Medicare Part D | Prescription Drug Coverage 101

Medicare Part D | Prescription Drug Coverage 101

Understanding Medicare

Medicare is the federal health care insurance program primarily for those of retirement age. The program was signed into law in 1965 and today covers over 60 million Americans. Medicare is divided into four parts—Part A, Part B (Part A and B are collectively known as Original Medicare), Part C, and Part D. 

What Is Medicare Part D?

Medicare Part D, also known as Medicare prescription drug coverage, is an optional program to help you cover the cost of prescription drugs. The Medicare prescription drug plan (PDP) was officially enacted in 2003 under the Medicare Modernization Act and went into effect on January 1, 2006. Under this act, Medicare Part D provided prescription drug coverage through private companies to Medicare beneficiaries.

What Does Medicare Part D Cover?

There are a variety of plans to choose from under Medicare D. Each plan offering has their own list of covered drugs. This list of drugs is called a formulary. A formulary includes both brand-name prescription drugs and generic drugs. All plans must cover at least two drugs per drug category. 

Using the drugs listed on the plan will save you money because the insurance coverage provider negotiated a lower price. If you choose a drug not listed on your plan you will have to pay full price for the drug instead of a copayment or coinsurance. Generally if your specific drug is not listed on the plan, there will be a comparable alternative available through your coverage. You can also apply for a formulary exception to have your drug approved through your insurance provider.

Each plan’s formulary will list drugs under different tiers. The higher the tier, the more expensive the drug will be to you. A breakdown of Medicare Part D’s cost structure is listed below under copay tiers.


What Are the Costs of Medicare Part D Plans?

Medicare will cover a portion of your prescription drug costs. The costs that you cover for prescription drugs is considered your out-of-pocket costs. Your out-of-pocket costs will depend on the following factors:

  • The drugs you use
  • The plan you choose
  • Whether you go to a pharmacy in your plan’s network
  • Whether the drugs you use are on your plan’s formulary  
  • Whether you get Extra Help paying your Medicare Part D costs

Extra Help is an assistance program to help cover some of the Medicare costs. To qualify for Extra Help, a person must be receiving Medicare, have limited resources and income, and reside in one of the 50 states or the District of Columbia.

The following are the payments associated with Medicare Part D plans: 

Premium: Your monthly premium will depend on the area in which you live and the plan you choose. When reviewing your premium cost be sure to weigh it against the overall cost per year and the cost of the drugs you take. In other words, a lower monthly premium may or may not be the best choice for you if the other payments are much higher. Weigh all of the options before making a decision. 

Deductible: The deductible is the amount of money you must pay out of pocket before Medicare will cover costs. For example, a $300 deductible means that you will need to pay $300 before your insurance plan covers the remaining costs. A lower deductible may be a good option, however you should also compare the premium and other costs to ensure that it is the best financial fit for your situation.

Copay: A copay is a fixed dollar amount for your prescriptions. For example, you may have to pay $10 for a generic drug and Medicare will cost the remainder of the costs. 

Copay tiers: Each Medicare Part D plan places drugs in different tiers. These tiers determine how much your copay amount will be for each drug. The lower the tier, the lower the cost will be to you. Generic drugs are typically labeled as Tier 1 drugs.

Tier Type Tier 1 Tier 2 Tier 3 Tier 4 Tier 5
Drug Type Preferred Generic Drugs Non-PreferredGeneric Drugs Preferred Generic and Brand Name Drugs Non-Preferred Generic and Brand Name Drugs Specialty Drugs
Copay Cost $ $$ $$$ $$$$ $$$$$

Coinsurance: Coinsurance is the percentage of the prescription cost that you are responsible for covering. Typically plans require coinsurance for drugs in higher tiers.  

Coverage gaps: With Medicare, there is a threshold where the insurance coverage no longer covers the costs of drugs and you are required to pay out of pocket. The point where Medicare Part D stops paying is called the “donut hole.” The cost between the donut hole and catastrophic coverage is known as the coverage gap, and a percentage of it will need to be covered by you. This year, it is expected that you will not have to pay more than 25% for covered brand-name and generic drugs during the gap. In previous years, the percentage you had to cover was much higher. Now the insurance companies will be responsible for more of the cost.

Catastrophic coverage: In 2020, catastrophic coverage kicks in when your out-of-pocket costs for prescription drugs reaches $6,350. This is an increase from 2019 when the dollar amount was set at $5,100. At this dollar amount, Medicare will cover the majority of the remaining cost of the drugs. The amount you will be responsible for will be under 5%.

Late enrollment penalty: The late enrollment penalty is an amount added to your monthly premium. You may owe this amount if, for any continuous period of 63 days or more after your Initial Enrollment Period is over, you go without one of the following:

  • A Medicare prescription drug plan (Part D)
  • A Medicare Advantage plan (Part C) 
  • Creditable prescription drug coverage

Is Medicare Part D Right for You?

You may wish to enroll in a Medicare Part D plan if:

  • You use prescription drugs on a regular basis
  • You think you may need prescription drugs in the future
  • You do not have prescription drug coverage
  • You are worried about increasing prescription drug costs
  • You are having trouble paying for your prescription drugs

How to Enroll in Medicare Part D

In order to enroll, you must be eligible for Medicare. You are eligible for Medicare if you meet one of the following qualifications:

  • You are age 65 or older
  • You have a qualifying disability for which you have been receiving Social Security Disability Insurance (SSDI) for more than 24 months
  • You have been diagnosed with end-stage renal disease
  • You are entitled to Medicare Part A and/or enrolled in Medicare Part B

The Initial Enrollment Period is a seven-month timeframe that begins three months before the month you turn 65 and ends three months afterward. During this period you can enroll into Medicare Part D. If you miss the initial enrollment period then you can sign up during the general enrollment period which runs every year from January 1 to March 31.

Once you are eligible, the first step to enrolling is to review the private plan offers available in your location. To learn about Medicare Advantage, Supplement, and Prescription Drug plans, request a free quote.