Filling the Gaps with Part D: Prescription Drug Coverage

For most of your life, you have probably picked up prescriptions without thinking too much about the insurance that paid for them. In retirement, this becomes an active choice. Original Medicare (Parts A and B) does not cover the vast majority of prescription drugs you take at home. For that, you need a Medicare Part D plan.

Part D plans are offered by private insurance companies. You can buy a standalone Part D plan to go along with your Original Medicare, or you can get your drug coverage included as part of a Medicare Advantage plan (these are often called MA-PDs).

How Part D Works

Each Part D plan has its own list of covered drugs, called a formulary. It is essential to check this list to make sure your specific medications are included before you enroll. Formularies are often divided into tiers, with drugs in lower tiers (like generic medications) having lower copayments than drugs in higher tiers (like brand-name or specialty drugs).

The costs for Part D can seem complex, but they generally break down into a few parts:

Monthly Premium: You pay a monthly fee to the insurance company for the plan.

Annual Deductible: This is the amount you must pay out-of-pocket for your prescriptions before the plan starts to pay. The maximum deductible allowed by law changes each year.

Copayments or Coinsurance: After you meet your deductible, you will pay a set amount (copayment) or a percentage of the cost (coinsurance) for each prescription you fill.

The Part D Coverage Stages (The “Donut Hole”)

Part D plans have different coverage phases you move through during the year based on how much you and your plan spend on drugs. For many years, this included a dreaded “coverage gap,” often called the donut hole, where you were responsible for a much larger portion of your drug costs.

Thanks to recent legislation like the Inflation Reduction Act, these costs are changing significantly. The coverage gap is effectively closing. More importantly, starting in 2025, there will be a new annual cap on what you have to pay out-of-pocket for your prescription drugs under Part D. The cap for 2025 is expected to be around $2,000. This is a landmark change in Medicare benefits 2025 and will provide much-needed financial protection for people with high drug costs.

Even if you do not take many prescriptions now, it is strongly recommended that you enroll in a Part D plan when you first become eligible for Medicare. If you delay and sign up later, you may have to pay a permanent late enrollment penalty, which is added to your monthly premium for as long as you have coverage.