OBJECTIVE: To examine drug costs and entry and exit rates into the Part D coverage gap for beneficiaries with diabetes in Medicare Advantage managed care plans. STUDY DESIGN: Cross-sectional observational study. METHODS: Study patients were Medicare Advantage Part D beneficiaries with diabetes from 2 large California health plans who were continuously enrolled in 2006 and had a drug coverage gap starting at $2250. Entry and exit into the gap, total drug costs, and out-of-pocket drug costs were determined using pharmacy databases. RESULTS: In 2006, 26% of the 42,801 beneficiaries with diabetes reached the coverage gap; 2% of beneficiaries exited the gap and qualified for catastrophic coverage. Beneficiaries incurred a mean of $2182 in total drug costs during 2006. Drug expenditures remained stable over the year for beneficiaries who did not enter the gap. For beneficiaries who entered the gap, total drug costs were higher overall and decreased at year’s end as out-of-pocket expenses increased. CONCLUSIONS: Fewer diabetes patients in this study entered the coverage gap than had been previously estimated, but the entry rate was much higher than that of the general Medicare Advantage Part D population. Patients entering the gap had lower subsequent monthly drug expenditures; this may be due to lower-than-expected drug prices and greater use of generics in managed care, or it may potentially signal poorer drug adherence. Future work should examine these hypotheses and explore risk factors for entering the Part D coverage gap.