What is Medicare Part D?

Medicare drug coverage (Part D) helps pay for prescription drugs (Rx) you need. Part D plans are offered by private insurance companies and provide prescription drug coverage to individuals living in a plan’s service area.

All plans must cover a wide range of prescription drugs that people with Medicare take, including most drugs in certain “protected classes,” like drugs to treat cancer or HIV/AIDS. A plan’s list of covered drugs is called a “formulary,” and each plan has its own formulary. Medicare drug coverage typically places drugs into different levels, called “tiers,” on their formularies. Drugs in each tier have a different cost. For example, a drug in a lower tier will generally cost you less than a drug in a higher tier. 

It's important to know that you must have creditable drug coverage - coverage that is comparable to or better than what is available through Medicare - once you’re eligible for Medicare. Otherwise, you could incur a Late Enrollment Penalty.

There are two ways to get Medicare drug coverage (Part D):

1. Stand-alone Medicare drug plans. These plans add Medicare drug coverage (Part D) to Original Medicare. You must have Part A and/or Part B to purchase a separate Medicare drug plan. Medicare Supplement plans do not include prescription coverage and therefore require enrollees to purchase a separate Part D plan.

2. Medicare Advantage Prescription Drug (MAPD) plans. These Medicare Advantage plans (Part C) roll Part A (hospital-related), Part B (medical-related), and Part D (prescription drug) benefits into one plan.

Actual costs of Part D plans, as well as the amount you pay for your medications, are set by the insurance companies, and approved by the government. Your costs will vary based on the medications that you take and the plan you choose. 

Most Part D plans include:

• A monthly premium
• An annual deductible
• A prescription drug formulary
• Copays and/or coinsurance per drug
• Coverage phases (Deductible, Initial Coverage Phase, the Coverage Gap―also known as the Donut Hole, and the Catastrophic Coverage Phase)                                                                                                                                                          

The formal term for this period is the “coverage gap.” It refers to a gap in Medicare Part D prescription coverage―a short-term limit on what costs the drug plan will cover. When Medicare beneficiaries reach this gap, their out-of-pocket cost responsibility changes. In 2024, individuals enter the donut hole once the value of their covered prescriptions has reached $5,030. The coverage gap threshold can change each year. Read more about the Part D donut hole here.

The Inflation Reduction Act of 2022 is a significant piece of legislation that includes multiple initiatives. For Medicare beneficiaries, it means significant cost-cutting measures that will affect Medicare Part D for many years to come. 

In 2024, Medicare beneficiaries who reach the catastrophic coverage phase of their drug coverage no longer pay coinsurance or copays for drugs covered by their Medicare plan. 

In 2025, a $2,000 out-of-pocket maximum will be implemented for Part D plans. Individuals will have the option to pay out-of-pocket Part D costs in monthly amounts over the course of the year if they choose. 

A complete timeline with the Part D provisions of the Inflation Reduction Act can be found here.

If your income is above a certain level, you will also pay a Part D surcharge. This additional charge is due on top of your plan’s monthly premium.

What is the Medicare Part D late enrollment penalty?

You may have to pay a late enrollment penalty if at any time after your Initial Enrollment Period is over, there’s a period of 63 or more days in a row when you don't have Medicare drug coverage or other creditable prescription drug coverage. The late enrollment penalty is an amount that can be added to your Medicare drug coverage (Part D) premium. You may have to pay the penalty for as long as you have Medicare drug coverage. The cost of the late enrollment penalty depends on how long you went without Part D or creditable prescription drug coverage. Medicare calculates the penalty by multiplying 1% of the “national base beneficiary premium” ($34.70 in 2024) times the number of full, uncovered months you didn't have Part D or creditable coverage. This monthly premium is added to your monthly Part D premium. For more information about the late enrollment penalty and how to avoid it, call our advisors at 937.915.3563.