What Is the Medicare Donut Hole?

Medicare provides healthcare coverage for people ages 65 and older. If you’re enrolled in a Medicare Part D prescription drug plan, it’s possible that you could encounter a gap in coverage, depending on how much you spend. This gap, referred to as the Medicare donut hole, can potentially affect what you pay for prescription medications.

Key Takeaways

The Medicare donut hole is a coverage gap that may arise with Medicare Part D prescription drug plans.
While Medicare donut hole gaps have been reduced, it’s still possible that you may end up paying more out of pocket for medications.
Medicare recipients can make changes to their plans and coverage during the annual fall open enrollment period.
If you need additional help with prescription drug costs, there are a number of programs that may offer financial assistance.

What Is the Medicare Donut Hole?

Medicare Part D coverage pays for prescription drug costs for older adults who are enrolled in Medicare. The Medicare donut hole represents a coverage gap or temporary limit on what the plan covers for prescriptions. The gap begins after you and your drug plan have spent a certain amount for covered medications.

For 2024, the coverage gap begins once you and your plan have spent $5,030 on covered drugs. If your annual drug spending for 2024 exceeds that amount, then you may find yourself in the Medicare donut hole.

Important

Medicare Part D is not the only way to get prescription drug coverage. You can also get coverage through a Medicare Advantage Plan (Part C).

What Happens When Someone Enters the Donut Hole?

If you and your drug plan reach the spending threshold and enter into the donut hole coverage gap, you’ll pay no more than 25% of the cost for any covered brand-name prescription drugs. That rate applies whether you purchase prescription drugs at a pharmacy or through a mail-order service. The discount is applied to the price your plan has set with the pharmacy for each drug you’re prescribed.

Medicare pays 75% of the cost of generic drugs while you’re in the donut hole, and you’ll pay the other 25%. Almost the entire full price of brand-name drugs counts toward getting you out of the donut hole. With generic drugs, however, you only get credit for the amount that you pay. With all Medicare Part D plans, the donut hole closes once you reach $8,000 in out-of-pocket costs for covered drugs in 2024.

The $8,000 amount includes money that you pay for covered prescriptions, your deductible, amounts paid by others on your behalf, and amounts paid by eligible prescription drug assistance programs. In 2024, once you reach this point, catastrophic coverage will automatically kick in, and this means you won't have to pay coinsurance or co-pays for the remainder of the year (it was not like this before 2024).

Note

Premiums that you pay for Medicare Part D do not count toward closing the coverage gap.

Medicare Donut Hole and the Inflation Reduction Act

The Inflation Reduction Act will bring some significant changes to Medicare that could affect coverage gaps for those with Medicare Part D. Specifically, the law is set to:

Require the federal government to negotiate prices for certain prescription drugs covered under Medicare Part B and Part D
Require drug companies to pay rebates to Medicare when drug prices rise faster than inflation
Cap out-of-pocket expenses for individuals who receive Medicare Part D
Expand eligibility for full benefits under Medicare Part D’s Low-Income Subsidy Program

How Does the Donut Hole Work in Medicare?

The donut hole in Medicare is a coverage gap that occurs when you and your drug plan reach a certain spending threshold. To get out of the donut hole, your out-of-pocket costs must exceed a specific dollar amount. Costs that can be applied toward closing the donut hole include deductibles, co-insurance, co-payments, discounts for brand-name drugs, and amounts you pay while you’re in the gap.

How Do I Get Out of the Medicare Donut Hole?

To get out of the donut hole, you’ll need to close the gap in coverage by bringing your out-of-pocket spending up to a certain level. Medicare Part D beneficiaries are considered to have closed the gap once their spending reaches $8,000. Again, eligible expenses include amounts paid toward your deductible, generic and brand-name drugs, co-insurance, and co-payments. Medicare Part D premiums and pharmacy dispensing fees do not count toward closing the donut hole.

When Can I Sign Up for Medicare Part D?

Generally, you’re eligible to enroll in Medicare beginning in the year when you turn 65 years old. If you are already enrolled in Medicare and would like to join, switch, or drop a drug plan, you can do so during the annual Medicare open enrollment period. Medicare open enrollment extends from Oct. 15 to Dec. 7. If you’re enrolled in a Medicare Advantage Plan, you can switch to a different plan or move to Original Medicare during a second open enrollment period that extends from Jan. 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 affording their prescription medications. Extra Help can offer an estimated $5,100 in benefits each year to people who qualify. To be eligible, you must be receiving Medicare and have limited financial resources. If you can enroll in Extra Help, you won’t have any coverage gap or donut hole with Medicare Part D.

The Bottom Line

Prescription drug costs can take a toll on your budget. Finding ways to minimize these costs may be important if you have a limited income in retirement. If you’re enrolling in Medicare drug coverage for the first time, it’s important to understand how the donut hole works and how it may affect your prescription drug costs. And if you already have Medicare, consider weighing your current plan benefits against other options to see if switching plans during the fall open enrollment period would benefit you.