Donut Hole
The coverage gap phase in Medicare Part D where, historically, the beneficiary paid a higher percentage of drug costs; largely eliminated for 2025 by the Inflation Reduction Act's $2,000 annual cap.
The "donut hole" was a gap in Medicare Part D coverage established when the program launched in 2006. After spending a certain amount on covered drugs, beneficiaries entered the coverage gap and paid much higher cost-sharing until spending reached the catastrophic coverage threshold. At its worst (2010), beneficiaries paid 100% of drug costs in the donut hole.
The ACA (2010) began gradually closing the donut hole. By 2020, coverage gap cost-sharing was reduced to the same levels as the initial coverage phase (25% for most drugs). For 2025, the Inflation Reduction Act eliminates the meaningful financial impact of the coverage gap entirely by capping total beneficiary out-of-pocket drug costs at $2,000/year and restructuring the coverage phases.
Despite the policy reform, understanding the donut hole remains relevant because: (1) many beneficiaries still encounter it in 2024 with a temporary cost-sharing increase, (2) the terminology persists widely in Medicare communications and plan literature, and (3) the 2025 restructuring changes how cost-sharing accrues across the phases.
Real-World Example
In 2024, a beneficiary taking Eliquis (apixaban) at $450/month entered the coverage gap after $4,660 in total drug spending; their cost-sharing increased to 25% of drug cost in the gap, adding $112/month in out-of-pocket costs until reaching catastrophic coverage — a structure that the 2025 $2,000 cap eliminates.