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Understanding Medicare Part D: Prescription Drug Coverage Explained

Medicare Part D is prescription drug coverage available to Medicare beneficiaries. Medicare enrollment does not automatically include prescription drug coverage, so it’s important to understand what your options are, how to find the right plan, and when you can enroll to avoid potential penalties.

To determine which Medicare Part D plans would best fit your needs, it’s best to familiarize yourself with the program’s features and benefits. This article provides an overview of the Medicare Part D enrollment process and what you should look for when considering your prescription drug coverage options.

What is Medicare Part D?

Medicare Part D is a federal program that provides prescription drug coverage to Medicare beneficiaries. While the federal government oversees the program, individual Medicare Part D plans are purchased through private insurers which are approved by Medicare. Medicare Part D plans can be purchased as standalone prescription drug plans or as part of a Medicare Advantage plan. While there are certain rules and minimum coverage requirements for each Medicare Part D plan, each provides different coverage options.

Medicare Part D Eligibility

In order to obtain Medicare Part D coverage, you must join a Medicare-approved plan offering drug coverage. This means that whether you have Original Medicare, a Medicare Advantage plan, or other type of Medicare coverage, you must have Medicare Part A (hospitalization insurance) and/or Medicare Part B (medical insurance) to be able to enroll in a Medicare Part D prescription drug plan.

You must also be a US citizen or lawfully-present nonresident in the United States in order to qualify for Medicare Part D.

How to Enroll in Medicare Part D

If you are enrolling in Medicare Part D for the first time, you will usually do so during your Initial Enrollment Period, Annual Enrollment Period, Open Enrollment Period or Special Enrollment Period, if you qualify.

  • Medicare Initial Enrollment Period (IEP): There is a seven-month window for enrollment that is unique for each individual, as it is based on when you reach the age of 65. This includes the three months before, the month of, and the three months after your 65th birthday. If you enroll in Medicare Part D during the IEP, your Medicare Part D coverage begins based on your enrollment date. If it’s within the three months preceding your 65th birthday, your Part D coverage begins the first day of your birthday month. If you enroll in your birthday month or any of the three consecutive months, your coverage will begin the month after your enrollment date. For example, if you turn 65 in June, your Initial Enrollment Period is between March 1 and September 30.
  • Medicare Annual Enrollment Period (AEP): This runs every year from October 15 through December 7. All changes to your coverage will become effective January 1 of the following year. 
  • Medicare Advantage Open Enrollment Period (OEP): This runs every year from January 1 to March 31.  Coverage will begin on the first day of the month after selecting a plan.
  • Special Enrollment Period (SEP): If you are eligible for an SEP, you may be able to enroll in a Part D plan. To be eligible for SEP, there are special circumstances defined by Medicare, such as relocating outside a plan’s service area or moving in or out of a skilled nursing facility.

It’s best to enroll in Medicare Part D as soon as you are eligible, in order to avoid any penalties or lapse in coverage. There may be late enrollment penalties if you use the fall enrollment period to enroll for the first time. The late enrollment penalty kicks in if your Initial Enrollment Period elapses and you don’t have Medicare drug coverage or other creditable prescription drug coverage for 63 or more days in a row. 

This penalty must be paid as long as you have Medicare drug coverage. It is based on 1% of the national base beneficiary premium ($32.74 in 2023) multiplied by the number of full months you lacked Medicare Part D or other creditable prescription drug coverage, then rounded to nearest $0.10 and added to your Part D premium every month. The late enrollment penalty is not a one-time penalty.

Medicare Part D Coverage and Costs 

Your Medicare Part D expense will encompass premiums, deductibles, coinsurance, and copays. Once you reach your deductible, coverage begins and the costs are split between you and the insurer with coinsurance and copays.

