate as the initial coverage phase. The gap, in terms of the coinsurance rate, had technically closed.
But “closed” was misleading. The donut hole as a distinct cost-sharing phase disappeared, yet total out-of-pocket exposure remained high because there was still no hard cap on what a beneficiary could pay in a year. Under the pre-2025 structure, the catastrophic threshold was defined by a formula that could push annual out-of-pocket spending above $7,000 for people on expensive medications. And once in the catastrophic phase, beneficiaries still owed 5 percent of drug costs with no ceiling, meaning someone on a $100,000-a-year cancer drug could face thousands of dollars in ongoing costs even after passing the threshold. Before the most recent reforms, Part D beneficiaries using very expensive drugs were paying an average of roughly $4,500 per year out of pocket, compared with about $1,800 for similarly aged people on commercial insurance.7JAMA Health Forum. Comparison of Out-of-Pocket Spending on Ultra-Expensive Drugs in Medicare Part D vs Commercial Insurance
The $2,000 Cap and What It Changed
The Inflation Reduction Act of 2022 went further than the ACA by introducing a hard annual cap on out-of-pocket drug spending under Part D. Starting in 2025, no beneficiary pays more than $2,000 per year for covered prescription drugs, regardless of how expensive those drugs are.8PubMed Central. Changes in Medicare Part D Plan Designs After the Inflation Reduction Act This is the structural replacement for the donut hole: instead of a benefit with a gap in the middle and unlimited exposure at the tail, there is now a firm ceiling.
The impact is most dramatic for people who take expensive specialty medications. Among Part D beneficiaries with cancer, an estimated 42 percent would have exceeded $2,000 in annual out-of-pocket spending without the cap. With it, those beneficiaries are expected to save an average of roughly $8,500 a year. People with blood cancers stand to save even more, around $10,800 per beneficiary, because their medications tend to be among the costliest.9PubMed. Estimated True Out-of-Pocket Cost Changes From the Inflation Reduction Act on Medicare Part D Beneficiaries With Cancer
Early data on prescription abandonment offers another window. In 2023, before the cap took effect, about 72 percent of non-low-income-subsidy beneficiaries who were prescribed a specialty oral cancer drug abandoned the prescription, meaning they never picked it up. In 2024, when the cap’s first phase was in effect, that abandonment rate dropped to about 58 percent, a meaningful decrease of roughly 13 percentage points.10JCO Oncology Practice. Oncology drug abandonment after capping of annual out-of-pocket costs under Medicare Part D in 2024 That still means more than half of people walked away from a prescribed cancer medication, but the direction is encouraging.
The Front-Loading Problem
One wrinkle the $2,000 cap does not automatically solve is timing. Under Part D’s structure, the full annual out-of-pocket amount can land in a single month. If you fill an expensive specialty prescription in January, you might owe the entire $2,000 at once, even though your annual exposure is now capped. For someone living on Social Security, a $2,000 pharmacy bill in a single month can be just as unaffordable as a $5,000 bill spread over six months.
To address this, the Inflation Reduction Act also created the Medicare Prescription Payment Plan, which lets beneficiaries spread their out-of-pocket costs evenly across the calendar year. Enrollees who opt in can pay as little as about $167 per month instead of facing the full amount upfront.11PubMed. Reducing Medicare Part D Out-of-Pocket Costs for Specialty Oral Anticancer Drugs Under the Inflation Reduction Act: Highlighting the Benefits of Enrolling in the Medicare Prescription Payment Plan For beneficiaries on expensive disease-modifying therapies for conditions like multiple sclerosis, enrolling in this payment plan can reduce the January bill by more than 90 percent compared with paying it all at once.12PubMed Central. Reducing the Out-of-Pocket Costs of Disease-Modifying Therapies for Medicare Beneficiaries With Multiple Sclerosis The payment plan does not reduce total annual spending; it just spreads it out. But for someone on a fixed income, the difference between $2,000 in January and $167 per month can be the difference between filling a prescription and skipping it.
The high rate of prescription abandonment even after the cap’s introduction may partly reflect this front-loading issue. If the full annual cost hits at the pharmacy counter during a single visit, some patients walk away before they realize they can enroll in the payment plan. Awareness of the program is still a challenge, and enrollment requires an active opt-in step that many beneficiaries may not know about.
