What Is the Medicare Part D Donut Hole?
The Medicare Part D donut hole is one of the most misunderstood features of the Medicare prescription drug benefit. Officially called the coverage gap, it is a phase in your Part D benefit where you temporarily pay more for your medications after you and your plan have spent a combined amount that exceeds the initial coverage limit. In 2026, that limit is $5,430 in total drug costs. Once you cross this threshold, you enter the donut hole and your cost-sharing changes significantly.
Understanding the Medicare Part D donut hole is essential for every Medicare beneficiary, because it can mean the difference between manageable prescription costs and a sudden spike that catches you off guard. Roughly 3.5 million Part D enrollees reach the coverage gap each year, according to CMS data. This guide explains exactly how it works, what you will pay, and how to minimize the financial impact.
How the Part D Benefit Phases Work
Medicare Part D has four distinct benefit phases. The donut hole is the third. Here is how they flow:
Phase 1: Deductible
Most Part D plans have an annual deductible, capped at $590 in 2026. During this phase, you pay the full cost of your medications until you meet the deductible. Some plans have a $0 deductible for preferred generic drugs.
Phase 2: Initial Coverage
After meeting your deductible, your plan begins sharing costs with you. You pay copays or coinsurance based on the drug’s formulary tier. This phase continues until the total drug costs, what you and your plan pay combined, reach $5,430.
Phase 3: Coverage Gap (Donut Hole)
Once total costs exceed $5,430, you enter the donut hole. During this phase, you pay a larger share of drug costs. Thanks to the Inflation Reduction Act, brand-name drugs in the coverage gap now receive a manufacturer discount that counts toward your true out-of-pocket costs. For generic drugs, you pay 25% of the cost. For brand-name drugs, you pay 25% of the cost after the manufacturer discount is applied.
Phase 4: Catastrophic Coverage
When your true out-of-pocket spending reaches $2,000 in 2026 (a new cap established by the Inflation Reduction Act), you exit the donut hole and enter catastrophic coverage. Under the new rules, you pay $0 for covered drugs for the rest of the year. This is a major change from previous years, when catastrophic coverage still required copays.
What Counts Toward the Donut Hole Threshold
Not all spending counts toward entering the coverage gap. Here is what does and does not apply:
Counts toward the $5,430 initial coverage limit:
- The amount you pay out of pocket (deductible payments, copays, coinsurance)
- The amount your plan pays
Does NOT count:
- Your monthly Part D premium
- Payments by other insurance, such as employer coverage or the Extra Help subsidy
It is important to note that the initial coverage limit is based on total drug costs, not just your share. If your plan pays $300 and you pay $50 for a prescription, the full $350 counts toward the $5,430 threshold. This means patients on expensive medications can reach the donut hole within just a few months.
The $2,000 Out-of-Pocket Cap
Starting in 2025, the Inflation Reduction Act introduced a hard $2,000 annual cap on out-of-pocket Part D spending, which continues in 2026. This is a transformative change for Medicare beneficiaries, especially those taking expensive specialty drugs.
Under the previous structure, there was no out-of-pocket maximum, and patients could spend $5,000, $10,000, or more per year on medications. The new $2,000 cap means that once your true out-of-pocket costs reach $2,000, you pay nothing for covered Part D drugs for the rest of the calendar year.
What counts toward the $2,000 cap includes your deductible payments, copays, coinsurance during all phases, and amounts paid during the coverage gap. Manufacturer discounts on brand-name drugs in the gap also count toward the cap.
Medicare also offers the Medicare Prescription Payment Plan, which allows you to spread your out-of-pocket costs across the year in predictable monthly installments, rather than paying large amounts upfront when you fill expensive prescriptions. This is especially helpful for patients who hit the coverage gap early in the year.
How the Donut Hole Affects Different Drugs
The financial impact of the Medicare Part D donut hole varies depending on whether you take brand-name or generic medications.
