How does a Medicare Part D plan work?
Medicare Part D plans are like any insurance that provides lower-costing coverage for your prescription drugs.
And like any other insurance coverage, you usually pay the plan a monthly premium, you may have an initial deductible that you must pay first before your insurance coverage begins to pay a portion of your drug costs, and then as your insurance needs increase, the coverage costs (what your plan pays and what you pay) may change.
The following information describes how the basic or model 2021 Medicare Part D prescription drug plan is separated into four main parts. Depending on your prescription drug needs, you may only go into one or two parts of your Part D coverage (and if you spend over $6550 in prescription drugs you might go into all four parts of your Part D coverage):
- Part 1 - The Initial $445 Deductible - Some Medicare Part D prescription drug plans (PDP) and Medicare Advantage plans that provide drug coverage (MAPD) have an initial deductible that you must pay out-of-pocket before the start of your plan coverage (or before the start of your plan's cost-sharing). Many Medicare Part D plans (both PDPs and MAPDs) have a $0 deductible and provide "first dollar coverage" for your formulary prescriptions. You can see our Medicare Part D Plan Finder for examples of Medicare plans with different deductibles (just choose your state to see plans in your area). You may notice that some Medicare Part D plans have a "standard" Initial deductible, but the plans exempt low-costing drugs from the deductible, meaning your inexpensive generic drugs may be covered before you pay any of your deductible.
Important: Make sure your Medicare Part D plan covers your drugs.
In the next section, we discuss your plan's coverage of "formulary drugs". A "formulary" is a list of drugs that your Medicare Part D plan will cover. And it is important to understand that no Medicare Part D plan covers all prescription drugs.
Part D plans are only required to cover a certain number of drugs in specific drug classes. However, Medicare Part D plans can decide to cover a particular generic and exclude the corresponding brand-name drug from coverage. So the bottom line is - check your plan's formulary before enrollment to ensure that your prescriptions are covered by the plan.
- Part 2 - The Initial Coverage Phase - Once you meet your plans Initial Deductible (if any), your drug plan then provides cost-sharing coverage for formulary drugs. Cost-sharing is where you and your Medicare Part D plan share in the retail cost of covered drugs with co-insurance (a percentage of retail, such as 25%) or co-payment (such as $47 for a Tier 3 drug). Usually, the Initial Coverage Phase extends to a point where the total retail cost of the medication reaches $4130 - however, some plans lower this limit to $2,000 or even $1,850 (lower limits are used to lower monthly premiums for people with minimal medication needs). Once you meet your plan's Initial Coverage Limit, you will exit the Initial Coverage Phase and enter the Coverage Gap. (As a note, most people never leave their Medicare drug plan's Initial Coverage Phase).
- Part 3 - The Coverage Gap or Donut Hole - In this phase of coverage, you will receive a 75% discount on all formulary drugs (generic and brand-name drugs). Meaning that you will only pay 25% of the drug's retail cost when you reach the Donut Hole. In addition, some Medicare plans also provide partial or supplemental Gap Coverage. In such as plan, a member who purchases a brand-name medication that also has coverage in the Donut Hole will actually receive the brand-name drug manufacturer's portion of the Donut Hole Discount (70%) is also applied to the brand-name formulary drug purchase.
- Part 4 - The Catastrophic Coverage Phase - When a person has spent more than $6550 for prescription medications, they will be protected by Catastrophic Coverage - here the cost of medications is substantially reduced to about 5% of the retail drug price. When a person reaches Catastrophic Coverage, they will remain in this coverage area through the end of the year (December 31st).
Looking for more information about the basics of Medicare Part D coverage?
We have an extensive section of Frequently Asked Questions (FAQs) online that can help you understand the basics of Part D coverage and also let you explore some of the more advanced topics surrounding Medicare Part D and Medicare Advantage plan coverage. As a start, you can see one of our more popular questions "What is a Medicare Part D plan". In this question we discuss different ways to get your prescription coverage, the different parts of Medicare and how they fit together, and a series of specific questions that many people ask about Medicare Part D coverage.
An example of the model or standard Medicare Part D plan in action
Your out of pocket prescription drug costs are calculated on a progressive basis (like your federal income tax).
You will pay the first $445 yourself (as the Medicare Part D Plan deductible). After your deductible, you will pay 25% co-insurance towards all your prescription drug costs up to a total of $4130.
For example, let us assume that your total yearly prescription drug expenses are $4380.
Therefore, you will pay 25% of the difference between the deductible ($445) and ($4130) which is: (4130 - 445)*0.25 = $921.25.
When your costs total more than your $4130 Initial Coverage Limit, you will enter the Donut Hole and receive a 75% discount on all formulary drug purchases - or, as in our case, pay 25% of the difference between $4130 and (as in our example) $4380 or an additional cost of $62.5.
Your total ESTIMATED annual "Out of Pocket" prescription drug cost with a Medicare Part D plan should then be around: $445 + $921.25 + $62.5 = $1428.75
(plus your monthly premiums for the Medicare Part D plan).