What Is Medicare Part D?

Medicare Part D provides prescription drug coverage to Medicare beneficiaries. Sometimes referred to as a Medicare PDP (for prescription drug plan), the policies are sold by private insurance companies.

You may add a Part D plan to Original Medicare or to a Medicare Advantage (MA) plan that does not include coverage for prescription drugs. However, most MA plans – around 90 percent – cover prescription medications. When comparing Medicare Advantage plans, the designation MA-PD indicates that the plan includes Part D.

Medicare Part D Requirements

Medicare Part D eligibility includes anyone who is eligible for Original Medicare (Parts A and B). You may enroll in a standalone Part D plan if you have either Medicare Part A or Medicare Part B (or both).

As Part D drug plans are provided by private insurers, you must also meet the plan's requirements. This usually means living within the Part D plan's service area.

When Can You Join a Medicare Prescription Drug Plan?

You may only join a Medicare Part D plan during certain enrollment periods.

You may also purchase a Part D plan if you qualify for a Special Enrollment Period (SEP). There are literally dozens of ways you may qualify for an SEP. The most common are moving, losing your current coverage, and qualifying for Extra Help. Find the full list on Medicare.gov here.

What Is the Medicare Part D Premium?

Your Medicare Part D out-of-pocket costs typically include a monthly premium, yearly deductible, and either a copayment or coinsurance that you pay at the time of purchase. The amount of your Part D premium varies depending on the plan and provider you choose.

If you collect Social Security benefits, you can have your Part D premium deducted directly from your monthly payment. It typically takes 2 to 3 months before deductions begin. Once they do, your first payment will likely include all skipped payments. Once you're caught up, Social Security only deducts one payment per month.

You may qualify for Extra Help if your income or resources are limited. This Medicare program helps beneficiaries pay a variety of their out-of-pocket costs for prescription drugs, including the Part D premium.

What Is the Part D Late Enrollment Penalty?

If you go 63 days or more without Medicare prescription drug coverage (or another type of creditable coverage), you face lifelong penalties.

The Part D late enrollment penalty is 1 percent of the national base beneficiary premium times the number of months you went without prescription drug coverage. That total is then rounded to the nearest dime and added to your monthly premium. The national base beneficiary premium changes every year. In 2022, it is $33.37.

If you went 14 months without Medicare prescription drug coverage, your Part D late enrollment penalty would be $4.70. The calculation looks like this:

What Drugs Are Covered by Medicare Part D?

Medicare Part D coverage varies according to your plan. When comparing your Part D plan options, look carefully at the drug formulary. This is the list of prescription medications covered by the plan.

In addition to the formulary, most Medicare PDPs use a tier system to help manage drug costs. The tier your medication lands on gives you an idea what it will cost. Most Part D plans use 3 to 5 tiers, with costs rising along with the tier. A 4-tier example may look like this:

The more tiers there are, the lower your copayment usually is on the bottom tiers. For example, a 5-tier plan usually leaves you with copays under $5 for the first tier and under $15 for the second tier.

Medicare Part D Catastrophic Coverage

Catastrophic coverage is the fourth and final phase of Medicare Part D.

You start in the deductible phase. During this time, you pay 100 percent of all costs until you meet your yearly deductible. Again, since private insurance companies provide Part D plans, the yearly deductible varies. However, Medicare does set limit, which may change from year to year. In 2022, the maximum Part D deductible is $480.

Once you meet your yearly deductible, you enter the initial coverage phase, where your share of costs is 25 percent, with your plan making up the other 75 percent. You stay here until you and your plan spend a combined $4,430 (in 2022).

Only around 10 percent of Medicare Part D enrollees advance to the third phase. This is the coverage gap, better known as the donut hole. Your out-of-pocket costs do not change while you're in the coverage gap – you continue paying 25 percent. But the coverage gap is important because it defines how you reach the catastrophic coverage phase.

Although your out-of-pocket doesn't change while you're in the donut hole, cost-sharing for brand name drugs does. It looks like this:

• You pay 25 percent
• Your plan pays 5 percent
• The drug's manufacturer pays 70 percent

To leave the coverage gap, your out-of-pocket plus the drug manufacturer's spending must total $7,050. Your monthly premium does NOT count toward entering or leaving the coverage gap.

Once you enter catastrophic coverage, you pay only 5 percent of prescription costs for the rest of the year.

Medicare Tracks Your Spending

Medicare tracks your out-of-pocket spending throughout the year. It may feel Big Brother-ish, but this is why you don't wind up paying your yearly deductible twice. Even if you move to a new state and have to buy a new plan, Medicare knows you already paid the Part D deductible.

Tracking is also how Medicare knows when you've reached the $7,050 out-of-pocket that takes you to the catastrophic coverage phase.

Part D Drug Utilization Restrictions

Every Medicare Part D plan has certain rules and restrictions they enforce. The three most common ones are prior authorization, quantity limits, and step therapy. By enforcing these restrictions, the plan is hoping to contain costs and improve safety. Please note that not all Part D plans use all three of these restrictions on every medication. When comparing your Part D options, look for the drug utilization rules of each.

What Is Prior Authorization?

Prior authorization means that either you or your provider must get approval from your plan before a pharmacy can fill a prescription medication. Typically, this means that your insurance company wants proof that the medication is medially necessary. You'll most often see the prior authorization requirement for specialty medications. It's also common for drugs that are extremely potent or expensive.

In addition to demonstrating that the medication is medically necessary, your provider must also show why an alternative drug is not acceptable. This typically comes down to proving that alternatives were either harmful or ineffective at treating your condition.

What Are Quantity Limits?

Quantity limits restrict the amount of a prescription medication you can refill in a single time. Providers may order a prescription that exceeds the quantity limits of your plan for a particular drug. If so, then the provider needs to demonstrate why you need an exception to your Plan D provider. Most insurers provide some type of exception form.

What Is Step Therapy?

Your doctor may prescribe an expensive drug to treat your condition even though there is a generic or less expensive brand name alternative. In that case, step therapy means that you have to at least try one of the medications on a lower tier before your Part D plan will cover the more expensive alternative.

If the medication is not effective, your provider can help you file an exception request that explains why you need the more expensive alternative.

This is a requirement that could offer you a significant financial benefit. If the medication on the lower tier works, you and your insurance company both save money.

Medicare Part D and Pain Medications

Unless you've been living in a cave for the past decade, you've likely heard about America's opioid epidemic. Opioids are found in most prescription pain medications and they are highly addictive. To help protect your health, nearly every Part D carrier has some type of restriction on pain medications.

Of course, pain is a common symptom of a number of chronic conditions. Medicare beneficiaries who take prescription pain medication regularly should become familiar with their Part D plan's exception forms. As with any other medication, you also need to check the plan's drug formulary to ensure it includes your prescriptions.