If you take prescription medications, you have likely heard horror stories about the "Donut Hole." Officially known as the Coverage Gap, it is a temporary limit on what your Medicare Part D drug plan will cover.
While the Inflation Reduction Act has made significant changes to lower drug costs (including capping insulin at $35/month and capping total out-of-pocket spending), understanding the phases of coverage is still critical for budgeting.
The 4 Stages of Part D Coverage
Every Part D plan follows this basic structure, which resets every January 1st.
Stage 1: The Deductible
You pay 100% of your drug costs until you meet your plan's deductible.
- 2025 Limit: The standard maximum deductible is $590. (Some plans have $0 deductibles).
Stage 2: Initial Coverage
Once you meet the deductible, you enter the Initial Coverage phase. You pay a copay (flat fee) or coinsurance (percentage), and your plan pays the rest.
- You stay in this stage until the total cost of your drugs (what you paid + what the plan paid) reaches $2,000.
- Wait, $2,000? Yes. In a major change for 2025, the Inflation Reduction Act capped annual out-of-pocket prescription costs at $2,000. This effectively eliminated the old "Catastrophic Coverage" threshold that was much higher.
Stage 3: The "Donut Hole" (Eliminated!)
Good News: As of 2025, the "Donut Hole" as we knew it is effectively gone for the beneficiary. In previous years, once you hit the initial limit, you were responsible for 25% of drug costs until you hit a catastrophic limit. Now, once you have paid $2,000 out of your own pocket, you move directly to...
Stage 4: Catastrophic Coverage
Once your out-of-pocket spending hits $2,000, you pay $0 for covered Part D drugs for the rest of the year.
- Old Rule: You paid 5% of costs.
- New Rule (2025): You pay nothing. The plan and Medicare pick up the tab.
Summary of the 2025 Changes
The term "Donut Hole" is becoming obsolete because the confusing gap where you paid 25% has been replaced by a hard cap.
- $2,000 Cap: You will never pay more than $2,000 a year for Part D drugs.
- Smoother Costs: Many people will hit this cap earlier in the year and then have free prescriptions for the remaining months.
- "Smoothing" Program: You can now choose to spread that $2,000 liability over monthly payments instead of paying it all at the pharmacy counter in January and February. This is a huge relief for seniors on fixed incomes taking expensive medications.
Strategies to Lower Costs Even Further
Even with the cap, saving money is smart.
- Switch to Generics: Brand-name drugs eat up your $2,000 cap quickly. Generics work the same way for a fraction of the cost.
- Use Preferred Pharmacies: Most plans have "preferred" networks (like CVS, Walgreens, or Walmart) where copays are lower.
- Shop During Open Enrollment: Formularies (drug lists) change every year. Your drug might be "Tier 1" (cheap) this year and "Tier 3" (expensive) next year. Always compare plans during the Annual Enrollment Period (Oct 15 - Dec 7).
Drug Cost Checklist
- Review your Annual Notice of Change (ANOC) in September to see if your drugs are still covered.
- Ask your doctor about generic alternatives.
- Sign up for the "Smoothing" option if you expect to hit the $2,000 cap early.
Medicare is changing for the better, but it's still complex. Find a Part D plan that covers your meds.