Article
The Medicare Part D donut hole was a coverage gap where beneficiaries paid significantly more for prescriptions, but it has been fully eliminated starting in 2025.
Part D now moves directly from initial coverage to catastrophic coverage once you hit your $2,100 out-of-pocket cap, where Medicare covers all remaining costs for the year.
Choosing a Part D plan requires comparing formulary coverage of your specific medications rather than simply selecting the lowest premium option.
Prescription costs can shock you. A month of medication that cost $200 five years ago might cost $400 today. When you move into retirement, managing these costs becomes a central part of planning your healthcare budget. Medicare Part D, the prescription drug coverage program, exists to help. But the rules are complex. The phrase "donut hole" appears in discussions about Part D, and many people find this term confusing.
This article explains Medicare Part D, walks you through the cost phases, and shows you how the donut hole works and how recent changes have made prescription coverage more affordable. Understanding these rules puts you in control of one of your largest retirement healthcare expenses.
What Is Medicare Part D?
Medicare Part D is prescription drug coverage. It is separate from Parts A and B. You must choose to enroll in Part D or accept the consequences. Part D coverage is offered through private insurance companies that contract with Medicare.
Part D covers most prescription drugs used to treat illness and disease. It does not cover all drugs. Some drugs require prior authorization from your insurance company before they are covered. Some expensive specialty drugs may have restrictions.
Over-the-counter medications are not covered by Part D. Neither are vitamins, cosmetic drugs, or drugs used for hair loss. Weight-loss drugs are not covered unless they are prescribed for diabetes management.
You can enroll in Part D when you first become eligible for Medicare at age 65. There is a seven-month Initial Enrollment Period. If you miss this window and do not have creditable prescription coverage from another source, you will face a late enrollment penalty. This penalty increases your premium permanently. Even one month of delay can result in a penalty that follows you for the rest of your retirement.
You can avoid this penalty entirely if you kept creditable prescription coverage, drug coverage at least as good as Medicare Part D, during any time you were not enrolled in Part D. Common sources of creditable coverage include employer or union insurance, TRICARE, VA drug benefits, and FEHB coverage. Keep proof of this coverage, because you may need to document it if Medicare asks.
How Much You Pay: The Three Current Phases of Part D Coverage
Part D coverage has been significantly simplified in recent years. Understanding these three phases helps you predict costs more accurately:
Phase 1 is the deductible phase where you pay up to a plan's deductible (up to $615 in 2026, though many plans have lower deductibles or waive the deductible entirely).
Phase 2 is the cost-sharing phase where you pay a percentage (typically 25 percent) and Part D pays the rest until your out-of-pocket spending reaches $2,100. Only what you personally pay counts toward this threshold.
Phase 3 is catastrophic coverage that begins once you've paid $2,100 out-of-pocket. You then pay a small fixed amount per prescription while Part D covers the remainder. The donut hole coverage gap was eliminated in 2025 and no longer exists as a coverage barrier.
Important note: The donut hole elimination is recent. If you retired before 2025, this change is worth reviewing as your 2026 costs could be significantly lower than expected.
The Donut Hole: What Happened and What Changed
In the original design of Part D, the donut hole was a major gap in coverage. Once the combined amount you and your plan had spent on your drugs reached the plan's initial coverage limit, you entered the gap. At that point you paid a much larger share of the full drug price until your own out-of-pocket spending reached the catastrophic-coverage threshold. Both limits were set each year based on total drug costs and sat far above today's $2,100 out-of-pocket cap, which is why the gap could stretch on for months.
For people with high drug costs, this gap was financially devastating. A diabetic person on insulin, a cancer patient on expensive medications, or someone managing multiple chronic conditions could end up paying thousands of dollars during the donut hole phase.
The Affordable Care Act began to narrow this gap. Beginning in 2011, insurance companies started paying a portion of the donut hole cost. Over time, this benefit increased.
In 2022, the Inflation Reduction Act accelerated the elimination of the donut hole and introduced an annual cap on out-of-pocket drug spending for Part D enrollees. That cap took full effect in 2025 at $2,000 and is adjusted each year for inflation, rising to $2,100 in 2026.
The practical effect is that the donut hole no longer exists as a coverage gap. Once you reach your out-of-pocket cap, Part D covers most of your drug costs for the rest of the year. You move directly from cost-sharing to catastrophic coverage without the gap.
If you are currently on Part D and have been paying attention to costs, you may have noticed a significant decrease in what you pay for prescriptions. This is why. The changes have been substantial, and the savings for people with expensive medications have been even more dramatic.
