Research · 6 min read
The Part D Benefit Phases, and the Out-of-Pocket Cap
Two of the four phases people still describe were abolished in 2025. What remains is a deductible, a coinsurance stretch, and a hard ceiling above which the cost sharing on a covered drug is zero.
Key takeaways
- For 2025 and each subsequent year the regulation states there is no initial coverage limit and no coverage gap — two of the four phases people still describe were removed.
- Above the annual out-of-pocket threshold, cost sharing is $0 for 2024 and each subsequent year; before 2024 it was the greater of small copayments or five percent coinsurance.
- The threshold was $2,000 for 2025 and is indexed thereafter by the annual percentage increase in Part D drug expenditures, rounded to the nearest $50.
- Costs count toward the threshold only under the statute's definition of incurred costs, which excludes drugs outside the plan's formulary and most third-party reimbursement, with a short enumerated list of exceptions.
- Standard coinsurance is 25 percent of actual cost or an actuarially equivalent average, which is why two compliant plans can charge differently for the same drug.
- A plan may maintain up to two specialty tiers, with maximum cost sharing of 25 percent for a full-deductible plan and 33 percent for a no-deductible plan.
Answer first: the initial coverage limit and the coverage gap no longer exist
The regulation defining standard prescription drug coverage says both things plainly. On the initial coverage limit: "For year 2025 and each subsequent year. There is no initial coverage limit." On the coverage gap: "For 2025 and each subsequent year, there is no coverage gap."
What is left is a shorter sequence. There is an annual deductible. Above it, there is coinsurance on covered Part D drugs. And once a person's incurred costs pass the annual out-of-pocket threshold, the regulation sets cost sharing "equal to $0" for 2024 and each subsequent year.
That last figure is the substantive change. For years before 2024 the rule above the threshold was the greater of small copayments or five percent coinsurance — a floor, not a ceiling. The statute now states the same thing in its own terms: for 2024 and each succeeding year, the cost sharing above the threshold is "$0."
So a description of Part D that still contains a doughnut hole is describing a benefit that the regulation has removed. This matters for reading old material, and it matters for reading any page that quotes a cost structure without saying which year it belongs to.
The deductible and the coinsurance underneath the cap
Standard coverage begins with an annual deductible. The regulation sets it at $250 for 2006 and, for years after that, at the previous year's amount increased by a specified annual percentage increase and rounded to the nearest multiple of $5. It is an indexed figure, not a fixed one, and the regulation states the method rather than a current amount.
Above the deductible, standard coverage applies coinsurance for actual costs of covered Part D drugs. For 2025 and each subsequent year the regulation runs that coinsurance up to the annual out-of-pocket threshold, and sets it at either "25 percent of actual cost" or an amount "actuarially equivalent to an average expected coinsurance of no more than 25 percent of actual cost."
That word — actuarially equivalent — is why two plans can both be standard-benefit plans and still charge differently for the same drug. A plan taking the equivalence route may apply tiered copayments instead, provided the tiering is consistent with the equivalence requirement and with the limits on discriminatory tiering, and provided CMS approves it. The regulation states that tiered cost sharing "may not exceed levels annually determined by CMS to be discriminatory."
The specialty tier rules sit inside this same section, and they are more constrained than most readers expect. A Part D plan "may maintain up to two specialty tiers." For a plan carrying the full defined standard deductible, the maximum allowable cost sharing on the single or higher specialty tier is 25 percent coinsurance; for a plan with no deductible it is 33 percent; and for a plan with a deductible somewhere in between, the regulation sets out an equation for computing the maximum. The threshold that makes a drug specialty-tier eligible is itself computed by CMS from claims data, as the lowest 30-day-equivalent ingredient cost within the top one percent of all such costs.
The out-of-pocket threshold, and what counts toward it
The regulation states the threshold as a schedule. It was $3,600 for 2006, moved by various indexing formulas through 2024, and then: "For 2025. $2,000." For 2026 and each subsequent year it is the previous year's amount increased by the annual percentage increase in Part D drug expenditures and rounded to the nearest multiple of $50. The statute states the same schedule and adds the rounding rule.
Reaching the threshold is about incurred costs, and the statute defines that term with care. Incurred costs include costs for covered Part D drugs applied to the annual deductible and to cost sharing, and — for years before 2025 — amounts not paid because of the initial coverage limit. They do not include costs for drugs that are not included, or treated as included, in the plan's formulary.
The general rule is that costs count only if paid by the individual, or by another person such as a family member on their behalf, and are not reimbursed through insurance, a group health plan, or another third-party payment arrangement. That is the rule that keeps most outside payments from advancing someone toward the cap.
The statute then carves out a specific list of payers whose payments still count as incurred: amounts borne or paid under the low-income subsidy provisions, under a State Pharmaceutical Assistance Program, by the Indian Health Service or an Indian tribe, tribal organization or urban Indian organization, under an AIDS Drug Assistance Program, and under the reinsurance provision the statute cites. Those are enumerated exceptions, which is precisely why the general rule bites everywhere else.
Why your plan may not look like the standard benefit at all
The regulation recognizes three shapes of qualified coverage, and only the first is the textbook one. Standard prescription drug coverage is the defined benefit just described. Alternative prescription drug coverage must have a deductible no greater than the standard deductible, must impose cost sharing no greater than the standard rules once the annual out-of-pocket threshold is met, must have a total or gross value at least equal to that of defined standard coverage, and must have an unsubsidized value at least equal to that of standard coverage.
Enhanced alternative coverage is alternative coverage plus supplemental benefits. Those supplemental benefits can take two forms: coverage of drugs that the Part D drug definition specifically excludes, or changes that increase the actuarial value of the plan above defined standard coverage — a reduced deductible, reduced cost sharing, or, for years before 2025, a raised initial coverage limit.
