Prescription Drug Costs

Prescription Drug Costs: The Donut Hole Era Ends

For nearly two decades, one of Medicare's most confusing and financially damaging features was the Part D "donut hole"—a coverage gap where enrollees were responsible for a much larger share of drug costs after initial benefit limits were reached, before catastrophic coverage kicked in. The Inflation Reduction Act of 2022 phased out the donut hole by 2025 and introduced a hard cap on annual Part D out-of-pocket costs, fundamentally changing how retirees should plan for prescription drug expenses.

Understanding the new structure—how Part D costs work without the donut hole, what the out-of-pocket cap means in practice, and how to optimize Part D plan selection—is essential for the large population of retirees whose prescription drug costs are a significant healthcare budget item.

THE OLD DONUT HOLE: WHAT IT WAS AND WHY IT MATTERED

Under the pre-2024 Part D structure, beneficiaries progressed through three coverage phases:

Initial coverage phase: Medicare and the plan shared drug costs up to the initial coverage limit ($4,660 in 2023).

Coverage gap (donut hole): After the initial limit was reached, beneficiaries paid 25% of brand-name drug costs and 25% of generic costs until reaching the catastrophic threshold.

Catastrophic coverage: After reaching the out-of-pocket threshold ($7,400 in 2023), Medicare paid 95% of drug costs with a small copay.

The donut hole created a predictable annual financial shock for retirees on multiple expensive medications—particularly those managing cancer, diabetes, cardiovascular disease, or rheumatological conditions with branded biologics costing $5,000 to $20,000 per month. For these beneficiaries, reaching the donut hole was not a question of if but when in the year.

THE NEW STRUCTURE: WHAT CHANGED IN 2024 AND 2025

The Inflation Reduction Act restructured Part D in stages:

2024 changes: The out-of-pocket maximum for Part D was set at $3,300 per year. This means that once a beneficiary has spent $3,300 in out-of-pocket drug costs, their cost-sharing drops to $0 for the remainder of the year—no additional drug costs regardless of total drug spending. The donut hole was effectively eliminated for most practical purposes.

2025 changes: The out-of-pocket cap drops further to approximately $2,000 per year (the exact amount indexed to drug price inflation). Additionally, a Medicare Prescription Payment Plan (commonly called the smoothing option) allows beneficiaries to spread their out-of-pocket costs evenly across 12 months rather than paying large amounts early in the year when they reach thresholds.

The $2,000 annual cap represents a profound change for high-cost drug users. A beneficiary on a biologic medication costing $5,000 per month ($60,000 per year) previously faced potential thousands of dollars in donut hole exposure before reaching catastrophic coverage. Under the new structure, their total annual out-of-pocket exposure is capped at $2,000 regardless of total drug cost.

WHO BENEFITS MOST FROM THE NEW STRUCTURE

The 2024-2025 changes disproportionately benefit retirees who use expensive branded medications:

Cancer patients on oral targeted therapies (many now available as pills rather than infusions, and thus falling under Part D rather than Part B): Drugs like Revlimid, Pomalyst, and Ibrance previously cost beneficiaries tens of thousands in donut hole exposure. Under the cap, their annual exposure is $2,000 to $3,300.

Rheumatological disease patients on biologics (Humira, Enbrel, Orencia): Similarly high annual drug costs are now capped.

Diabetes patients on newer GLP-1 medications (Ozempic, Mounjaro): As these drugs move from branded to approved uses, their high prices (currently $800 to $1,000/month) would have triggered significant donut hole exposure; the cap limits annual out-of-pocket.

Beneficiaries on three or more moderately expensive medications: Even without any single extremely high-cost medication, accumulation of copays and coinsurance across multiple drugs can reach the out-of-pocket threshold.

NEGOTIATED DRUG PRICES: ANOTHER IRA CHANGE

The Inflation Reduction Act also authorized Medicare to negotiate drug prices directly with pharmaceutical manufacturers for the first time in the program's history. The first 10 drugs subject to negotiation were announced in 2023, with negotiated prices taking effect in 2026. Additional drugs will be added to negotiation each year.

The negotiated price list includes medications for blood clots, heart failure, kidney disease, and diabetes—conditions with high Medicare enrollment. While the full impact of drug price negotiation won't be felt for several years, it represents a structural reduction in the cost of specific high-utilization drugs for Medicare beneficiaries.

