Medicare Part D, also known as a prescription drug plan (PDP), has a list of covered medications, known as a formulary. Each formulary has different price-determining tiers, and generic medication is usually low-tier and the most cost-effective.
Private insurance companies administer PDPs, and when they allocate a medication to a tier, they determine how much a person will pay toward the cost of their prescription drugs.
In this article, we discuss the different tier levels, how they work, and look at more information on generic tier medication.
We may use a few terms in this piece that can be helpful to understand when selecting the best insurance plan:
- Deductible: This is an annual amount that a person must spend out of pocket within a certain time period before an insurer starts to fund their treatments.
- Coinsurance: This is a percentage of a treatment cost that a person will need to self-fund. For Medicare Part B, this comes to 20%.
- Copayment: This is a fixed dollar amount that an insured person pays when receiving certain treatments. For Medicare, this usually applies to prescription drugs.
The company that first manufactures a drug is the only one that can sell the medication until the patent expires, which can sometimes take up to 20 years. This will be the brand name drug.
After the patent has expired, other companies can making the generic medication.
The drug can only be a generic copy of the medication if it has the same:
- dosage form and route
- intended use
All generic drugs use the same active ingredients as brand name drugs. They may use different inactive ingredients, but they must prove that the medication works in the same way as the brand name.
Medicare Part D covers outpatient prescribed drugs that a person can administer themselves, or are administered in a doctor’s office or a hospital outpatient setting.
A person is eligible for a PDP when they first join Medicare. If they decide not to enroll when they are first eligible, a late enrollment penalty may apply for as long as the policy is active.
Individuals can obtain coverage for prescription medication by enrolling in a standalone PDP that runs alongside original Medicare or through a Medicare Advantage plan that includes prescription drug coverage.
A person can find and compare plans in their area using Medicare’s Plan Finder tool. Different insurers cover different drug options, so it may be useful for individuals to check that the policy covers the specific drug they need.
Once an individual has chosen the best policy for their needs, they can contact the company administering the plan using the details provided by Medicare’s search results.
It may be important to note that a person cannot have a Medicare Advantage plan with drug coverage and a PDP at the same time.
Each private company can organize their tiers in different ways. Generally, drugs at the lowest level will cost less than drugs at the highest.
When a doctor has prescribed a drug, the plan provider informs the pharmacy of the tier. The pharmacy then charges the person the appropriate copayment.
- Tier 1: These drugs typically have the lowest copayment and are mostly generic medicines.
- Tier 2: Mostly preferred, brand-name drugs, these drugs have a slightly higher copayment.
- Tier 3: These drugs have a higher copayment for non-preferred, brand-name medications.
- Specialty tier: A person pays the highest copayment for these high-cost prescription drugs.
An individual’s plan may organize their drugs differently. If the medication prescribed is on a high tier, and a generic drug is available on a lower tier but has been deemed unsuitable for a person by their doctor, they can file an exception and ask the plan provider to review the drug options.
The doctor must provide a supporting statement for the exception. A plan may then choose to cover a drug if there is sufficient evidence that it is necessary.
A formulary is a list of drugs, set by a private insurer, advising which drugs they will pay for in a person’s PDP.
In a formulary, the plan provider will have at least two of the most commonly prescribed drugs, but they can add or subtract them from the list at any time with good reason.
Coverage can change when:
- new drugs are released
- recent medical information changes treatment
- standard medical therapy changes
Some plans can remove brand name drugs and replace them with a generic alternative, and sometimes the cost of a brand name drug changes when a generic one becomes available.
A plan provider should always give a person notice of any change to the formulary or to the price of their medication.
A person will have several out-of-pocket costs for Medicare Part D.
Most plans have a premium, which is a charge a person must pay every month to keep their plan.
There may also be a deductible to pay before the plan starts to cover the drugs, but some plans do not have a deductible.
Private companies can choose the amount of the deductible for each year, but Medicare does not allow a deductible higher than $445 in 2021.
Most Medicare Part D plans have a coverage gap, known as the “donut hole.”
The coverage gap starts after the person and plan have spent the limit for covered drugs. The limit is set by Medicare.
In 2021, the amount per year to reach the coverage gap is $4,130. This amount can change every year.
Not everyone enters the coverage gap, but when they do, there is a temporary limit on how much the plan pays.
When a person is in the coverage gap, they pay no more than 25% of the cost of brand-name prescription drugs, but the full price of the drug will count toward out-of-pocket costs.
Medicare has a program that can help certain individuals with the costs associated with prescribed medicines.
Named Extra Help, this program is available for those who meet certain criteria.
To qualify a person must:
- be enrolled with Medicare
- live in one of the 50 states or the District of Columbia
- have limited resources or income
Medicare defines resources as the value of the items a person owns, such as real estate, bank accounts, and individual retirement accounts.
Medicare Part D provides prescription drug coverage.
Private insurance companies administer these plans, which are also known as prescription drug plans (PDPs), and they set the cost of the plan premiums, deductibles, and copayments.
Medicare does not allow private companies to set a deductible higher than $445 per year, in 2021.
Generic drugs are copies of brand-name drugs and they share certain key ingredients.
The plans have a list of covered medications that is also known as a formulary. The formulary has different pricing levels, also called tiers.
Drugs on the lowest tier are usually generic drugs that cost less.