Medicare Part D is the part of Medicare that covers prescription drug costs. Medicare requires that all people aged 65 years and over have some form of creditable prescription drug coverage.
A person may be able to set up prescription drug coverage through a Medicare Part D plan, a bundled Medicare Advantage plan, or a healthcare plan through their employer.
Choosing Medicare Part D can lead costs to vary, as private insurers administer these plans. Premiums and medication copayments may apply.
In this article, we cover what types of expenses a person can expect to incur with their Medicare-related Part D prescription drug coverage.
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.
Medicare Part D premiums vary depending on the choice of plan. People can go to Medicare.gov and search for a Medicare plan to find out more about estimated costs.
However, these premiums range in cost, varying by region and plan. For example, some Part D premiums may be as low as $12.18 in California, while Part D might have a $191.40 premium in South Carolina.
Medicare can collect the Part D premium from Social Security funds. People may also choose to pay a bill every month or have the health insurance company automatically deduct the money from a bank account.
Medicare requires that some people whose income is higher than a certain amount pay an additional premium for Medicare Part D.
They call this the income-related monthly adjustment amount (IRMAA). Medicare determines this amount using the monthly adjusted gross income from the enrollee’s most recent tax return.
A person does not pay their IRMAA to the insurance company that holds their plan. Instead, Medicare will often deduct this amount from their Social Security check.
If a person does not receive a check, they may have to pay a bill directly to Medicare or the Railroad Retirement Board.
The IRMAA premiums vary depending on whether a person files an individual, married filing jointly, or married filing separately return.
A person will start to pay if they are filing individually and earn more than $87,000 per year, or if they are filing jointly and earn more than $174,000 per year. The minimum IRMAA is $12.20 for 2020, and the maximum is $76.40.
Medicare Part D involves several costs outside the premium, including:
- Deductible: Some Medicare Part D plans do not have a deductible. The deductible for a Part D policy should not exceed $435 for the year 2020.
- Copayments: Some people may pay a flat rate for medications in certain tiers, such as $5 for generic medications. These count toward their yearly out-of-pocket expenses.
- Coinsurance: A person may need to pay a certain percentage of medication costs. These also count toward a person’s out-of-pocket limit.
- Coverage gap: Medicare Part D plans have a coverage gap or donut hole once Medicare and the individual spend a certain amount on drug costs. For 2020, this is $4,020. Once a person reaches the coverage gap, they will pay no more than 25% of the drug cost plus a dispensing fee. However, Medicare will not directly cover costs.
- Catastrophic coverage: When a person has spent $6,350 while in the coverage gap, they move to catastrophic coverage. With this coverage, a person will pay a very small coinsurance or copayment.
In 2015, an estimated 28% of those with Medicare Part D reached catastrophic coverage for spending, according to an article in Health Affairs. However, this percentage may now be lower due to new changes for the donut hole in 2020.
Medicare requires each company selling Part D plans to provide a standardized level of coverage. Each insurer will generate a list of medications that they cover — this is called a formulary.
To work with Medicare, insurance companies must cover at least two of the most commonly prescribed drugs in each drug category or class as generics.
The following are examples of the formulary tiers:
- Tier 1: These are drugs with a low copayment or none at all. This tier includes most generic prescription medications.
- Tier 2: These are drugs with a medium copayment that may include brand name prescription drugs.
- Tier 3: These are drugs with a higher copayment that the insurer considers “nonpreferred.” This category often includes brand name prescription drugs.
- Specialty tier: Specialty tier drugs have the highest copayments. These tend to be specialized, high cost prescription medications, such as chemotherapy drugs.
When a person chooses a Medicare Part D plan, they should carefully review the formulary to make sure that the medications that they take the most are on it.
People taking a brand name medication should also contact their doctor to see whether they can switch to a generic medication. Doing this could make Medicare Part D more cost effective.
Medicare Part D can help a person make their medications more affordable. Medicare requires that a person has some form of drug coverage. Private insurers administer Part D.
Out-of-pocket costs include premiums, coinsurances, and copayments. Once a person with Part D and Medicare have paid $4,020 for medications, the person enters a coverage gap known as the donut hole.
Insurers need to provide Medicare with a formulary of drugs that they cover. They should reimburse costs for at least two generic drugs in every class of medications.
If a person has specific questions about Medicare coverage or Part D plans, they should call 1-800-MEDICARE.