PART D PLAN SELECTION: THE ANNUAL EXERCISE

Part D premiums, formularies, cost-sharing structures, and pharmacy networks change annually. Medicare's Open Enrollment Period (October 15 to December 7) allows beneficiaries to review and change their Part D plan each year, with new coverage beginning January 1.

Plan selection is most consequential for beneficiaries taking specific expensive medications. The Medicare Plan Finder tool at medicare.gov allows enrollees to enter their specific medications, dosages, and preferred pharmacy—the tool then calculates the estimated annual total cost (premium plus estimated out-of-pocket costs) for every available Part D plan in the enrollee's area.

This comparison is the most important step in Part D plan selection and is frequently skipped by retirees who automatically re-enroll in the prior year's plan. A plan that minimized costs for a given drug regimen in 2024 may not be the lowest-cost option in 2025 because:

- Formulary changes: Plans change tier assignments for specific drugs annually

- Premium changes: Plans adjust premiums each year within limits - Preferred pharmacy networks: Plans change preferred pharmacy designations that affect cost-sharing - Drug cost changes: The underlying drug prices may change, affecting how quickly the out-of-pocket cap is reached

Annual review using the Medicare Plan Finder is the single most actionable step for minimizing Part D costs—and takes approximately 20 to 30 minutes per year.

LOW-INCOME SUBSIDY (LIS / EXTRA HELP)

For Medicare beneficiaries with limited income and assets, the Low-Income Subsidy (LIS), also called Extra Help, reduces or eliminates Part D premiums, deductibles, and cost-sharing. In 2024, the LIS was expanded to cover more beneficiaries, reaching those with incomes up to 150% of the federal poverty level.

Full Extra Help (income up to 135% FPL): No premium, no deductible, and nominal copays ($4.50 for generics, $11.20 for brands in 2024).

Partial Extra Help (income 135–150% FPL): Sliding scale premium and cost-sharing assistance.

Automatic enrollment: Beneficiaries receiving Medicaid, Supplemental Security Income (SSI), or Medicare Savings Program benefits are automatically enrolled in Full Extra Help. Others must apply through Social Security (at ssa.gov or by calling 1-800-772-1213).

Applications for Extra Help are not automatic—eligible beneficiaries who don't apply don't receive the benefit. Medicare counselors (State Health Insurance Assistance Programs, or SHIP, in each state) can assist with applications at no cost.

MEDICARE SAVINGS PROGRAMS: HELP WITH PART B PREMIUMS

Separate from Part D's Extra Help, Medicare Savings Programs (MSPs) provide assistance with Part B premiums and cost-sharing for beneficiaries with limited income. Four programs cover different income levels:

Qualified Medicare Beneficiary (QMB): Pays Part A and B premiums, deductibles, and cost-sharing for beneficiaries with income up to 100% FPL.

Specified Low-Income Medicare Beneficiary (SLMB): Pays Part B premium only for income up to 120% FPL.

Qualifying Individual (QI): Pays Part B premium for income up to 135% FPL (subject to funding availability, first-come-first-served).

Qualified Disabled and Working Individual (QDWI): Pays Part A premium for certain disabled working individuals.

MSP enrollment is administered through state Medicaid agencies—each state has its own application process. SHIP counselors can assist with applications.

THE PRACTICAL DRUG COST PLANNING FRAMEWORK

For retirement healthcare cost planning, the post-2025 Part D structure simplifies the drug cost projection:

Estimate current annual drug costs (premiums + copays + coinsurance until the annual cap). Assume a $2,000 annual out-of-pocket cap as the planning ceiling. Add the Part D premium ($480 to $1,440/year depending on plan selection). Total Part D cost ceiling: approximately $2,500 to $3,500/year.

This is more predictable than the old donut hole era, where costs could vary by thousands of dollars depending on the specific drug mix and annual drug price changes.

The simplification isn't complete—different drugs hit the out-of-pocket cap at different rates, plan premiums vary, and the formulary position of specific drugs affects how much cost-sharing accrues before the cap. But the elimination of the donut hole's unpredictable exposure and the implementation of a hard annual cap makes Part D cost planning substantially more tractable than it was through 2023.