Understanding Part D Coverage and Costs

Last updated on October 14th, 2022 at 02:55 pm

Medicare Part D prescription drug coverage may just be the most confusing part of Medicare!

Estimating your out-of-pocket costs goes beyond just looking at the monthly premium. Part D costs also depend on:

  1. The medications you take and how frequently you take them
  2. Where you fill your prescriptions
  3. Your plan’s annual deductible
  4. The coverage phases you enter throughout the plan year

Below we explain more about these factors so you can better understand how Part D coverage and costs work. Keep in mind that the Part D plan with the lowest monthly premium may not be the plan with the lowest total overall cost. Although your medication needs may change in the future, entering your medications, including the dosage and frequency as well as pharmacy preference, when shopping for plans will help reveal the most accurate recommendation.

1. Medications

There are two important things to know about how your medications influence your out-of-pocket costs. First, each drug plan has its own “formulary”. A formulary is a list of drugs that the plan covers. It is important to check a plan’s formulary to confirm if your drugs are covered. If a prescribed medication is not on a plan’s formulary, you may request a formulary exception from the plan or choose to pay for the full cost of the drug out of your own pocket. Sometimes a prescribed drug is included in the formulary but is subject to restrictions such as a quantity limit or dosage limit. Most plans require that your doctor submit a formulary exception on your behalf indicating the reason that you can’t take the preferred medications and must have one that is not currently on the formulary. There is typically specific paperwork that must be turned in as part of the exception process. Make sure to call your health plan and obtain copies of the correct forms to be submitted to make your doctor’s role easier and avoid delay. 

Second, medications included in a plan’s formulary are placed into tiers. Although Part D plans generally use the same 5-tier formulary shown below, tier placement can vary across plans for the same medication. The costs of drugs vary by tier and by coverage phase. 

Tier 1 – Preferred Generic

Tier 2 – Generic

Tier 3 – Preferred Brand

Tier 4 – Non-Preferred Brand

Tier 5 – Specialty Tier

2. Where you fill your prescriptions 

Your costs can also vary depending on where you fill your prescriptions. Most Part D plans have preferred pharmacy networks that offer drugs at lower levels of cost-sharing. This may include retail and/or mail order partners. Your out-of-pocket costs may be higher if you use non-preferred pharmacies. If a pharmacy is out of network with your Part D plan, you may be responsible for the full cost of your drugs. Beneficiaries who qualify for the Low-Income Subsidy (LIS) face low out-of-pocket drug costs regardless of a pharmacy’s preferred status.

3. Your Plan’s Annual Deductible

The Medicare Part D deductible is the amount you must pay for your prescription drugs before your plan begins to pay. However, not all drugs are subject to the deductible. For example, in some plans, the deductible may only apply to tier 3 drugs or higher. The amount of the Part D deductible can vary by plan, but Medicare dictates a maximum. Some plans have a $0 deductible.  

4. The Coverage Phases You Enter Throughout the Year

Every Medicare Part D plan has 4 distinct coverage phases. Drug costs vary by coverage phase. If you have enough drug costs, you could enter all 4 of these coverage phases during the plan year which runs from January 1 thru December 31. It can be frustrating and confusing, but the summary below aims to provide the important things you need to know. 

Deductible Phase

This is the first phase each plan participant starts out in. In this phase, you are 100% responsible for your prescription drug costs until your deductible is met. Remember, not all drugs are subject to the deductible, and not all plans have a deductible, so be sure to understand if and how this applies to your situation.

Initial Coverage Phase

After you meet your deductible, if applicable, you move into the Initial Coverage Phase. During this phase, you pay a copay or coinsurance for your drugs based on the drug’s tier. Remember that copays and coinsurance can vary depending on where you fill your drugs. Preferred network pharmacies usually offer drugs at the lowest level of cost-sharing. In 2023, you remain in this initial coverage phase until you and your plan spend $4,660 combined on drugs, including your deductible if applicable. In 2022 this initial coverage limit is $4,430. 

Coverage Gap (also known as the “Donut Hole”)

Once you and your plan spend a combined $4,660 during the year ($4,430 in 2022), you enter the Coverage Gap Phase, also known as the “Donut Hole”. During this phase, you pay 25% of the cost for all drug tiers (brand-name drugs and generic drugs) until you spend $7,400 in 2023 ($7,050 in 2022). The applicable manufacturers drug discounts also counts towards this out of pocket threshold. Once your out-of-pocket costs reach $7,400 in 2023, you’ll leave the Donut Hole.

Catastrophic Coverage

You’ll reach the Catastrophic Coverage Phase if your out-of-pocket drug costs reach $7,400 during 2023 ($7,050 in 2022). During this phase, you will pay no more than 5% of the cost for covered drugs for the rest of the calendar year. 

Part D plans can change annually, and your medication needs may change too. We recommend re-evaluating your Medicare Part D prescription drug coverage every year during the annual Open Enrollment Period (AEP) which runs October 15 thru December 7. During this time, you can make a change to your Part D plan and any changes made will be effective on January 1st