What Is Active Coverage Gap?
The active coverage gap, commonly known as the "donut hole," was a temporary phase in Medicare Part D prescription drug plans where beneficiaries were responsible for a higher percentage of their medication costs. This concept falls under Health Insurance and public Healthcare Policy, representing a specific design element within the broader framework of prescription drug coverage. Historically, after a beneficiary and their plan spent a certain amount on covered medications, they entered this gap, where their out-of-pocket costs increased significantly before reaching a catastrophic coverage level. While the active coverage gap no longer exists as of January 1, 2025, understanding its mechanics is essential for comprehending the evolution of prescription drug benefits in the United States.
History and Origin
The Medicare Part D program, which introduced the concept of the active coverage gap, was established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) and went into effect on January 1, 2006.25 To help manage program costs, policymakers designed the Part D benefit with several phases, including an initial coverage period, followed by the coverage gap where beneficiaries bore a larger share of the costs, and then catastrophic coverage.
Initially, beneficiaries in the active coverage gap were responsible for 100% of their prescription drug costs until they reached the catastrophic threshold.24 This design feature became widely known as the "donut hole" and was a significant source of concern for many seniors due to the unpredictable and potentially high Prescription Drug Costs it imposed.23 In response to these concerns and as part of broader healthcare reform, the Affordable Care Act (ACA) of 2010 included provisions to gradually close the coverage gap.22,21 This legislative effort progressively reduced the share of costs beneficiaries paid while in the gap, ultimately leading to its elimination for both brand-name and generic drugs.20 The Bipartisan Budget Act of 2018 accelerated the closure for brand-name drugs, effectively closing it in 2019, while the gap for generic drugs fully closed in 2020.19 The Inflation Reduction Act further solidified and simplified the cost-sharing structure, leading to the complete elimination of the active coverage gap as of December 31, 2024.18,17
Key Takeaways
- The active coverage gap, or "donut hole," was a phase in Medicare Part D where beneficiaries paid a higher percentage of prescription drug costs.
- It was established with the introduction of Medicare Part D in 2006.
- The Affordable Care Act (ACA) initiated a gradual phase-out of the active coverage gap, starting in 2011 and completing in 2020.
- As of January 1, 2025, the active coverage gap has been eliminated, simplifying Medicare Part D's cost-sharing structure.
- The elimination aims to provide more predictable and affordable prescription drug costs for beneficiaries.
Formula and Calculation
The active coverage gap did not involve a specific formula for its existence, but rather defined a period where the cost-sharing percentage changed. Historically, a beneficiary's progression through the Medicare Part D benefit stages, including the active coverage gap, was determined by the accumulation of "True Out-of-Pocket" (TrOOP) costs. TrOOP included the Deductible, Copayments, and Coinsurance paid by the beneficiary, along with discounts provided by drug manufacturers for brand-name drugs while in the gap.
Before the gap closed, the calculation of a beneficiary's cost within the active coverage gap typically involved a percentage of the drug's cost. For instance, by 2020, beneficiaries were responsible for 25% of the cost of covered brand-name and generic drugs once they entered the gap, similar to the initial coverage phase.16, The remaining portion was covered by the plan and drug manufacturers' discounts.
Interpreting the Active Coverage Gap
In its operational years, interpreting the active coverage gap primarily involved understanding when a beneficiary would enter it and how their financial responsibility for medications would change. It was a critical point in a beneficiary's annual drug spending cycle where out-of-pocket costs, while eventually subsidized, increased notably compared to the initial coverage phase. For beneficiaries with high medication expenses, navigating the active coverage gap required careful financial planning and awareness of their plan's Benefit Design. The impact of the gap was that many individuals either reduced their medication use or stopped taking drugs altogether due to the increased costs.15,14 The presence of the active coverage gap introduced financial uncertainty and served as a barrier to consistent access to necessary medications for some.
Hypothetical Example
Consider a hypothetical Medicare Part D beneficiary, Mrs. Davis, in 2018, before the full closure of the active coverage gap. Her plan had a $400 annual deductible. After meeting her deductible, she entered the initial coverage phase where she paid 25% coinsurance for her prescriptions, and her plan covered the remaining 75%.
Suppose the initial coverage limit for 2018 was $3,750 (the total amount spent by Mrs. Davis and her plan). If Mrs. Davis, through a combination of her coinsurance payments and the plan's contributions, reached this $3,750 threshold, she would then enter the active coverage gap.