In addition to manufacturer policies and legislation that influence drug prices, the costs of your prescription drugs that are covered under Medicare Part D may also be different throughout the year based on which coverage phase you are in. Medicare Part D coverage operates in four phases:

1. Deductible Period

You will need to pay for your prescription drugs at the full price until you meet your deductible. Once that has been met, the plan will begin covering your prescription drug costs. Deductibles can vary by plan type, location, and insurer, but some plans have a $0 deductible and the maximum deductible for 2023 is $505. This maximum deductible is adjusted annually by the Centers for Medicare & Medicaid Services (CMS).

2. Initial Coverage Period

Once your plan starts to pay for your prescription drugs after meeting your deductible, your initial coverage period may vary. This duration depends on the terms and structure of your specific plan and what your drug costs are. For a majority of Medicare Part D plans in 2023, this initial coverage period ends once you reach $4,660 in total drug costs. This encompasses both the amount your plan paid and how much you paid out of pocket and in copays.

3. Coverage Gap

Once your plan’s threshold in total drug costs has reached $4,660, you enter the coverage gap, also referred to as the “Medicare donut hole”. Due to legislative changes in 2020, the donut hole was essentially closed. Beneficiaries once had to pay a higher percentage of drug costs while in the coverage gap, but beneficiaries are now responsible for 25% of the cost of their drugs during this coverage phase.

4. Catastrophic Coverage

All plans commence catastrophic coverage once you have $7,400 in out-of-pocket costs for drugs covered under Medicare Part D. If you’ve reached catastrophic coverage phase, your coinsurance or copays will be significantly lower for the remainder of the year.

The $7,400 threshold includes:

  • Deductible
  • Amounts paid during your initial coverage
  • Brand-name drugs after manufacturer discounts (if purchased during the coverage gap)
  • Drug costs paid by others such as family members or charities
  • Amounts paid by certain government programs (namely State Pharmaceutical Assistance Programs)

Drugs that are not covered under Medicare Part D, the amount your plan pays for your drugs, covered drugs obtained outside your plan’s network, the 75% discount on generics, and your monthly premiums do not count towards the $7,400 threshold.

While Medicare has a list of drugs that all plans must cover regardless of plan type and benefit structure, each plan has its own formulary. Medicare drug coverage also operates in tiers, with drugs in higher tiers typically costing more than those in lower tiers. 

Always review your prospective plan’s formulary so you are aware of which tier structure your prescription drugs fall within. This will help you determine if the plan’s coverage will suit your needs.

Extra Help and Assistance Programs 

The Extra Help program provides assistance to low-income Medicare beneficiaries to help pay for Medicare Part D premiums, deductibles, coinsurance, and other costs. Extra Help eliminates the late enrollment penalty and can also reduce your plan’s deductible.

State-level Medicare Savings Programs and State Pharmaceutical Assistance Programs (SPAPs) can also reduce your drug costs and provide assistance with related expenses like copays and premiums.

Navigating Medicare Part D can be difficult. Medicare.gov has free 24/7 online chat and live phone line service. Your state’s Medicaid office or Department of Aging is also likely to offer free Medicare counseling to help you navigate enrollment and understand your plan’s coverage and costs.

Tips for Choosing a Part D Plan 

Always review every plan’s premium, deductible, copays and coinsurance, as well as other aspects of coverage such as covered drugs and in-network pharmacies. Depending on your overall finances, you may choose a plan with higher premiums but a lower or $0 deductible. Part D coverage may be subject to change every year, so you should review and re-evaluate your current plan’s coverage when the annual change notices arrive.

Every plan has a different formulary. You should review it based on the medications you currently take and anticipate needing and choose the plan that has the formulary that best fits your needs.

Medicare Part D is purchased through private insurers but overseen by the federal government. Subsequently, the costs associated with prescription drugs will be subject to regulation that can also change. It’s essential to explore your options for prescription drug coverage and review any changes made to your current coverage, so you can make informed decisions about your healthcare. Contact a Baylor Scott & White Health Plan licensed insurance agent today to learn more about our Medicare Advantage coverage options.