Medicare Part D Coverage Gap: How the Donut Hole Works in 2026
Use this guide to understand the assumptions, inputs, results, and next steps behind the calculator.
The Medicare Part D "donut hole," officially known as the coverage gap, is a confusing and often expensive phase of prescription drug coverage. It begins after you and your drug plan have spent a certain amount on covered drugs, and in this phase, you are responsible for a larger portion of your medication costs. For 2026, you enter the coverage gap once your total drug costs reach $5,300.
This calculator is designed for Medicare beneficiaries who want to project their annual prescription drug spending and understand when they might fall into the donut hole. By estimating your costs, you can better budget for healthcare expenses in retirement and compare Part D plans more effectively during Open Enrollment. Understanding these phases is a critical part of managing your retirement healthcare costs.
The Four Stages of Medicare Part D Coverage in 2026
Your Medicare Part D coverage isn't a single, flat benefit; it operates in four distinct stages throughout the calendar year. Your out-of-pocket costs change as your total drug spending moves you from one stage to the next. This calculator models your journey through these phases based on your estimated drug costs.
Here is a breakdown of the standard Part D benefit structure for 2026:
| Coverage Stage | How It Works & What You Pay | 2026 Threshold |
|---|---|---|
| 1. Deductible | You pay 100% of your prescription drug costs until you meet your plan's deductible. | $590 |
| 2. Initial Coverage | After the deductible, you pay a copayment or coinsurance (typically 25%) for each prescription, and your plan pays the rest. | Ends when total drug costs reach $5,300 (what you and your plan pay combined). |
| 3. Coverage Gap (Donut Hole) | You now pay 25% of the cost for both brand-name and generic drugs. You remain in this phase until your out-of-pocket spending reaches the annual limit. | Ends when your "True Out-of-Pocket" (TrOOP) spending reaches $8,400. |
| 4. Catastrophic Coverage | For the rest of the year, your drug costs are significantly lower. You'll pay a small coinsurance (around 5%) or a fixed copay for each prescription. | Begins after your TrOOP exceeds $8,400. |
It's important to note that not everyone will reach the coverage gap or catastrophic coverage. If your total annual drug costs are low, you may only ever be in the deductible and initial coverage phases. This tool helps you see which stages you are likely to encounter.
Understanding True Out-of-Pocket (TrOOP) Spending
The key to exiting the donut hole is meeting the True Out-of-Pocket (TrOOP) threshold, which is $8,400 in 2026. However, not every dollar you spend on healthcare counts toward this limit. Understanding what counts is crucial for accurately projecting your costs.
TrOOP is the total of specific payments that accumulate to help you qualify for Catastrophic Coverage.
What Counts Toward Your TrOOP Limit:
- Your Deductible: The initial $590 you pay before your plan's coverage kicks in.
- Your Coinsurance/Copayments: The amounts you pay for prescriptions after meeting your deductible and before the catastrophic phase.
- Your Payments in the Coverage Gap: The 25% you pay for brand-name and generic drugs while in the donut hole.
- Manufacturer Discounts: Crucially, the 70% discount provided by manufacturers on brand-name drugs while you are in the coverage gap does count toward your TrOOP. This helps you get out of the donut hole faster.
What Does NOT Count Toward Your TrOOP Limit:
- Your monthly Part D plan premiums.
- The amount your Part D plan pays for your drugs.
- Pharmacy dispensing fees.
- Costs for drugs that are not covered by your plan's formulary.
- Drugs purchased from outside the United States.
Because of the complex TrOOP calculation, particularly the inclusion of manufacturer discounts, it can be difficult to track your progress out of the donut hole on your own. This is why a dedicated calculator is essential for accurate retirement budget planning.
How Brand-Name vs. Generic Drugs Affect Your Journey Through the Gap
The type of drugs you take—brand-name or generic—has a significant impact on how quickly you move through the coverage gap. While you pay 25% for both in the donut hole, the way they contribute to your TrOOP limit is vastly different.
This distinction is one of the most misunderstood parts of Part D coverage.
| Drug Type | Your Payment in the Gap | What Counts Toward TrOOP ($8,400 Limit) | Impact on Your Progress |
|---|---|---|---|
| Brand-Name Drug | You pay 25% of the drug's cost. | 95% of the drug's cost (your 25% + the 70% manufacturer discount). | You move through the donut hole much faster. |
| Generic Drug | You pay 25% of the drug's cost. | 25% of the drug's cost (only what you paid). | You move through the donut hole slowly. |
Example: Imagine a $200 drug cost in the coverage gap.
- If it's a brand-name drug: You pay $50 (25%). The manufacturer pays $140 (70%). Your plan pays $10 (5%). A total of $190 ($50 + $140) gets credited to your TrOOP limit.
- If it's a generic drug: You pay $50 (25%). Your plan pays $150 (75%). Only your $50 payment gets credited to your TrOOP limit.
As you can see, high-cost brand-name drugs, while more expensive per prescription, accelerate your path to the financial protection of catastrophic coverage. This is a critical factor when estimating how long your money will last against high medical expenses.
The Math Behind Your Part D Out-of-Pocket Costs
The calculator simulates your drug spending throughout the year, applying the rules for each coverage phase. The most complex calculations involve the coverage gap and the accumulation of True Out-of-Pocket (TrOOP) spending.
