The Donut Hole (Coverage Gap) of Medicare Part D: How It Works

If you're just starting your Medicare journey or are well along that path, it's likely that you've heard of the “donut hole" coverage gap. What is it anyway, aside from sounding like a delicious sweet snack? Read on to learn more about what the donut hole is, how it affects you and how to manage it.

What Is the Donut Hole Coverage Gap?

The “donut hole" is a funny little term referring to a not-so-funny gap in coverage of prescription drug costs for people on Medicare Part D.¹ In other words, most Medicare plans have a financial cap on how much they will cover in prescription drug costs per year.² When you reach this amount, you fall into the “donut hole," where Medicare will no longer cover your prescriptions again until the next billing cycle or unless your out-of-pocket expenses reach $7,400.²

Who Falls Into the Donut Hole?

For 2023, Medicare Part D coverage takes care of all drug prescriptions up to $4,660 on covered medications.¹ Any amount past that falls into the donut hole, an area of no coverage where any drugs must be paid for out of pocket until the $7,400 cap.²

Who Does Not Fall Into the Donut Hole?

It is possible for a Medicare subscriber to avoid the donut hole. If you don't spend up to $4,660 per year on drugs, you will not have to worry about that coverage gap. Additionally, those subscribers using the Extra Help program will never fall into the coverage gap,² as it is designed to buffer those with the lowest resources.³

What Is the Part D Extra Help Program?

The Extra Help program is an exception to the coverage cap.¹ This program helps people in low-income situations pay for aspects of their healthcare, including premiums, deductibles and other out-of-pocket expenses.³

To qualify for the Extra Help program, the Social Security Administration reports that “your resources must be limited" to either $16,660 per year for an individual or $33,240 for a married couple living together.⁴ You must also have no or limited assets, which includes things like real estate, stocks and bonds, cash at home or in bank accounts, retirement accounts and other assets.⁴

Donut Hole Prescription Drug Costs

For those who do enter the donut hole gap in coverage, it doesn't mean that you will necessarily have to pay for all drugs at full price — discounts do apply. Additionally, the out-of-pocket costs you spend on drugs once you're in the donut hole are capped at $7,400.² This applies to both brand-name and generic prescription drugs.

Brand-name drugs

For brand-name drugs that are covered by Medicare, you'll pay no more than 25% of the cost of your prescription drugs if you buy them at a pharmacy or order them by mail.¹ The manufacturer and your plan will make up the remaining costs of the drugs.¹

However, you will also have to pay a small dispensing fee, which will typically be shared in a 75%-25% split, with you paying the lesser amount and Medicare paying the higher amount.¹

Both the costs that you personally pay and that the manufacturer pays will count toward your out-of-pocket expenses to help get you out of the coverage gap.¹

How the numbers play out

To explain this further, imagine a patient named Jane Smith who has fallen into the Medicare donut hole by spending the cap of $4,660. When she pays for her covered, brand-name drug at the pharmacy, at a price of $60 plus a $2 dispensing fee, the cost before her discount is $62. She will only have to pay 25% of that fee, however, or $15.50.¹

Both her payment of $15.50 and the manufacturer's discount of $42 count toward her out-of-pocket spending. Any other fees do not.¹

Generic drugs

Medicare will also pay 75% of the price for generic drugs during the coverage gap.¹ You'll pay the remaining 25% of the price.¹

The coverage for generic drugs works differently from the discount for brand-name drugs. For generic drugs, only the amount you pay will count toward getting you out of the coverage gap.¹

How the numbers play out

In this scenario, imagine a patient named Frank Jones who has fallen into the donut hole of his Medicare drug plan. When he goes to pay for his $20 generic prescription at the pharmacy, the cost before his discount is $20 plus a $2 dispensing fee, for a total of $22. Mr. Jones only has to pay 25% of that total, or $5.50.¹

His payment of $5.50 will be all that counts toward his out-of-pocket spending.¹

Getting Out of the Donut Hole

If you enter the donut hole, it's especially important to keep track of your qualifying out-of-pocket expenses; one of the ways to get out of the donut hole is to reach a cap of $7,400, which is considered a “catastrophic" payment stage.² At this stage, your Medicare plan should cover most of your prescription drugs, leaving you with only a small copay of no more than 5% of the cost of your drugs for the rest of the year.⁵

There are other options to consider beyond the donut hole. For example, people who fall into the Medicare donut hole might be better served by Medicaid, another federal program to help people of low-income afford healthcare.⁶ People who fall into the donut hole can also look into State Health Insurance Assistance Programs (SHIPs), which offer local counseling and assistance to Medicare-eligible individuals and families.⁷

Tips on How to Avoid the Donut Hole Coverage Gap

Avoiding the donut hole in the first place is the ideal situation, though some people may not be able to do so. Here are some tips to help steer clear of it, if possible:²

• Estimate annual drug costs in advance when possible and determine how you will pay for them, in order to budget and plan.
• Discuss lower-cost drug alternatives with your healthcare professionals.
• Seek out discounts on medications.
• Choose generic drugs over brand-name drugs.
• Opt for in-network pharmacies only.

Most importantly, do not stop taking your medications if you fear you can't afford them; seek help to pay for them through your healthcare provider first.⁶

The Inflation Reduction Act Will Help by 2025

The 117th United States Congress passed the Inflation Reduction Act with President Biden signing it into law in August 2022. It will help people on Medicare who fall into the donut hole by putting a cap of $2,000 on out-of-pocket prescription drug costs by 2025, which is about $5,400 less per year than people have to spend to get out of the donut hole.⁸ It will also expand the Extra Help program to 150% of the poverty level in 2024, and make insulin available at only $35 per month with a covered prescription.⁸

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Author Bio

Jordan Rosenfeld has been freelance writing for 21 years about finances, health, education and more. Her work has appeared in The Atlantic, The Billfold, Good Magazine, GoBanking Rates, Daily Worth, Quartz, Medical Economics, The New York Times, PayPal, The Washington Post and more.