There is a structural restriction attached. A prescription drug plan sponsor "may not offer enhanced alternative coverage in a service area unless the PDP sponsor also offers a prescription drug plan in that service area that provides basic prescription drug coverage." The enhanced product cannot be the only product in a region.
One more provision explains why the deductible sometimes behaves oddly. If a beneficiary has not satisfied their plan's own deductible but has accumulated enough incurred costs to satisfy the defined standard deductible, the regulation deems them to have satisfied the plan deductible and treats them as an applicable beneficiary under the Manufacturer Discount Program. Where a plan uses a deductible other than the defined standard one and a beneficiary has met the plan deductible without reaching the standard figure, manufacturer discounts are not available for that beneficiary and the plan must cover the portion the discount would have covered until the standard threshold is crossed.
What the cap does not do
The out-of-pocket threshold is a limit on cost sharing for covered Part D drugs under the plan's formulary. It is not a limit on total spending on medications. Costs for a drug not included, or treated as included, in the plan's formulary are excluded from incurred costs by the statute's own terms, so paying for such a drug moves a person no closer to the ceiling.
It is also not a monthly limit. Reaching the threshold is a cumulative event within a plan year, which means the timing of the crossing depends on when costs are actually incurred, and the count restarts with the year.
And it does not equalize plans. Because alternative and enhanced coverage are defined by actuarial comparison rather than by identical design, two plans that both satisfy the regulation can present different deductibles, different tiers and different coinsurance on the way to the same statutory ceiling.
For people who qualify for the low-income subsidy, a separate set of rules replaces this structure rather than supplementing it. The cost-sharing subsidy regulation eliminates the annual deductible for full subsidy eligible individuals, reduces cost sharing below the out-of-pocket limit to capped copayment amounts, and eliminates all cost sharing for covered Part D drugs above the out-of-pocket limit. Other low-income subsidy eligible individuals get a reduced deductible and fifteen percent coinsurance up to the limit under the terms the regulation sets. That is a different benefit design, described on its own terms elsewhere on this site.
Sources
- 42 CFR § 423.104 — Requirements related to qualified prescription drug coverageThe deductible schedule and its indexing; the 25 percent coinsurance and the actuarial equivalence alternative; tiered copayments and the limit on discriminatory tiering; the specialty tier rules including the two-tier maximum, the 25 and 33 percent coinsurance limits and the CMS-computed specialty-tier cost threshold; the statements that there is no initial coverage limit and no coverage gap for 2025 and later; the $0 cost sharing above the threshold for 2024 and later; the annual out-of-pocket threshold schedule including $2,000 for 2025 and the indexing and $50 rounding for later years; the definitions of alternative and enhanced alternative coverage and the requirement that a sponsor offering enhanced coverage also offer basic coverage in the service area; and the rules on drugs not subject to the defined standard deductible.
- 42 CFR § 423.782 — Cost-sharing subsidyThat full subsidy eligible individuals have the annual deductible eliminated, capped copayments below the out-of-pocket limit and no cost sharing above it, and that other low-income subsidy eligible individuals have a reduced deductible and fifteen percent coinsurance up to the limit.
- 42 U.S.C. § 1395w-102 — Prescription drug benefitsThe statutory initial coverage limit provision applying only to years preceding 2025; the protection against high out-of-pocket expenditures, including cost sharing of $0 for 2024 and each succeeding year; the annual out-of-pocket threshold schedule with $2,000 for 2025 and indexing thereafter, and the $50 rounding rule; and the definition of incurred costs, including the exclusion of drugs not in the plan's formulary, the general non-reimbursement rule, and the enumerated payers whose payments still count.
Frequently asked questions
Is there still a coverage gap in Part D?
No. The regulation states that for 2025 and each subsequent year there is no coverage gap, and separately that for 2025 and each subsequent year there is no initial coverage limit. Descriptions that still include a doughnut hole are describing the pre-2025 structure.
What is the out-of-pocket threshold?
The regulation sets it at $2,000 for 2025, and for 2026 and each subsequent year at the prior year's amount increased by the annual percentage increase in Part D drug expenditures, rounded to the nearest multiple of $50. No current-year figure is stated here because no current-year parameters document was read for this article.
What happens to cost sharing above the threshold?
The regulation sets cost sharing equal to $0 for 2024 and each subsequent year once an enrollee's incurred costs exceed the annual out-of-pocket threshold. For years before 2024 it was the greater of specified copayments or five percent coinsurance.
Does everything I pay for drugs count toward the cap?
No. The statute counts costs for covered Part D drugs applied to the deductible and cost sharing, but excludes costs for drugs not included, or treated as included, in the plan's formulary. Costs generally count only if paid by the individual or someone on their behalf and not reimbursed through insurance, a group health plan or another third-party arrangement — with enumerated exceptions for amounts borne under the low-income subsidy, a State Pharmaceutical Assistance Program, Indian health programs, an AIDS Drug Assistance Program, and the cited reinsurance provision.
Why does my plan's deductible differ from the standard one?
Because the regulation allows alternative and enhanced alternative coverage. Alternative coverage must have a deductible no greater than the standard deductible and must meet stated value tests; enhanced coverage adds supplemental benefits, which can include a reduced deductible or reduced cost sharing. A sponsor offering enhanced coverage in a service area must also offer a basic plan there.
How high can specialty tier cost sharing go?
The regulation permits up to two specialty tiers and sets the maximum allowable cost sharing on the single or higher specialty tier at 25 percent coinsurance for a plan carrying the full defined standard deductible and 33 percent for a plan with no deductible, with an equation for plans whose deductible falls between. CMS sets the specialty-tier cost threshold from claims data as the lowest 30-day-equivalent ingredient cost within the top one percent of such costs.