The Medicare donut hole exists because Congress needed to keep costs down when it created the prescription drug benefit in 2003. Lawmakers wanted to help seniors pay for medications but didn’t want to fund unlimited coverage, so they designed a gap in the middle of the benefit where enrollees would temporarily lose most of their coverage and pay more out of pocket. That gap, officially called the “coverage gap,” became known as the donut hole because coverage wraps around it: you’re covered at the beginning, uncovered in the middle, then covered again at the end.
Why Congress Built a Gap Into the Benefit
Before 2006, Medicare had no outpatient prescription drug coverage at all. The Medicare Modernization Act of 2003 created Part D to fill that void, but the program came with a massive price tag. To limit federal spending while still offering meaningful help to seniors with low or moderate drug costs, Congress structured the benefit in phases. Rather than covering a smaller percentage of every prescription all year long, they chose to provide stronger coverage up front, then pull it back once a beneficiary’s total drug spending hit a certain threshold. Coverage kicked back in at a higher level once spending reached the catastrophic phase.
The design was a political compromise. Full coverage for every dollar of drug spending would have cost far more than legislators were willing to approve. At the same time, Congress prohibited Medicare from directly negotiating drug prices with manufacturers, something the Veterans Administration and most other wealthy countries do routinely. That decision kept drug prices under Medicare higher than they needed to be, which made the coverage gap hit harder for people taking expensive medications.
How the Coverage Phases Work
Part D coverage has historically moved through four phases, each with different cost-sharing rules.
- Deductible phase: You pay the full cost of your prescriptions until you meet your plan’s annual deductible.
- Initial coverage phase: Your plan starts sharing the cost. You typically pay a copay or coinsurance for each prescription, and the plan covers the rest.
- Coverage gap (the donut hole): Once your combined drug spending (what you and your plan paid together) crosses a set threshold, you enter the gap. As of 2024, you pay 25% of the cost for both brand-name and generic drugs during this phase. For brand-name drugs, the manufacturer also provides a discount that counts toward moving you through the gap.
- Catastrophic phase: Once your true out-of-pocket costs reach a set limit, catastrophic coverage begins and your costs drop sharply.
The key number that determines when you exit the donut hole is your “true out-of-pocket” spending, or TrOOP. This includes what you personally pay, plus manufacturer discounts on brand-name drugs, payments from family members, state pharmacy assistance programs, and certain charity contributions. Notably, for generic drugs, only your own spending counts toward this threshold. For brand-name drugs, both your payments and the manufacturer discount count, which means brand-name prescriptions can move you through the gap faster.
Why It Hit Some Seniors So Hard
The donut hole was particularly painful for people with chronic conditions requiring multiple medications. Someone managing diabetes, high blood pressure, and high cholesterol could easily spend enough to enter the gap within the first few months of the year. Once inside, their monthly drug costs could jump dramatically, and many seniors reported cutting pills in half, skipping doses, or abandoning prescriptions entirely because they couldn’t afford the sudden increase.
The original version of the donut hole was far worse than its later iterations. When Part D launched in 2006, beneficiaries in the gap paid 100% of their drug costs out of pocket. The Affordable Care Act in 2010 began gradually closing the gap by requiring drug manufacturers to offer discounts on brand-name medications and by slowly increasing the share paid by insurance plans. By 2020, the beneficiary’s share in the gap had dropped to 25%, down from 100%.
The 2025 Overhaul
The Inflation Reduction Act of 2022 brought the most significant changes to Part D since its creation. Starting in 2025, Medicare Part D has a hard cap of $2,000 on total annual out-of-pocket drug spending. Once you hit that amount, you pay nothing more for covered prescriptions for the rest of the year. This effectively eliminates the donut hole as a financial burden, even though the benefit structure still technically has phases.
The law also replaced the old Coverage Gap Discount Program with a new Manufacturer Discount Program. Drug manufacturers are now required to provide discounts not just in the gap but during the initial coverage and catastrophic phases as well. Part D coverage is only available for drugs whose manufacturers have signed a discount agreement with Medicare. These manufacturer discounts will phase in fully over six years for smaller drug companies.
Another important change arrived a year earlier, in 2024. Previously, beneficiaries who reached the catastrophic phase still owed 5% coinsurance on every prescription, with no limit. For someone on a cancer drug costing $10,000 a month, that 5% added up fast. The 2024 changes set the catastrophic threshold at $8,000 in true out-of-pocket costs and eliminated the 5% coinsurance, giving catastrophic-phase enrollees full coverage for the first time.
Help for Lower-Income Enrollees
Medicare’s Extra Help program (also called the low-income subsidy) can eliminate the donut hole entirely for people who qualify. Under Extra Help, you pay no premium, no deductible, and just small copays for each prescription: up to $5.10 for generics and $12.65 for brand-name drugs in 2026. Once your total drug costs reach a set threshold, you pay $0 for covered medications for the rest of the year.
Eligibility depends on income and assets. For 2026, the income limit is $23,940 for an individual and $32,460 for a married couple. Resource limits are $18,090 for an individual and $36,100 for a couple. Payments made through Extra Help count toward your true out-of-pocket threshold, so the program accelerates your path through the coverage phases even if your personal spending is minimal. State pharmacy assistance programs and certain charitable organizations can also make payments on your behalf that count toward TrOOP, helping you exit the gap sooner.