Medicare Part D is the component of Medicare that provides prescription drug coverage. It is offered through private insurance companies approved by Medicare and is available to all Medicare beneficiaries. Understanding how Part D works, how to choose a plan, and how to avoid costly mistakes can help Medicare beneficiaries manage their prescription drug costs more effectively.
How Medicare Part D came to be
Medicare Part D was created by the Medicare Modernization Act of 2003 and took effect in 2006. Before Part D was created original Medicare did not cover outpatient prescription drugs leaving many Medicare beneficiaries to pay the full cost of their medications out of pocket. Part D filled this significant gap in Medicare coverage and today covers prescription drugs for tens of millions of Americans.
How Medicare Part D works
Medicare Part D coverage is provided through private insurance companies that have been approved by Medicare to offer drug plans. Each Part D plan has its own list of covered drugs called a formulary, its own cost sharing structure, and its own premiums.
Part D coverage is available in two ways:
- Standalone Part D plan — a separate prescription drug plan that can be added to original Medicare or in some cases to certain types of Medicare Advantage plans that do not include drug coverage
- Medicare Advantage plan with drug coverage — MAPD — most Medicare Advantage plans include Part D drug coverage combining hospital, medical, and drug coverage into a single plan
What Part D covers
Part D plans cover a wide range of prescription drugs including brand name and generic medications. Each plan maintains a formulary — a list of covered drugs — that is organized into tiers with different cost sharing levels:
- Tier 1 — preferred generic drugs, typically the lowest cost sharing
- Tier 2 — non-preferred generic drugs
- Tier 3 — preferred brand name drugs
- Tier 4 — non-preferred brand name drugs
- Tier 5 — specialty drugs, typically the highest cost sharing
Not all drugs are covered by all Part D plans. If a drug you take is not on a plan’s formulary you may be able to request an exception or choose a different plan that covers your medication.
Part D costs
Part D plans have several cost components:
- Premium — the monthly amount you pay for Part D coverage. Premiums vary by plan and location. People with higher incomes pay an additional amount called the Income Related Monthly Adjustment Amount — IRMAA.
- Deductible — some plans have an annual deductible that must be met before the plan begins paying for drugs. The maximum deductible allowed by Medicare is adjusted annually.
- Copays and coinsurance — your share of the cost for each prescription after the deductible is met. The amount varies by the drug’s tier on the plan’s formulary.
- Out of pocket maximum — beginning in 2025 Medicare Part D plans have a cap on out of pocket drug costs. Once you reach this cap you pay no more for covered drugs for the rest of the year. This is a significant new protection for people with high drug costs.
The low income subsidy — Extra Help
People with limited income and resources may qualify for the Low Income Subsidy — also called Extra Help — a federal program that helps pay Part D premiums, deductibles, and copays. Extra Help can significantly reduce prescription drug costs for eligible beneficiaries.
To find out if you qualify for Extra Help contact the Social Security Administration at ssa.gov or call 1-800-772-1213. You can also apply through your state’s Medicaid agency.
When to enroll in Part D
It is important to enroll in Part D at the right time to avoid late enrollment penalties:
- Initial enrollment period — you can enroll in Part D during your seven month initial enrollment period around your 65th birthday
- Annual open enrollment period — October 15 through December 7 each year when you can join, switch, or drop a Part D plan
- Special enrollment periods — available in certain situations such as losing other creditable drug coverage
If you do not enroll in Part D when you are first eligible and do not have other creditable drug coverage — coverage at least as good as Medicare Part D — you may face a late enrollment penalty. The penalty is added to your monthly premium permanently and increases the longer you wait to enroll.
How to choose a Part D plan
Choosing the right Part D plan requires comparing plans based on your specific medications. Steps to choose a plan include:
- Make a list of all your current prescription drugs including the dosage and how often you take them
- Use Medicare’s Plan Finder tool at medicare.gov to compare plans available in your area
- Enter your medications into the Plan Finder to see which plans cover your drugs and at what cost
- Compare total annual costs including premiums, deductibles, and estimated drug costs for your specific medications
- Consider the plan’s pharmacy network — using preferred pharmacies can reduce your costs
- Check the plan’s star rating — higher rated plans generally provide better service
The lowest premium plan is not always the best choice. A plan with a higher premium but lower drug costs for your specific medications may cost less overall.
Reviewing your Part D plan annually
Part D plans can change their formularies, premiums, and cost sharing from year to year. It is important to review your Part D coverage every year during the annual open enrollment period — October 15 through December 7 — to make sure your plan still covers your medications at a reasonable cost and to compare it with other available plans.
Finding help with Part D
The State Health Insurance Assistance Program — SHIP — provides free unbiased counseling to Medicare beneficiaries and their families to help them understand and compare Part D plans. To find your state’s SHIP program visit shiphelp.org or call 1-800-MEDICARE.
Key terms to know
- Medicare Part D — the Medicare program that provides prescription drug coverage through private insurance plans
- Formulary — a list of drugs covered by a Part D plan organized into tiers with different cost sharing levels
- Premium — the monthly amount paid for Part D coverage
- Deductible — the amount paid out of pocket before Part D coverage begins
- Low Income Subsidy — Extra Help — a federal program that helps low income Medicare beneficiaries pay Part D costs
- Late enrollment penalty — a permanent premium increase imposed on beneficiaries who did not enroll in Part D when first eligible
- IRMAA — Income Related Monthly Adjustment Amount, an additional premium paid by higher income Medicare beneficiaries
- Creditable coverage — prescription drug coverage at least as good as Medicare Part D that exempts a person from the late enrollment penalty
Sources
- Medicare.gov — Part D Drug Coverage
- Centers for Medicare and Medicaid Services
- Social Security Administration — ssa.gov
- State Health Insurance Assistance Program — shiphelp.org
This article is for general informational purposes only and does not constitute legal or financial advice. Medicare Part D plan details costs and rules are subject to change annually. Consult a licensed insurance professional or contact your state SHIP program for guidance specific to your situation.