Brand-Name Drugs in the Gap
Drug manufacturers are required to provide a discount (currently 10% under the Inflation Reduction Act framework, with plans covering an additional 65%) on brand-name drugs purchased during the coverage gap. You pay 25% of the drug’s price. For a brand-name medication costing $500, your share would be $125.
Generic Drugs in the Gap
For generic drugs, you pay 25% of the cost during the coverage gap. There is no manufacturer discount for generics, but generics are already priced much lower than brand-name drugs. A generic that costs $30 would cost you $7.50 in the donut hole.
This is why switching from brand to generic whenever possible is one of the most effective strategies for minimizing donut hole costs. Even a single brand-to-generic switch can reduce your annual drug spending by hundreds of dollars.
Strategies to Minimize Donut Hole Costs
While you cannot always avoid the coverage gap, several strategies can reduce its impact on your budget.
Use generics aggressively. Ask your doctor whether generic alternatives are available for all your brand-name medications. The cost difference is especially pronounced during the donut hole. See our generic vs. brand name drugs guide for details.
Apply for Extra Help. If you qualify for the Medicare Part D Extra Help program, you bypass the donut hole entirely. Full Extra Help recipients pay flat copays of $4.50 (generic) and $11.20 (brand) throughout the year, with no gap phase. Apply through Social Security to check your eligibility.
Compare plans annually. During the Annual Enrollment Period (October 15 through December 7), use the Medicare.gov Plan Finder to compare total annual costs across plans. A plan with a higher premium but better coverage gap benefits may save you money overall.
Use manufacturer patient assistance programs. Some manufacturers offer free medication to Medicare patients who reach the coverage gap. Check with each manufacturer or visit NeedyMeds.org for program listings.
Consider the Medicare Prescription Payment Plan. Spreading your costs evenly across the year does not reduce total spending, but it eliminates the shock of large out-of-pocket payments during the months when you are in the gap.
Frequently Asked Questions
Has the donut hole been eliminated?
Not entirely. The coverage gap still exists as a phase of the Part D benefit where your cost-sharing rate changes. However, the Inflation Reduction Act’s $2,000 out-of-pocket cap dramatically limits the financial damage. Many beneficiaries will now pass through the donut hole and hit the cap quickly, paying $0 for the rest of the year. This is a major improvement over the pre-2025 structure.
When does the donut hole reset?
The coverage gap resets on January 1 of each year. Your total drug costs and out-of-pocket spending start over at $0. This means you will go through the deductible and initial coverage phases again before potentially re-entering the gap.
Does the $2,000 cap include my premium?
No. Monthly Part D premiums do not count toward the $2,000 out-of-pocket cap. Only deductible payments, copays, and coinsurance count. This is why premium costs and drug cost-sharing should be evaluated together when choosing a plan.
Can I avoid the donut hole by choosing a different plan?
Some plans offer enhanced gap coverage that provides better cost-sharing during the coverage gap than the standard benefit. These plans often have higher premiums. Use the Medicare.gov Plan Finder to compare the total estimated annual cost, including gap spending, across plans in your area.
What is the difference between the donut hole and the out-of-pocket cap?
The donut hole is a specific phase where your standard cost-sharing arrangement changes. The $2,000 out-of-pocket cap is the maximum you will spend on covered drugs in a year. You may enter the donut hole at $5,430 in total drug costs but reach the $2,000 cap well before that, depending on your cost-sharing. Once you hit $2,000 in true out-of-pocket costs, you pay $0 regardless of which phase you are in.
Plan Ahead for the Coverage Gap
The Medicare Part D donut hole is no longer the financial catastrophe it once was, thanks to the $2,000 annual cap. But understanding how it works helps you choose the right plan, time your prescriptions wisely, and take advantage of programs like Extra Help that can eliminate gap costs altogether. Review your plan during the Annual Enrollment Period, explore generic alternatives, and visit our healthcare costs guide for more ways to keep prescription spending under control.