Who Saves the Most From These Changes?
The elimination of the donut hole is most meaningful for people with high drug costs. Those who benefit most include:
People taking expensive medications, especially brand-name drugs for serious chronic conditions where changes are transformative.
People managing multiple chronic conditions with expensive drugs (insulin, heart medication, blood pressure medication), who might previously have hit the donut hole mid-year.
Older retirees and people with lower incomes who have higher drug costs relative to income and benefit from a clear out-of-pocket spending limit.
People taking $10,000+ per-year cancer medications and catastrophic-cost prescriptions who now know costs cap at $2,100.
If you spend less than $2,100 on prescriptions annually, you may not hit the coverage cap at all, so the donut hole changes do not directly affect you.
How to Choose a Part D Plan
Part D is offered by multiple private insurance companies, and your options vary based on where you live. Every plan must cover at least two drugs from each major drug category, but plans differ in which specific drugs they cover and what they charge.
When evaluating Part D plans, follow this comparison process
Check your current medications to verify whether the plan covers them, what copays or coinsurance you'll owe, and whether your doctor will need to request prior authorization
Look at the formulary (the list of covered drugs) and call the plan or visit its website to verify that your medications are covered and at what tier (tier 1 generics are cheapest, higher tiers are more expensive)
Compare annual costs by adding up the deductible, the copays or coinsurance you expect to pay, and any premiums since some plans have higher premiums but lower copays while others are the opposite
Consider whether you might hit the catastrophic coverage phase if you take expensive medications, as this helps you choose a plan that will give you good coverage during catastrophic phase
A cheap plan might not cover your drugs well, so compare based on your actual prescriptions rather than premium alone.
The Medicare Prescription Payment Plan
Starting in 2025, beneficiaries can enroll in the Medicare Prescription Payment Plan. This allows you to spread your Part D costs over the calendar year instead of paying large amounts at once.
Under this plan, you can spread your out-of-pocket drug costs into equal monthly payments instead of paying large amounts at the pharmacy. There is no minimum spending requirement to take part. For example, if you expect to spend $1,200 out of pocket, you could pay $100 per month instead of paying larger amounts when you fill your expensive prescriptions.
Every Part D plan must offer this option. You can opt in before the plan year begins or at any point during the year, though enrolling earlier spreads your costs over more months. Ask your Part D plan whether they offer this option and whether it makes sense for your situation.
What Happens If a Drug Is Not Covered?
If your doctor prescribes a drug that your Part D plan does not cover, you have options. Some drugs are excluded from coverage because they are newer, more expensive alternatives to covered drugs.
You can ask your doctor to prescribe a different drug that is covered by your plan. Often, there is a similar drug in the same class that works just as well at a lower cost.
You can request an exception. Your doctor can ask your insurance company to cover the drug anyway. Insurance companies have processes for reviewing these requests. They grant exceptions for drugs that are medically necessary.
You can pay the full cost of the drug out of your pocket. This is expensive, but if the drug is essential and nothing else works, it might be worth considering.
Special Situations and Assistance Programs
If your income is low, you may qualify for Extra Help (or the Low-Income Subsidy). This program helps pay Part D premiums, deductibles, and copays. To apply, contact Social Security.
If you are also eligible for Medicaid, you get both Part D and Medicaid prescription coverage. Medicaid covers drugs that Part D does not. This combination often provides the most comprehensive coverage.
If you have end-stage renal disease or other chronic conditions, different rules may apply. Ask Medicare or your doctor whether you qualify for a special situation.
Many drug manufacturers offer patient assistance programs. If a drug you need is very expensive and not fully covered, the manufacturer may provide it free or at a reduced cost. Ask your doctor or pharmacist whether your drug has an assistance program.
Common Mistakes to Avoid
Mistake One: Not Enrolling in Part D
Some people think they do not take many medications so they do not need Part D. But if you ever do need expensive medications, you will regret not having Part D. The late enrollment penalty is permanent.
Mistake Two: Not Reviewing Your Plan Annually
Your Part D plan's costs, coverage, and formulary change every year. Drugs you previously had to pay for might be covered this year. Your current plan might raise its premium. You should review your options every fall during open enrollment and switch plans if a better option exists.
Mistake Three: Not Checking Whether a Drug Requires Prior Authorization
Some covered drugs require your doctor to get prior authorization before the pharmacy can fill it. If you do not know this, you might show up at the pharmacy and find your prescription is delayed. Ask your doctor or insurance company before your prescription is filled.
