Medicare coverage Coverage gap Medicare Part D donut hole

Thanks to the Affordable Care Act (ACA), the donut hole closed completely in 2020.

The donut hole is the coverage gap that occurs when you and your Medicare drug plan have reached a pre-determined spending limit for covered drugs. For example, in 2024, once you have spent $5,030 on covered drugs, you enter the coverage gap.

However, for 2025, once you reach the $2,000 initial coverage gap, you will enter the catastrophic phase and pay nothing out-of-pocket for each covered prescription until the end of the year.

The Medicare donut hole is now closed

The Medicare donut hole closed completely in 2020 as a provision of the Affordable Care Act. This has led to some confusion, however, since there is still an initial coverage phase under Medicare Part D.

This confusion mainly results from the fact that few people understand how Medicare Part D cost-sharing works, both today and historically. This page explains the three Medicare Part D coverage phases, your costs at each stage, and how you leave the initial coverage phase to enter the catastrophic coverage phase.

What are the 3 Phases of Medicare Part D?

The three phases of Medicare Part D are:

Deductible Phase
Initial Coverage Phase
Catastrophic Coverage Phase

During the deductible phase, you are responsible for 100% of your prescription drug costs until you meet your Part D plan's annual deductible. The insurance companies that provide Part D plans set their own costs, including deductibles and premiums. However, they must work within guidelines established by the Centers for Medicare & Medicaid Services (CMS). In 2025, the maximum Part D deductible is $590.

The Part D initial coverage phase

Once you meet your Medicare Part D annual deductible, you enter the initial coverage phase. Your out-of-pocket costs during this stage are 25% of your plan's negotiated costs for covered medications. You pay this in the form of copays or coinsurance at the time of purchase.

You remain in the initial coverage phase until you and your plan spend a combined total of $2,000 on covered prescription drugs. At that point, you enter the catastrophic coverage phase.

The catastrophic coverage phase

You enter the catastrophic coverage phase once your total out-of-pocket spending reaches $2,000 in 2025. This includes money you paid for covered prescriptions during the deductible phase. In addition, the manufacturer discount on brand-name prescription drugs counts toward your total out-of-pocket for Part D coverage (i.e. the 70% described above).

The monthly premium for your Part D or Medicare Advantage Prescription Drug plan does not count toward this total cost. Neither does the cost of over-the-counter medications.

Once you reach the catastrophic coverage phase, you have no out-of-pocket expenses for the rest of the calendar year.

Drug costs that don't count toward your total out-of-pocket

When figuring your total out-of-pocket Part D spend, exclude the following:

Costs paid for by a third party, such as a secondary insurance plan through an employer or union
Drugs not covered by Medicare
Drugs purchased from a pharmacy outside your Medicare Part D prescription drug plan's network
Medications that are not covered by your plan's drug formulary (even if you got the plan to make an exception for a non-approved drug)
Monthly premiums
Over-the-counter medications

For plan specifics, please contact your Part D provider.

Choosing a Medicare Part D plan

When comparing Medicare Part D plans, one of the first things to consider is the drug formulary. This is the list of prescription medications the plan covers. If it doesn't include yours, you probably want to find a different Part D plan. Even if you get your Part D benefits through a Medicare Advantage plan, you still need to check the drug formulary.

Costs are likely your next concern. To estimate these, you need to look beyond the monthly premium. The drug tiers the plan uses to determine copays will help you figure out what you'll pay for your medications. The lower the tier, the lower your cost. You should also check the plan's yearly deductible.

Comparing Medicare Part D plans is easy with our Find a Plan tool. Enter your location information and coverage start date to begin reviewing Medicare plans in your area.

Additional resources

ClearMatch Medicare: Find a Medicare Plan
Medicare.gov: Costs
Social Security Administration: Extra Help

DONNA FREDERICK

After retiring from a career as an executive travel counselor in 2006, Donna Frederick embarked on a second career as a licensed insurance agent. During that first year, many clients told Donna how overwhelmed they felt by Medicare, but that her assistance helped them finally understand the Medicare program. That experience inspired Donna to focus her efforts on educating her clients to ensure they fully understand their Medicare options. Today, Donna takes pride in providing outstanding customer service and going the extra mile to make sure each client knows all of their options and has a sound understanding of their Medicare plan, from costs to coverage and all points in between.