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.
The following information describes how the basic or model 2026 Medicare Part D prescription drug plan is separated into three 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 $2,100 out-of-pocket for prescription drugs you may go into all three parts of Part D coverage):
- Part 1 - The Initial $615 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.
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 coinsurance (a percentage of retail, such as 25%) or copayment (such as $47 for a Tier 3 drug). Usually, the Initial Coverage Phase extends until you have spent $2,100 out-of-pocket for your formulary prescription drugs.
Once you meet your plan's $2,100 RxMOOP, or maximum out-of-pocket for prescription drugs, you will exit the Initial Coverage Phase and enter the Catastrophic Coverage Phase. (As a note, most people never leave their Medicare drug plan's Initial Coverage Phase).
- Part 3 - The Catastrophic Coverage Phase - When a person has spent $2,100 for prescription medications, they will be protected by Catastrophic Coverage - here plan members will not have any out-of-pocket costs for formulary drug purchases. They will remain in this coverage phase through the end of the year (December 31st).
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 phases of coverage.You will pay the first $615 yourself (as the Medicare Part D Plan deductible). After your deductible, you will pay 25% coinsurance towards all your prescription drug costs up to a total of $2,100.
For example, let us assume that your total yearly prescription drug expenses are $5,280.
You will pay the first $615 while in the deductible and then 25% of the difference between the deductible ($615) and the drug costs ($5,280) or $4,665*0.25 = $1,166.25.
When your out-of-pocket costs reach the $2,100 RxMOOP, you will enter the Catastrophic Coverage Phase where you will pay nothing for your formulary drug purchases for the remainder of the year.
In this example, your total ESTIMATED annual "out-of-pocket" prescription drug cost with a Medicare Part D plan should then be around: $615 + $1,166.25 = $1,781.25
(plus your monthly premiums for the Medicare Part D plan).