Mistake Four: Not Using a Preferred or Generic Drug
Generic drugs cost much less than brand-name drugs. If your condition can be managed with a generic, use it. Your insurance company pays less, your copay is lower, and your out-of-pocket costs stay down.
Mistake Five: Thinking All Pharmacies Have the Same Cost
Some pharmacies charge more than others for the same drug. Ask your insurance company for a list of preferred pharmacies in your area. Using a preferred pharmacy keeps your copays lower.
Managing Your Prescriptions in Retirement
Once you understand how Part D works, you can manage your prescription costs actively. Request generic drugs when possible. Use your insurance company's mail-order pharmacy for long-term medications if they offer a better price. Ask your doctor whether lower-cost alternatives exist.
Keep copies of your Part D plan information. Bring it to every doctor visit and every pharmacy visit. This helps ensure you get the coverage you are entitled to.
If your medications change during the year, contact your insurance company to review your costs. What seemed like a good plan might no longer be optimal if your prescriptions change.
The elimination of the donut hole is a significant benefit for retirees with high drug costs. Understanding how it works and choosing the right Part D plan puts you in control of this major retirement healthcare expense.
The Bottom Line
Medicare Part D provides prescription drug coverage for people on Medicare. You choose a plan, pay a deductible, and then share costs with insurance until you hit an out-of-pocket cap of $2,100 in 2026. After that, catastrophic coverage begins and Part D covers most of your drug costs. The donut hole, once a major gap in coverage, has been essentially eliminated thanks to changes from the Inflation Reduction Act. By choosing the right plan and understanding how the system works, you can minimize your prescription costs in retirement.
Frequently Asked Questions
When should I enroll in Part D?
Enroll during your Initial Enrollment Period, which is seven months centered on when you turn 65. If you miss this window and do not have creditable coverage, enroll as soon as possible to minimize your late enrollment penalty.
What is the late enrollment penalty for Part D?
The penalty is 1 percent of the national average Part D premium for each month you delay enrollment. The national average premium changes yearly. This penalty is added to your monthly premium and is permanent, so it increases your costs for life.
Does Part D cover insulin?
Yes. Insulin is covered by Medicare Part D. Beginning in January 2023, a major change took effect: beneficiaries pay no more than $35 per month for each covered insulin product under Part D. This cap continues through 2026 and beyond.
Can I switch Part D plans mid-year?
You can switch plans once per year during the Annual Enrollment Period, which runs from October 15 to December 7 each year. Outside this window, you can only switch if you have a qualifying life event, such as moving to a new state or losing your current coverage.
What is a formulary?
A formulary is the list of drugs covered by your Part D plan. It shows which drugs are covered, what tier they are (which determines your copay), and any restrictions like prior authorization. You should check your plan's formulary before choosing a plan.
Are mail-order prescriptions covered by Part D?
Yes. Most Part D plans cover prescriptions from mail-order pharmacies. Mail order is often cheaper, especially for long-term medications. Ask your plan about mail-order options.
Do I pay the full price if a drug is not on my plan's formulary?
If a drug is not covered by your plan, you have the option to pay the full price out of pocket if you choose. However, that payment will not count toward your out-of-pocket cap for the year, so it does not help you reach catastrophic coverage.
What is prior authorization and why is it required?
Prior authorization means your doctor must get approval from your insurance company before you can fill a prescription. It is required for some drugs to ensure they are medically necessary and appropriate. Ask your doctor to request it before you go to the pharmacy.
If I qualify for Medicaid, how does it work with Part D?
If you are eligible for both Medicare and Medicaid, you are a "dual eligible." Medicaid covers what Part D does not and vice versa. This combination usually provides very comprehensive coverage.
Will my Part D plan cover the same drugs next year?
Plans change their formularies every year. A drug covered this year might not be covered next year, or it might move to a higher tier with a higher copay. Review your plan annually during open enrollment to ensure it still covers your medications at an acceptable cost.
How much will my prescription costs increase each year?
Prescription drug prices increase roughly 4 to 6 percent annually on average, though specialty drugs increase faster. Part D premiums and copays also rise. Compare plans during annual enrollment to find the best option for your prescriptions.
Navigate Medicare's prescription coverage gaps and donut hole with confidence. Use Retirelens to coordinate your drug coverage with your complete health and financial retirement plan at retirelens.com.
*This content is for informational purposes only and does not constitute financial, tax, or legal advice. Please consult a qualified professional regarding your individual circumstances.*