Before the hole closed, Medicare Part D beneficiaries were responsible for 100% of prescription drug costs once they reached their spending threshold, until hitting catastrophic coverage eligibility. This process left many people struggling financially, often having to choose between paying for vital medications or other necessities. 

However, elimination of the donut hole doesn’t mean that your medications are free after you’ve reached your deductible and out-of-pocket spending limit. There are still several phases to part D coverage—including what Medicare still calls a coverage gap—and the covered amounts and deductibles change very year.

How Part D coverage works

Medicare part D plans have four parts: the deductible stage, initial coverage, the coverage gap, and catastrophic coverage. Each part resets every year.

In the deductible stage, you pay 100% of the cost of your drugs until you meet your deductible (currently, $505). Under initial coverage, you pay 25% of the cost of any covered brand name drug or generic drug on your plan’s formulary, (or less, depending on your plan). Once you have spent $4,660 on covered drugs (for 2023), you enter what was previously known as the coverage gap.

Here, you still pay 25% of the cost of all your drugs, until you get all the way through where the coverage gap used to be, according to Louise Norris, a health policy analyst for Medicareresources.org. That gap has dropped to 25%—equal what you pay under initial coverage. After you’re through the coverage gap, you’re into catastrophic coverage.

Just to make things more confusing, most plans aren’t standard designs, Norris says. Before you reach the coverage gap, there may be other parameters for how plans charge you, such as fixed copays after you hit your deductible, then a 25% co-insurance once you hit the spending threshold.

It’s confusing, but understanding costs incurred during this time will help you better manage your budget for prescription drugs.

Getting out of the gap

While you’re in the coverage gap, the difference in cost between what you pay for brand-name drugs (25%), what your plan pays, and what the manufacturer discount on the drug is during this time, is applied toward your annual out-of-pocket costs. This helps to move you through the gap. If you take generics, the formula works a little differently. You’ll still pay no more than 25% of the cost of any drug, but only the amount you pay (not the price difference) counts toward overall out-of-pocket spending.

After you spend $7,400 on prescription costs, you enter the catastrophic coverage period. At that point, your cost drops to 5% of any drug, or a small copay, depending on which is greater. The copays for prescriptions in the catastrophic coverage level change also each year, so it’s something to be aware of, especially if you take expensive medications.

“The portion you pay while in the coverage gap can quickly add up if you’re on expensive medications, that cost thousands of dollars a month,” says Norris, “One of the biggest problems we see with people on Part D is inertia.”

Formularies change, drug prices change, and your own prescriptions may change over the course of the year, but most people don’t take advantage of the open enrollment period to do a coverage checkup, including comparing costs at different pharmacies, and they don’t change drug plans, even if it could benefit them financially, Norris says.

However, there’s some good news: Starting in 2024, provisions in the Inflation Reduction Act eliminate the 5% beneficiary co-insurance and copay requirements at the catastrophic coverage threshold. This effectively caps your out of pocket drug costs at approximately $3,250 for that year, according to the Kaiser Family Foundation.

The law, which was signed by President Biden in 2022, has other important provisions to help control Medicare Part D costs. It:

• caps the price of insulin at $35 per month
• limits annual increases in Part D premiums through 2030
• expands eligibility for Medicare Part D Low-Income Subsidy full benefits to 150% of the Federal Poverty Level
• caps Medicare Part D out-of-pocket spending at $2,000 per year starting in 2025.

And for the first time, it allows the government to negotiate prices directly with pharmaceutical manufacturers, in an effort to lower the cost of the most expensive drugs. Initial negotiations begin this year, with the savings going into effect in 2026.

Assistance with medication costs

If you need help paying for medications, there are several options which may assist with costs:

• Extra Help Plan: This is the government’s assistance program for those meeting certain income and resource requirements that helps you pay for your prescription medications. If you qualify, you’ll automatically be enrolled, or you can apply online through the Social Security Administration website.
  
• State Pharmaceutical Assistance Program (SPAP): Many states have an SPAP to help people pay for their medications. Depending on the program, you may get help with paying your part D premium or it may help offset prescription drug costs. 
  
• State Health Insurance Assistance Programs can help you navigate the complexities of Medicare and Medicare Advantage and find a Part D drug plan that works for your needs and budget.
  
• Patient Assistance Programs: Most major drugmakers have programs that provide discounted or no-cost medications to those who qualify. Some require proof of income or detailed drug spending records, so be sure to check requirements.  
  
• Disease Funds: Many charitable organizations help support people with serious diseases or conditions and may help you pay for your medications. 
  
• Generics: Ask your health provider if they can substitute generics for pricier brand-name drugs. If no generic is available, you can contact your Part D insurer and appeal a denial of coverage to see if the plan will cover your medication. 
  
• Prescription Discount programs and “best price” strategies: Sometimes costs for drugs may be less if you do not use your insurance or use a discount program to pay. However, drugs purchased outside of your Part D insurance plan coverage will not count toward your deductible or getting you out of the coverage gap.