The ABCD of Medicare: What is Medicare Part D?

Medicare Part D covers outpatient prescription drugs for people with Medicare. You don’t automatically get Part D with Medicare — you need to sign up for it. Part D plans are sold by private health insurance companies, but they have to follow rules established by the federal government.

Part D is technically optional, but going without prescription drug coverage is risky. If you don’t sign up when you first become eligible, there are significant, permanent penalties for enrolling later.

Here’s what you need to know about how to buy and use Medicare Part D prescription drug coverage.

What is Medicare Part D?

In simple terms, it’s insurance that specifically covers prescription drugs. Getting this kind of prescription drug coverage through Medicare comes in two different ways, and how it operates depends on your existing Medicare coverage.

1. Medicare Part D and Original Medicare:

If you’re already enrolled in Original Medicare (Part A and/or Part B), the process involves purchasing a distinct Medicare Part D plan from a private health insurance provider. This plan is solely dedicated to providing you with prescription drug coverage. You have the flexibility to explore and select from various stand-alone plans, each with its own cost and coverage particulars. It’s worth noting that a separate premium is associated with the Part D plan you choose.

2. Medicare Part D and Medicare Advantage

Medicare Advantage, also known as Medicare Part C, offers a comprehensive alternative to Original Medicare and is provided by private health insurance companies. These Medicare Advantage plans encompass all the advantages of Part A and Part B, and the majority of them additionally incorporate coverage for prescription drugs. Should you be enrolled in Medicare Advantage, the general rule is that you’re unable to acquire an independent, stand-alone Medicare Part D plan. Nevertheless, specific, less common types of Medicare Advantage plans that lack their prescription drug coverage do present exceptions to this rule.

What does Medicare Part D cover?

Medicare Part D plans don’t cover every drug. Plans have a list of the drugs they cover, called a formulary. The formulary also lays drugs out into tiers with different out-of-pocket costs.

• Medicare Part D plans’ formularies must meet certain minimum standards set by the federal government.
• Plans have to cover certain categories of drugs, such as drugs to treat asthma or high blood pressure.
• Within each category, they have to cover at least two distinct drugs.
• If you or your health care provider believe that you need a specific drug that your Medicare Part D plan doesn’t cover, you can ask for an exception. Your health care provider might need to demonstrate that the specific drug is medically necessary for your plan to cover it. 

Medicare Part D cost

Most Medicare Part D plans have premiums and some combination of deductibles, copays and coinsurance. The specifics depend on the plan you choose and the phase of coverage.

Medicare Part D Premiums 

Medicare Part D plans individually establish their premiums, which are sanctioned by the government. Consequently, what you’ll pay is contingent upon the specific plan you decide to go with.

For stand-alone Medicare Part D plans, the average premium for fundamental coverage hovers around $31.50 per month in the year 2023, as reported by the Centers for Medicare & Medicaid Services .

In the case of Medicare Advantage plans, they encompass a bundled assortment of coverage, erasing the existence of a standalone Part D premium for those that include prescription drug coverage.

Individuals with notably higher incomes are subject to an income-related monthly adjustment amount (IRMAA) atop their monthly premiums . In the year 2023, beneficiaries whose income for the year 2021 surpassed $97,000 (for individual returns) or $194,000 (for joint returns) will be required to pay an additional sum on top of their plan’s premiums. The amount ranges from $12.20 to $76.40 per month, contingent upon their income level.

Understanding Medicare Part D Copays and Coinsurance

The landscape of Medicare Part D copays and coinsurance is delineated by four distinct phases. The specific phase you find yourself in hinges upon the cumulative amount you’ve expended out-of-pocket for covered prescription medications throughout the year. Let’s delve into the four phases and the accompanying costs that define them:

Phase 1: Deductible

As your journey through your chosen plan commences, your covered drugs don’t receive contribution from the plan until you fulfill the annual deductible requirement. It’s noteworthy that the legal upper limit for the deductible stands at $505 for the year 2023. Upon meeting this deductible, you advance to the subsequent phase.

Phase 2: Initial Coverage

During this phase, the responsibility for payment shifts to you in the form of copays or coinsurance for covered medications. The choice between the two depends on where the drug falls within your plan’s formulary. Transitioning to the next phase takes place once the combined expenditure on covered drugs by you and your plan reaches $4,660 in 2023.

Phase 3: The Doughnut Hole

In this stage, the focus shifts to a different approach. Instead of adhering to the copays or coinsurance as stipulated by the plan’s formulary, you now shoulder up to 25% of the total cost of covered drugs. This is commonly referred to as the “coverage gap.” The conclusion of this phase is marked by reaching a spending of $7,400 in 2023 for covered drugs.

Phase 4: Catastrophic Coverage

As the final phase unfolds, the structure changes yet again. You now contribute 5% of the cost of your covered prescription drugs or $4.15 for generic drugs, or $10.35 for brand-name drugs in 2023—whichever amount is higher. This phase endures until the year’s end. However, it’s vital to note that this year, 2023, is the last year featuring the 5% coinsurance for the catastrophic coverage phase. The Inflation Reduction Act will eliminate this coinsurance starting in 2024.

Enrolling in Medicare Part D

Initial Enrollment Period

The initial enrollment period offers you the window to enroll in a stand-alone prescription drug plan (Medicare Part D) or a Medicare Advantage plan that encompasses Part D prescription drug coverage. This span of seven months begins three months before the month you turn 65, includes your birthday month, and extends three months after your birthday month. For instance, if your 65th birthday falls in July, your enrollment period spans from April 1 to October 31.

Note: If your birthday falls on the first day of any month, your initial enrollment period of seven months starts earlier, commencing four months before your 65th birthday and concluding two months after your birthday month. Consequently, if your birthday is on July 1, your initial enrollment period spans from March to September.

Special Enrollment Period (if you meet the criteria)

The special enrollment period offers you the opportunity to enroll in Medicare coverage even if it’s not within your initial enrollment period or an open enrollment period. In scenarios where you lose existing coverage, such as prescription drug coverage from your employer that qualifies as creditable, you might qualify for a special enrollment period .

Generally, special enrollment periods extend over a two-month duration. For instance, if your employment concludes or you lose your qualifying employer insurance, the two-month special enrollment period starts in the subsequent month—whichever comes first.

By enrolling during the special enrollment period, you can circumvent the imposition of late enrollment penalties.

Medicare Part D Late Enrollment Penalty

Choosing not to enroll during the initial enrollment period while lacking “creditable prescription drug coverage” might result in the imposition of a late enrollment penalty. The term “creditable prescription drug coverage” refers to coverage from either your employer or your spouse’s employer or union, which pays, on average, at least the same amount as the standard drug coverage offered by Medicare.

Open Enrollment Period

The fall open enrollment period for Medicare and Medicare Advantage, spanning from October 15 to December 7 each year, presents the opportunity to join or transition to a different Medicare Part D or Medicare Advantage plan.

For those with a Medicare Advantage plan, there’s an additional chance during the Medicare Advantage open enrollment, which runs from January 1 to March 31 annually. Within this period, you can switch plans or make the transition to Original Medicare while also having the option to secure a stand-alone Medicare Part D plan.