For years, Medicare beneficiaries who took expensive medications faced open-ended drug costs. Even after reaching catastrophic coverage, they owed 5 percent of every prescription with no upper limit. The Inflation Reduction Act of 2022 changed that. Beginning in 2025, the Medicare Part D out-of-pocket cap limits what enrollees pay each year for covered drugs, starting at $2,000 and adjusting annually for inflation. For 2026, the Centers for Medicare & Medicaid Services announced the cap at $2,100. This guide explains how the cap works, how to spread payments over the year, and what to consider when choosing a plan.
Who the cap applies to
The cap applies to everyone enrolled in Medicare prescription drug coverage, whether through a standalone Part D plan (PDP) used alongside Original Medicare or through a Medicare Advantage plan that includes drug coverage (MA-PD). It applies only to drugs covered by your plan’s formulary, including drugs approved through an exception or appeal. It does not apply to drugs your plan does not cover, to drugs covered under Part B, such as many infusions given in a doctor’s office, or to monthly premiums.
The new Part D coverage phases
The redesigned benefit has three phases:
1. Deductible
Plans can charge an annual deductible up to a federal maximum that CMS sets each year ($590 in 2025 and $615 in 2026). Many plans have lower deductibles or none, and some apply the deductible only to higher-cost tiers. During the deductible, you pay the full negotiated price for covered drugs.
2. Initial coverage
After the deductible, you pay copays or coinsurance set by your plan, often a flat amount for generics and a percentage for brand-name or specialty drugs. This continues until your out-of-pocket spending reaches the annual cap.
3. Catastrophic coverage
Once your out-of-pocket costs reach the cap, you pay nothing for covered Part D drugs for the rest of the calendar year. The old coverage gap, sometimes called the donut hole, no longer exists.
What counts toward the cap
Your deductible, copays, and coinsurance count. So do payments made on your behalf by certain others, such as Extra Help, state pharmaceutical assistance programs, AIDS drug assistance programs, the Indian Health Service, and many charities. Premiums do not count, nor do costs for drugs outside your formulary.
Spreading costs: the Medicare Prescription Payment Plan
Hitting a cap of roughly $2,000 in January can still strain a fixed income. The Medicare Prescription Payment Plan, available since 2025, lets you pay your out-of-pocket drug costs in monthly installments over the calendar year instead of all at the pharmacy counter. Key points:
- It is voluntary and free; there is no interest or fee.
- Every Part D plan and MA-PD plan must offer it.
- You pay $0 at the pharmacy for covered drugs, and your plan bills you monthly.
- Monthly bills are calculated using a formula that spreads remaining costs over the remaining months of the year, so payments can be higher if you join later in the year.
- It does not reduce the total you pay; it only changes when you pay.
- Starting in 2026, enrollees who opt in can have their participation renew automatically for the following year unless they opt out.
The program works best for people likely to reach the cap or face high costs early in the year. If your drug costs are low and steady, it may not help much. If you also qualify for Extra Help, Extra Help usually provides more savings.
Extra Help for people with limited income
Extra Help, also called the Low-Income Subsidy, pays Part D premiums, deductibles, and most copays for people with limited income and resources. Since 2024, people with incomes up to 150 percent of the federal poverty level who meet resource limits qualify for full Extra Help. People who receive Medicaid, Supplemental Security Income, or a Medicare Savings Program qualify automatically. Others can apply through Social Security. With Extra Help, copays for generics and brand-name drugs are small fixed amounts set each year.
Negotiated drug prices
The Inflation Reduction Act also gave Medicare authority to negotiate prices for certain high-cost drugs. Negotiated prices for the first 10 drugs, including several common diabetes, blood thinner, and heart failure medications, took effect January 1, 2026. Additional drugs, including some Part B drugs in later years, are scheduled for negotiated prices in subsequent years. Negotiated prices lower the price your coinsurance is based on and reduce costs for the program, though your actual savings depend on your plan’s cost-sharing design.
Insulin and vaccines
Under the same law, Medicare enrollees pay no more than $35 for a month’s supply of each covered insulin product, with no deductible, under Part D and for insulin used with a pump under Part B. Adult vaccines recommended by the Advisory Committee on Immunization Practices, such as the shingles vaccine, are covered under Part D with no cost-sharing.
How to choose a Part D plan with the cap in mind
The cap limits your worst-case cost, but plans still differ significantly in premiums, deductibles, formularies, pharmacy networks, and utilization rules. Practical steps:
- List every medication with dose and frequency.
- Use the Medicare Plan Finder on Medicare.gov to compare plans in your area. Enter your drugs and preferred pharmacies to see estimated annual costs, including premiums.
- Check the formulary for each drug, the tier, and whether prior authorization, step therapy, or quantity limits apply.
- Compare preferred pharmacies. Many plans have lower copays at preferred pharmacies or mail order.
- Estimate total annual cost, premiums plus out-of-pocket, rather than looking only at premiums.
- Review your plan every fall. Plans change formularies, premiums, and networks every year. Your Annual Notice of Change, sent by September 30, summarizes changes.
Open enrollment for Medicare runs from October 15 to December 7 each year, with changes taking effect January 1. Medicare Advantage enrollees also have a Medicare Advantage open enrollment period from January 1 to March 31 to switch to another MA plan or return to Original Medicare.
Premium changes
Plan redesign shifted more costs to insurers and drug manufacturers, which has put upward pressure on standalone Part D premiums. CMS has run a premium stabilization demonstration to limit increases for some plans. Compare premiums carefully each year rather than renewing automatically.
If your drug is not covered
You can ask your plan for a coverage determination or formulary exception, with a supporting statement from your prescriber explaining why alternatives are not appropriate. If denied, you have the right to appeal through several levels, including independent review. Expedited decisions are available when waiting could seriously harm your health. Drugs approved through an exception count toward your out-of-pocket cap.
Creditable coverage and late enrollment penalties
If you delay Part D enrollment without other creditable prescription coverage, such as qualifying employer or VA coverage, you may owe a late enrollment penalty for as long as you have Part D. Employers must send an annual notice telling you whether their drug coverage is creditable. Keep these notices; they prove you do not owe a penalty if you join Part D later.
Real-world examples of how the cap changes costs
Consider an enrollee who takes a brand-name specialty medication with a negotiated price of several thousand dollars per month and a plan charging 25 percent coinsurance after the deductible. Under the old design, that person could have paid well over $3,000 by the time catastrophic coverage began and then 5 percent of each fill for the rest of the year. Under the cap, out-of-pocket spending stops at $2,100 for 2026, likely reached within the first few months. With the Prescription Payment Plan, those costs could be spread as monthly bills instead of paid in a lump at the pharmacy.
An enrollee who takes only inexpensive generics will probably never approach the cap, and for that person the most important factors remain premium, deductible, and pharmacy pricing. Both scenarios show why reviewing your actual medication list matters more than any single headline figure.
Related reading: Medicaid Eligibility in 2026: Income Limits, Expansion States, and How to Apply.
Frequently Asked Questions
Does the cap include my monthly Part D premium?
No. The cap covers only out-of-pocket costs for covered drugs. Premiums are separate.
Does the cap reset every year?
Yes. It applies per calendar year and resets January 1, along with your deductible.
Is the cap the same for Medicare Advantage plans?
Yes. Medicare Advantage plans with drug coverage must apply the same annual cap for Part D drugs.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
