For years, the Part D 'donut hole' or coverage gap was one of the most uncomfortable surprises for Medicare beneficiaries: you would reach a point in the year where you suddenly paid much more for your medications, right when you needed them most. The changes from the Inflation Reduction Act have completely transformed that reality. This guide explains what remains of the coverage gap in 2026, how the new annual out-of-pocket cap works, and what all of this means for your wallet if you live in Southern California.
What the Part D coverage gap is
The coverage gap, popularly known as the 'donut hole,' is one of the stages within Part D's cost structure. Traditionally, after you and your plan spent a certain amount on medications during the year, you would enter this stage and start paying a higher percentage of your drug costs — until a few years ago, up to 25% coinsurance — with no clear limit on how much you could end up spending in total.
The name 'donut hole' comes precisely from that image: there was a 'hole' in the middle of coverage where costs rose, between the initial coverage stage and the catastrophic coverage stage that came after it.
How the Inflation Reduction Act changed it
The Inflation Reduction Act introduced, gradually between 2024 and 2025, a deep structural change: instead of a coverage gap with rising, uncapped costs, there is now a single annual out-of-pocket cap for Part D-covered drugs. Once you reach that cap during the year, you pay nothing more for your covered medications for the rest of the calendar year, no matter which technical 'stage' you are in.
The law also created the Medicare Prescription Payment Plan, an optional program that lets you spread your Part D out-of-pocket costs into monthly payments across the year instead of facing large lump-sum costs at the pharmacy. If you have already reviewed how Part D works in general, including this payment program, you can see our Medicare Part D guide, which covers the basics of how this part of Medicare works.
The four Part D coverage stages in 2026
Although the annual cap greatly simplified the picture, Part D's stage structure still technically exists:
- Deductible: the amount you pay out of pocket before your plan starts sharing the cost of your medications, with a maximum set by Medicare each year.
- Initial coverage: you pay a copay or coinsurance for each drug based on your plan's formulary tier, until your combined costs — yours and the plan's — reach a certain threshold.
- Coverage gap (donut hole): the stage where costs used to rise sharply; today, thanks to the annual cap, your out-of-pocket spending keeps gradually approaching that limit instead of spiking.
- Catastrophic coverage: once your out-of-pocket spending reaches the annual cap, you enter this stage and pay nothing more for covered drugs for the rest of the year.
If you are also concerned about how your income can affect your Part D premium through the IRMAA surcharge, that is a separate consideration from the out-of-pocket cap discussed in this guide; you can review the details in our 2026 Medicare IRMAA guide.
Availability, cost, benefits, and eligibility vary by person, product, contract, and insurance company, as well as by your service area. Guarantees are subject to the claims-paying ability of the issuing insurance company. Karla Arámburo is not affiliated with or endorsed by Medicare or the federal government.
What the annual cap means for high-cost medications
The biggest benefit of this change is for people taking specialty, biologic, or high-cost brand-name medications, such as treatments for cancer, rheumatoid arthritis, or certain chronic conditions. Before this reform, those beneficiaries could spend tens of thousands of dollars a year in some cases. With the annual cap in place, their total spending on Part D-covered drugs is limited, which represents considerable savings and, above all, predictability for planning the household budget for the year.
If your income is limited, you may also qualify for the Extra Help program, which can further reduce your Part D premium, deductible, and copays, even before you reach the annual cap. We can review together whether you qualify.
What this means for Southern California beneficiaries
For the families I work with in Orange, Los Angeles, San Diego, and Riverside counties, this change generally translates into fewer mid-year surprises and more certainty about the total annual cost of medications, especially for those managing chronic conditions that require several medications on an ongoing basis. However, the annual cap does not eliminate the importance of comparing plans: the monthly premium, the plan-specific deductible, and whether your preferred pharmacy is in-network still vary from one insurer to another, and those differences do affect your total cost before you reach the cap.
If you are approaching your enrollment date or want to review whether your current plan is still the best option for 2026, you can check our 2026 Medicare enrollment dates guide so you don't miss any important window.
How I help you review your situation
As an independent, bilingual insurance agent licensed to serve families across Southern California, I review your medication list, preferred pharmacy, and year-to-date spending with you, to help you understand which coverage stage you are in and which Part D or Medicare Advantage plan with drug coverage makes sense for your specific situation in 2026.
You can call or text (619) 321-8733 to schedule a free, no-pressure conversation, in Spanish or English, about your Part D drug coverage.
Frequently asked questions
Does the Part D 'donut hole' still exist in 2026?
The coverage gap stage still technically exists in Part D's structure, but starting in 2025 it no longer represents a sharp jump in your out-of-pocket costs, because a new annual cap limits your total spending on covered drugs, regardless of which stage you are in.
What is the Part D out-of-pocket cap for 2026?
For 2026, the annual out-of-pocket cap on Part D-covered drugs is set by Medicare and adjusted each year. Once you reach that cap, you pay nothing more for your covered medications for the rest of the calendar year. We can confirm the exact figure in effect for your plan.
What changed with the Inflation Reduction Act?
The Inflation Reduction Act (IRA) gradually eliminated the traditional coverage gap's 25% coinsurance with no overall spending limit, and replaced it with a single annual out-of-pocket cap, along with other protections such as the Medicare Prescription Payment Plan, which lets you spread those costs into monthly payments.
What are the Part D coverage stages?
There are generally four: the annual deductible, the initial coverage stage, the coverage gap (donut hole) stage, and the catastrophic coverage stage. With the new annual cap, many beneficiaries reach catastrophic coverage faster than before, and once there, their covered drugs come at no additional cost for the rest of the year.
How does this affect someone with high-cost medications?
It is precisely for people taking high-cost specialty or brand-name medications that this change offers the biggest benefit: previously, those beneficiaries could spend thousands of dollars a year with no clear ceiling; now, their total spending on covered drugs is capped annually, no matter how many costly medications they need.
Does the annual cap apply the same way across all Part D plans?
The out-of-pocket cap applies program-wide to Part D for drugs covered under your plan's formulary. However, monthly premiums, plan-specific deductibles, and which drugs each formulary covers still vary between insurers, so comparing plans remains important.
How do I know which coverage stage I am in?
Your Part D insurer sends you an Explanation of Benefits (EOB) summary each month showing how much you have spent and which stage you are in. We can also review that information together during a consultation.