Who Benefits Most From Expanded Low-Income Subsidies
The Inflation Reduction Act also expanded Part D’s low-income subsidy program. Before 2024, beneficiaries who qualified for a partial subsidy still faced copays, premiums, and deductibles that were lower than the standard benefit but still substantial enough to create adherence problems. Research comparing partial-subsidy recipients to those receiving full subsidies found that the partial-subsidy group reported cost-related nonadherence at nearly double the rate: 39 percent versus 22 percent. The gap was even wider among women and members of racial and ethnic minority groups.13PubMed Central. Affordability and adherence gains for Medicare Part D low-income subsidy recipients when low-income subsidy benefits expanded in 2024
Starting in 2024, the IRA expanded full subsidy eligibility to cover everyone who previously received only partial subsidies, eliminating the intermediate tier of cost sharing for low-income beneficiaries. The expectation is that removing these remaining financial barriers will improve medication adherence across the board, with the largest gains for the populations that were most affected by cost-related skipping: women, Black and Hispanic beneficiaries, and people managing multiple chronic conditions. The evidence here is directional but strong: when out-of-pocket costs go down, adherence goes up, and the effect is most pronounced in the groups that could least afford the costs to begin with.
How Drug Plans Are Adapting
Shifting more financial risk onto drug plans and manufacturers was always going to produce adjustments on the insurer side. Under the new Part D structure, plan sponsors bear a larger share of drug costs above the out-of-pocket cap, which changes the economics of covering expensive drugs. Early evidence shows that some plans have responded by making their formularies smaller, particularly for drugs in “protected classes” that plans were historically required to cover broadly, and for lower-tier medications.14PubMed. Inflation Reduction Act Changes To Part D Plan Design: Lower Premiums, Higher Deductibles, And Some Smaller Formularies Payer organizations have also signaled they may impose more stringent criteria for accessing certain medications, such as requiring prior authorization or step therapy, though evidence of widespread changes on that front has not yet materialized.15Value in Health. Implications of the Inflation Reduction Act on US Payer Organizations’ Medicare Part D Formularies and Benefit Design
Some insurers have exited the Part D market entirely. The redesign shifts enough financial liability onto plan sponsors that certain smaller or less profitable plans have decided the math no longer works for them.16PubMed Central. Insurer Exits After the Inflation Reduction Act Part D Redesign For affected beneficiaries, this means finding a new plan, which is an administrative hassle but not a loss of coverage, since Medicare assigns displaced enrollees to other available plans. The concern is whether a market with fewer competitors eventually leads to fewer choices or worse coverage terms.
Price Negotiation vs. the Spending Cap
The Inflation Reduction Act’s headline provision, the one that attracted the most political attention, was giving Medicare the authority to negotiate prices directly with drug manufacturers for the first time. That is a separate tool from the out-of-pocket cap, and research suggests the two provisions have very different effects on what beneficiaries actually pay. For people taking specialty drugs, the $2,000 cap produces a far larger reduction in annual costs than price negotiation alone. Negotiated prices help the Medicare program as a whole save money, which offsets the federal cost of enforcing the out-of-pocket cap, but the individual beneficiary’s wallet sees the cap as the main source of relief.17JAMA Health Forum. Inflation Reduction Act Provisions and Medicare Part D Out-of-Pocket Costs for Specialty Drugs
This distinction matters because debates about the IRA’s drug provisions often conflate the two. If price negotiation were repealed but the spending cap remained, most beneficiaries on expensive medications would still see large out-of-pocket savings. If the cap were removed but negotiation survived, people taking specialty drugs would be back to facing enormous pharmacy bills. The two policies work together, but they are doing different jobs: the cap protects the individual from catastrophic costs, while negotiation protects the federal budget. For the person standing at the pharmacy counter deciding whether to fill a prescription, it is the cap that changed their life.
Remaining Gaps for Beneficiaries Who Do Not Take Expensive Drugs
Most of the attention around these reforms focuses on people with high drug costs, and for good reason. But the majority of Part D beneficiaries never came close to the donut hole in any given year and will never approach $2,000 in annual out-of-pocket spending. For them, the more relevant changes are subtler and sometimes work in the wrong direction. Some plans have raised deductibles or adjusted tier placements in response to the new rules, which can increase costs for routine prescriptions even as catastrophic exposure shrinks.14PubMed. Inflation Reduction Act Changes To Part D Plan Design: Lower Premiums, Higher Deductibles, And Some Smaller Formularies A beneficiary who takes two generic medications and pays $30 a month out of pocket is unlikely to notice the $2,000 cap, but could notice if their plan dropped a preferred drug from the formulary or added a new deductible.
Reform liability has also shifted among stakeholders in ways that will continue to play out. The new structure increases plan sponsors’ financial exposure, which means drug plans have stronger incentives than before to negotiate harder with manufacturers, steer patients toward cheaper alternatives, and manage utilization tightly.18PubMed. Reforming the Medicare Part D Benefit Design: Financial Implications for Beneficiaries, Private Plans, Drug Manufacturers, and the Federal Government Whether that pressure leads to genuinely lower drug prices or just more administrative hurdles for patients trying to get the drugs their doctors prescribed is one of the open questions of the next few years. The donut hole is gone, but the tension between cost control and access that created it in the first place has not disappeared. It has just moved to different parts of the system.