Medicare Part D basics
Original Medicare does not cover or subsidize the cost of prescription drugs. Medicare Part D, also called Prescription Drug Plans or “PDP”, is a Medicare program designed to help seniors finance the rising costs of prescription drugs and premiums.
What prescriptions do Medicare Part D cover?
Medicare Part D encompasses a variety of drug plans — each of which covers its own set list of drugs (called a formulary). The cost of a drug plan varies based on which types of drugs you need and whether you use a pharmacy in your plan’s network.
Each Part D plan has its own formulary, which provides a list of both generic and brand-name covered drugs. This list divides the plan’s covered prescriptions into different tiers, and each tier has a different cost.
Here’s an example of a typical Part D plan’s tiers:
- Tier 1 (lowest copayment): most generic prescription drugs
- Tier 2 (medium copayment): preferred, brand-name prescription drugs
- Tier 3 (higher copayment): non-preferred, brand-name prescription drugs
- Specialty tier (highest copayment): very high-cost prescription drugs
According to the the Food and Drug Administration (FDA), generic drugs are the same as brand-name drugs in:
- dosage form
- safety
- strength
- active ingredients
- route of administration
- quality
- performance characteristics
- intended use
Generally, all Medicare drug plans must cover at least two prescriptions per drug category, however, plans can choose which ones they will offer. Meaning, if the formulary does not include your specific medication, a similar one should be available in most cases. Using the medications covered on your plan’s formulary instead allows you to save money.
These plans are permitted to make changes to their drug availability throughout the year (even if you’re currently taking them) as long as they follow these guidelines:
- They provide written notice at least 30 days prior to the effective change date.
- When a refill is requested, written notice of the change and at least a month’s supply is provided under the same plan rules, prior to the change.
How to get a Part D plan
There are two ways you can receive prescription drug coverage: with Original Medicare (as Part D) or bundled into a Medicare Advantage plan. If you join a Medicare Advantage plan with prescription coverage, you can get all everything for one monthly premium.
Prescription drug coverage is voluntary; if you choose to not enroll in a PDP, your Original Medicare coverage will not be affected in any way. But, if you do not enroll and go for any continuous period of 63 or more days after your Initial Enrollment Period is over without prescription drug coverage, you may owe a late enrollment penalty. It is recommended that you sign up for Medicare Part D as soon as you’re eligible.
After you first enroll, you are able to make changes annually to your PDP coverage. Each year, insurance carriers that offer Part D plans examine their performance and make necessary adjustments, including changing actuary tables and formularies, premiums, and pharmacies. Comparison shopping PDP plans annually gives you the opportunity to make sure your prescriptions are still covered at the best price.
PDP costs
Medicare Part D plans charge a monthly fee (premium) that varies by plan. CMS designates a base beneficiary premium (based on bids submitted by PDPs and Medicare Advantage plans with prescription coverage), but many people opt for additional coverage that will cost more.
There is significant variation in the actual premiums people pay for Medicare Part D. These premiums vary by location, insurance company, and types of drugs covered.
In addition to the premium, PDP plans have a slightly confusing cost structure for out-of-pocket drug costs. Here is the breakdown of the most basic model for Medicare Part D costs you should understand:
Part 1: Deductible
Beneficiaries are responsible for 100 percent of this initial fee, which is set by their plan.
Part 2: Initial coverage
The beneficiary will pay a certain amount for each prescription filled. The per-prescription cost is determined by the insurance carrier, and there are out-of-pocket limits each year to help curb out-of-pocket costs.
Part 3: The Coverage Gap or Donut Hole
In the past, beneficiaries were required to pay more per prescription after exhausting their initial coverage. However, this was changed in 2020 so that beneficiaries only stay responsible for paying 25 percent of their prescription costs. You may notice a change in the amount you owe per prescription between you owe under initial coverage and what you owe in the donut hole, but the donut hole is considered “closed” as of 2020.
Part 4: Catastrophic coverage
This coverage comes into effect when a beneficiary has spent over $7,050 for prescription drugs. It greatly reduces the cost of such medications through the end of the year. Out-of-pocket totals reset at the end of each year.
Because PDPs are based on percentages, it’s important to try and save as much money on prescriptions up front, which will lower your overall cost. Learn how to save more on prescription drugs.
If you feel like you may benefit from help managing your prescriptions, Medicare has Medication Therapy Management programs available.
Enrolling in Medicare Part D
You can enroll in a Medicare Part D plan during your Initial Enrollment Period for Part D — which for most people begins three months before their 65th birthday and ends three months after, as long as they’re enrolled in Medicare Part A and B. If you do not sign up for Part D when you are first eligible, you may have to pay a Part D late enrollment penalty, which is an added monthly cost to your Part D premium.
After you initially enroll in a Part D plan, you do not need to re-enroll every year. But, you are able to change your plan annually during the Medicare Annual Enrollment Period (AEP). During this time, you can comparison shop Part D plans and find a better fit for your changing needs. This is an option for beneficiaries because plans change their benefits annually; AEP is a chance to manage those changes.
