Why anyone would read this is beyond me. It's the sort of thing no one wants to think about let alone try to understand... until the day they walk up to the same prescription counter they've been going to for months where their prescriptions have cost only a few bucks or maybe $20 or $47, and then the counter person tells them, "That will be $325.90 for today." Then, suddenly, they're interested in how Medicare Part D drug plans work. Yes, this happens, and yes, I get the phone calls. Even though I explained this when I enrolled them, something I must do to be compliant with Medicare marketing rules, it's the rare person who's actually listening, and I don't blame them really. So, I decided to write it down, and here it is.
What is Medicare Part D and Do I Have It?
Medicare Part D is a voluntary outpatient prescription drug benefit for people with Medicare provided through private plans from carriers that contract with the federal government. "Outpatient prescription drug" simply means the prescriptions you pick up at the pharmacy. (Other drugs, for example, drugs administered in a medical office or setting, are covered under Medicare Part B, not Part D.) If you are on Original Medicare (Part A & Part B) with a Medicare Supplement, you likely have a stand-alone Part D prescription drug plan (PDP) for which you pay a separate premium and have a separate member ID card. If you are on a Medicare Advantage plan (aka, Part C, and which replaces Original Medicare) then your PDP is likely part of the Medicare Advantage plan (or MAPD, for Medicare Advantage Prescription Drug plan).
The entire list of drugs covered by a PDP is called the formulary. Each drug in the formulary is assigned to a cost tier which determines what you will pay for a drug. Typically, there are five cost tiers, 1 through 5, with most generics assigned to cost tiers 1 or 2 and brand name and specialty drugs assigned to tiers 3 through 5.
Some may not have a PDP at all because they have other prescription drug coverage Medicare considers to be "creditable", meaning that it is at least as comprehensive as a Part D PDP. The most common examples would be Veterans Administration (VA) coverage or Tricare for Life. Many veterans get their drugs through their VA coverage and do not need to be enrolled in a Part D PDP.
Drug Coverage Under Medicare is Not Like Drug Coverage in Under-65 Health Plans
Until you transitioned your health care to Medicare, you were likely covered by employer group health (EGH) or Affordable Care Act (ACA, aka, Obamacare) coverage via the healthcare.gov health insurance marketplace. Under those plans, if the co-pay for a medication is $10 in January, it is still $10 in June and again in December. That IS NOT how Medicare drug plans work. Instead, PDPs introduce what are called "stages of coverage" as illustrated in the lead graphic for this post.
Stages of Coverage
The important thing to remember here is that, as you and the plan spend money on your prescription drugs, the plan is keeping track of those costs, referred to as true -out-of-pocket costs (TrOOP). TrOOP is what triggers the different stages of coverage. (For details about what does and does not count toward TrOOP, see this document from CMS.) If the TrOOP reaches a stage-triggering threshold, you move into the next stage of drug coverage, and the cost of your drugs to you changes. The stages are:
Deductible stage. For 2023, the maximum deductible is $505 but your deductible may be less depending on how your plan is structured. Most stand-alone PDPs use the maximum deductible; most MAPDs have a much lower or no deductible. On many plans, the deductible does not apply to tier 1 and tier 2 drugs, so unless you're taking name brand drugs, you are shielded from the deductible.
Initial coverage stage. You stay in the initial coverage stage until your TrOOP reaches $4,660 in 2023. Somewhere around 95% of Medicare beneficiaries will never leave the initial stage of coverage. In this stage, you are paying usually very reasonable co-pays for lower tier drugs.
Coverage gap stage. Once TrOOP reaches $4,660 in 2023, you leave the initial coverage stage and enter the coverage gap (aka, donut hole). Somewhere around 5% of Medicare beneficiaries reach this stage every year. In this stage, you pay 25% of the cost of your drugs, the plan pays 5% and the remaining 70% is discounted by the manufacturer. Both the amount you pay and the manufacturer discounts count towards TrOOP. This is the stage where, as mentioned in the introduction to this post, people tend to get sticker shock when picking up their drugs at the pharmacy counter. You stay in the coverage gap stage until TrOOP reaches $7,400 in 2023.
Catastrophic stage. Once TrOOP reaches $7,400 in 2023 you enter the catastrophic stage of coverage. In this stage, you pay a small co-pay or coinsurance, the greater of 5% of the drug cost, $4.15 for generics or $10.35 for name brand drugs.
A Word About IRMAA
If your income is such that CMS levies an income-related monthly adjustment amount (IRMAA), that amount will be collected by CMS directly by way of a monthly bill. Note that the IRMAA charge is not part of the drug plan premium. Click here for the 2023 IRMAA chart.
Better News on the Horizon for Medicare Drug Costs
With the passing into legislation of the 2022 Inflation Reduction Act, there is good news for Medicare drug costs coming in the next few years. Some of these changes have already gone into effect. For details about upcoming changes that will be welcome news for drug costs under Medicare, read all about it in my blog post here: What Does the Inflation Reduction Act of 2022 Mean to You?