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What was the Medicare donut hole?

What was the Medicare donut hole?

Medicare provides health insurance for people age 65 and older. If you were enrolled in a Medicare Part D prescription drug plan before 2025, you may experience a coverage gap if you and your plan spent a certain amount on drugs in a year. If you encounter this loophole, called the Medicare donut hole, you’ll have to pay a larger portion of the cost of your prescriptions until you reach an annual limit. However, the new 2025 Medicare rules effectively close the coverage gap.

Key insights

  • The Medicare donut hole was a coverage gap that could arise in health plans with Medicare prescription drug coverage (Part D).
  • The Inflation Reduction Act of 2022 placed an annual cap on prescription drug costs in Medicare, effectively ending the donut hole.
  • Medicare recipients can change their plans and coverage during the fall annual enrollment period.
  • If you need additional help with prescription drug costs, many programs may offer financial assistance.

What was the Medicare donut hole?

Medicare Part D is the part of Medicare that helps pay for prescription drugs. The Medicare donut hole was a coverage gap or a temporary limit on how the plan would cover prescriptions. The gap would arise after you and your drug plan spend a certain amount on covered drugs.

In 2024, the coverage gap begins once you and your plan have spent $5,030 on covered medications. If your total drug costs for the year exceed this amount, your out-of-pocket expenses must reach $8,000 before you can close the coverage gap and receive catastrophic coverage.

What happened to the Medicare donut hole?

The Inflation Reduction Act of 2022 (IRA) eliminated the Medicare donut hole. Starting in January 2025, Medicare Part D caps annual drug costs at $2,000 per year. Previously, once you hit the donut hole, you had to pay 25% of the cost of brand-name and generic drugs (and in previous years, you paid 100% of the drug cost in the gap). This cost-sharing obligation ends in 2025.

The IRA also provides additional financial relief by requiring:

  • A $35 per month cap on insulin (per covered prescription)
  • Expanded eligibility for the Medicare Part D Low-Income Subsidy Program
  • Negotiated discounts on some expensive medications covered by Medicare
    Parts B and D
  • No cost contribution for recommended vaccinations
  • A requirement that pharmaceutical companies pay rebates to Medicare when drug prices rise faster than inflation

What happened when someone entered the donut hole?

Entering the Medicare donut hole means paying more for prescription drugs. You used to pay 100% of your drug costs, but in 2024 you’re only paying 25% and would be out of the donut hole having spent $8,000 out of pocket.

With brand name drugs, the 25% you paid counted towards getting out of the donut hole, but also almost the full price of the drug. For generic drugs, only the 25% you pay will be credited towards your deductible.

After your deductible reached the $8,000 limit, you exited the donut hole and entered the catastrophic coverage phase, where you don’t have to pay for your prescriptions out of pocket for the rest of the year.

Important

Your Medicare Part D premiums will not count toward closing the coverage gap.

Frequently Asked Questions (FAQs)

How did the Medicare donut hole work?

The donut hole in Medicare was a gap in coverage that occurred when you and your drug plan reached a certain spending threshold. To get out of the donut hole, your out-of-pocket expenses must have exceeded a certain dollar amount. The costs incurred to close the donut gap included deductibles, coinsurance, copayments, brand-name drug discounts, and amounts you paid during the coverage gap.

How did you get out of the Medicare donut hole?

To get out of the donut hole, you had to close the coverage gap by increasing your out-of-pocket expenses to a certain level. In 2024, Medicare Part D beneficiaries were considered to have closed the gap once their spending reached $8,000. Eligible expenses include amounts paid toward your deductible, generic and brand-name medications, coinsurance, and copayments. Medicare Part D premiums and pharmacy dispensing fees were not counted toward the donut hole closure.

When can I enroll in Medicare Part D?

You can enroll in Medicare from three months before your 65th birthday to three months after your 65th birthday. If you are already enrolled in Medicare and would like to join, switch, or cancel a drug plan, you may do so during the annual Medicare open enrollment period. Open enrollment for Medicare runs from October 15th to December 7th. If you are enrolled in a Medicare Advantage plan, you can switch to another plan or switch to the original Medicare plan during the Medicare Advantage open enrollment period from January 1 to March 31 each year.

What is Medicare Extra Help?

Medicare Extra Help is a special program that provides financial assistance to people who need help financing their prescription medications. To qualify, you must be enrolled in Medicare and meet the asset and income requirements. If you’re eligible for Extra Help, you’ll pay no additional premiums or deductibles and receive significant discounts on brand name and prescription medications.

The conclusion

Prescription drug costs can put a strain on your budget. If you have limited income in retirement, it may be necessary to find ways to minimize these costs. In the past, Medicare Part D enrollees faced potentially costly out-of-pocket expenses once their drug coverage entered the coverage donut hole. The Inflation Reduction Act mandated significant changes to address the coverage gap. New regulations cap out-of-pocket costs for medications at $2,000 per year, and other provisions have made essential medications like insulin more affordable. However, if you already have Medicare and want to change or expand your benefits, you should consider switching plans during the fall enrollment period.