Here are the core formulas used to determine your costs:
For calculating how much of a drug's cost counts toward getting you out of the donut hole (the TrOOP threshold), the formulas differ for brand-name and generic drugs.
TrOOP Credit in Gap (Brand Drug) = Your Payment + Manufacturer Discount
Where:
- Your Payment = The drug's retail cost multiplied by your 25% coinsurance.
- Manufacturer Discount = The drug's retail cost multiplied by the 70% manufacturer discount.
TrOOP Credit in Gap (Generic Drug) = Your Payment
Where:
- Your Payment = The drug's retail cost multiplied by your 25% coinsurance.
Finally, your total out-of-pocket cost for the year is the sum of what you pay in each of the four phases.
Total Annual OOP = Amount Paid in Deductible Phase + Amount Paid in Initial Coverage Phase + Amount Paid in Coverage Gap + Amount Paid in Catastrophic Phase
This step-by-step calculation across phases determines your total cost and whether your savings are sufficient to meet your retirement needs.
Strategies to Manage Costs in the Donut Hole
If the calculator shows you'll spend significant time in the coverage gap, don't despair. There are proactive steps you can take to manage and potentially lower your prescription drug costs.
- Discuss Alternatives with Your Doctor: This is the most effective first step. Ask if there are generic equivalents, lower-cost brand-name drugs, or therapeutic alternatives for your condition that are just as effective.
- Use the Medicare Plan Finder: During the annual Open Enrollment Period (October 15 - December 7), use the official Medicare.gov Plan Finder tool. You can enter your specific list of medications to see which Part D or Medicare Advantage plans in your area will cover them at the lowest total annual cost.
- Apply for Extra Help: The Extra Help program, also known as the Low-Income Subsidy (LIS), helps people with limited income and resources pay for Medicare prescription drug costs, including premiums, deductibles, and coinsurance. If you qualify, you will not enter the donut hole.
- Check for State Pharmaceutical Assistance Programs (SPAPs): Many states have programs that help eligible residents pay for prescriptions. These programs can work alongside your Part D plan.
- Look for Patient Assistance Programs (PAPs): Many drug manufacturers offer PAPs to provide free or low-cost brand-name medications to people who can't afford them. Be aware that assistance from these programs typically does not count toward your TrOOP.
- Plan Your Withdrawals: High out-of-pocket medical costs can strain a fixed income. Integrating these expenses into your overall retirement withdrawal strategy is essential for long-term financial health.
Frequently Asked Questions About the Medicare Donut Hole
What exactly is the Medicare donut hole?
The "donut hole" is the third phase of Medicare Part D coverage, officially called the Coverage Gap. You enter this phase when your total drug costs (what you and your plan have paid) exceed the initial coverage limit ($5,300 in 2026). In this phase, your out-of-pocket costs increase until you reach the catastrophic coverage threshold.
How do I know if I'll enter the donut hole in 2026?
You will enter the donut hole if the combined cost of your prescription drugs paid by both you and your plan exceeds $5,300 for the year. This calculator is the best way to estimate this. Generally, if your total monthly retail drug costs are over $442, you are on track to enter the gap.
Is the donut hole different with a Medicare Advantage (Part C) plan?
Most Medicare Advantage plans include prescription drug coverage (MA-PDs). These plans must offer coverage that is at least as good as a standard Part D plan, so they also have the same four coverage phases, including the donut hole. However, some MA-PDs offer enhanced coverage, such as covering certain generic drugs while you are in the gap.
Are my Part D out-of-pocket costs tax-deductible?
Yes, you can deduct out-of-pocket medical expenses, including Part D premiums and drug costs, that exceed 7.5% of your adjusted gross income (AGI). You must itemize your deductions to do this. This can be an important part of a tax-efficient plan to reduce taxes on retirement income.
What is happening to the coverage gap in the future?
The Inflation Reduction Act of 2022 made significant changes. Starting in 2025, the law eliminates the 5% coinsurance in the catastrophic phase and caps annual out-of-pocket drug spending at $2,000. This effectively redesigns the Part D benefit, providing a much stronger financial safety net for beneficiaries with high drug costs.
Does the 70% manufacturer discount apply to generic drugs in the gap?
No, it does not. The 70% manufacturer discount only applies to brand-name drugs. For generic drugs, you pay 25% of the cost in the gap, and your plan pays the other 75%. This is why generic drug spending accumulates TrOOP much more slowly.
Does my monthly Part D premium count towards the donut hole or TrOOP?
No, your monthly plan premium does not count toward meeting your deductible or your True Out-of-Pocket (TrOOP) spending limit. It is a separate administrative cost for maintaining your insurance coverage.
Can I use a Health Savings Account (HSA) to pay for Part D costs?
Yes, you can use funds from your Health Savings Account (HSA) tax-free to pay for your Part D premiums, deductibles, and coinsurance. However, you cannot contribute new money to an HSA once you are enrolled in any part of Medicare.
Next Steps
Now that you have a better understanding of your potential Part D costs, you can take more informed steps. Use this projection to compare plans during Open Enrollment or to create a more accurate retirement budget.
For a broader view of your medical spending, see the Retirement Healthcare Cost Calculator. To understand how these and other expenses fit into your overall financial picture, explore the Retirement Needs Calculator or the How Long Will My Money Last Calculator.
Last updated: July 2026