While in the active coverage gap in 2018, Mrs. Davis would have paid 35% of the cost for brand-name drugs (receiving a 65% discount from the manufacturer and plan) and 44% for generic drugs.13 If her monthly brand-name drug cost was $300, she would pay $105 per month in the gap, compared to $75 per month in the initial coverage phase. She would continue paying these higher percentages until her cumulative out-of-pocket spending, including what she paid in the deductible, initial coverage, and the active coverage gap, reached the Out-of-Pocket Maximum for that year (e.g., $5,000). Once she reached this limit, she would exit the active coverage gap and enter the Catastrophic Coverage phase, where her costs would drop significantly.
Practical Applications
While the active coverage gap is now a historical element, its evolution offers insights into Risk Management in public health programs and the impact of Subsidies on patient access. The gradual closure of the gap, largely driven by the Patient Protection provisions of the Affordable Care Act, demonstrated a policy shift aimed at reducing financial burdens on individuals with high prescription drug needs.12
For actuaries and policymakers, analyzing the effects of the active coverage gap provided valuable data on drug utilization, adherence, and beneficiary spending patterns. It highlighted how cost-sharing structures influence healthcare consumption and the importance of predictable costs for beneficiaries. The elimination of this gap reflects a move towards a more simplified and predictable cost model for Medicare Part D participants, influencing future healthcare policy discussions regarding prescription drug affordability. The Centers for Medicare & Medicaid Services (CMS) continually monitors and adjusts Part D benefit parameters, demonstrating the dynamic nature of healthcare policy.11
Limitations and Criticisms
The active coverage gap faced significant criticism due to its disproportionate impact on beneficiaries with chronic conditions or those requiring expensive medications.10 The unpredictability of costs once a person entered the gap led to financial hardship for many, and studies indicated that it often resulted in beneficiaries reducing or stopping their essential medications.9 This behavior, driven by financial strain, could lead to poorer health outcomes and increased hospitalizations, undermining the overall goal of comprehensive prescription drug coverage.
Critics argued that the gap created a barrier to care, forcing individuals to choose between essential medications and other necessities. The initial 100% beneficiary responsibility in the gap was particularly contentious. While subsequent legislative changes, primarily under the ACA, aimed to mitigate these effects by introducing manufacturer discounts and increasing plan responsibility, the fundamental criticism centered on the inequitable distribution of drug costs.8 The very existence of the active coverage gap highlighted a flaw in the original Formulary and benefit design, prompting legislative action to address its perceived shortcomings and move towards a system with greater Out-of-Pocket Maximum protection.
Active Coverage Gap vs. Catastrophic Coverage
The active coverage gap and Catastrophic Coverage are two distinct phases within the former Medicare Part D benefit structure, now significantly altered. The active coverage gap, also known as the "donut hole," was an intermediate phase where a beneficiary's percentage of drug costs increased after they and their plan had collectively spent a certain amount on medications. During this period, beneficiaries paid a higher share of the costs, although this share was gradually reduced over time by law.
In contrast, catastrophic coverage was the phase entered after a beneficiary's cumulative out-of-pocket spending (including payments made in the deductible, initial coverage, and the active coverage gap) reached a government-defined annual threshold. Once in catastrophic coverage, the beneficiary's costs significantly decreased, typically to a very small coinsurance or copayment, with Medicare covering the vast majority of the remaining costs.7 The crucial difference was the financial burden: the active coverage gap represented increased beneficiary responsibility, while catastrophic coverage provided substantial relief, capping annual out-of-pocket expenses. As of 2025, the active coverage gap has been eliminated, and a new $2,000 annual out-of-pocket spending cap for prescription drugs means that beneficiaries will enter catastrophic coverage and pay nothing for covered medications once they reach this limit.6,5
FAQs
What was the "donut hole" in Medicare Part D?
The "donut hole," or active coverage gap, was a phase in Medicare Part D prescription drug plans where beneficiaries faced higher out-of-pocket costs for their medications after reaching an initial spending limit and before qualifying for catastrophic coverage.
Is the Medicare Part D "donut hole" still active?
No, the Medicare Part D active coverage gap has been eliminated as of January 1, 2025.4 This change, primarily due to the Inflation Reduction Act, means beneficiaries will no longer experience a period of significantly increased costs in the middle of their drug coverage.
How did the Affordable Care Act (ACA) affect the active coverage gap?
The Affordable Care Act initiated a gradual closure of the active coverage gap starting in 2011. It introduced discounts on brand-name drugs from manufacturers and increased plan responsibility for generic drugs, progressively reducing the percentage beneficiaries paid while in the gap.3,2
What replaced the active coverage gap in Medicare Part D?
As of 2025, the active coverage gap is replaced by a simplified structure where, after any applicable Deductible and initial Coinsurance or Copayments, a beneficiary's total out-of-pocket spending for covered prescription drugs is capped at $2,000 annually. Once this cap is reached, they enter the catastrophic coverage phase and pay nothing for the remainder of the year.1