Medicare was created in 1965. The federal government did not pass a law to add prescription drug coverage until 2003 and those benefits did not kick in until 2006. Although Part D has saved people millions in drug costs over the years, it can still be tricky to track your dollars and cents. From the deductible to the donut hole, these are the Part D costs you can expect to pay for your medications.

Part D premiums, the Income-Related Monthly Adjustment Amount, and Part D late fees are addressed elsewhere.

What Is Medicare Part D?

Medicare Part D is a prescription drug plan run by private insurance companies. In order to offer these plans, the insurance company must sign a contract with the federal government. There are rules they need to follow or else the company could lose the privilege of offering these plans to the public.

Part D plans negotiate with pharmaceutical companies to get drugs onto their formularies at the lowest rates. Just like you, the plan does not want to pay more than they have to. The plans then place these drugs in tiers. The higher the tier, the higher the cost to you (and to your Part D plan). Generally speaking, tier 1 includes inexpensive generic medications and more expensive brand-name medications are included in higher tiers.

What Does Part D Cover

Part D plans tend to offer broad coverage. The government requires they cover all drugs in each of six drug classes: AIDS/HIV, anticonvulsant, antidepressant, antipsychotic, cancer/chemotherapy, and immunosuppressant medications. They also cover at least 2 drugs in most other drug categories. They never cover over-the counter drugs, drugs purchased from other countries, vitamins/minerals (except for fluoride preparations, niacin, prenatal vitamins, and Vitamin D for a medical reason), or drugs used for the following purposes: cosmetic reasons, cough/cold symptoms, erectile dysfunction, fertility, hair growth, or weight management.

The Four Phases of Part D Coverage

To understand how Medicare Part D works, you have to understand the four phases of coverage.

The Deductible

Each Part D plan has a deductible that you pay out of pocket each year before your plan starts to pay toward your medications. The federal government sets a limit on how high a plan can set the the deductible each year. In 2023, the deductible can be no more than $505.

Initial Coverage Limit

After your deductible, you will pay your Part D plan’s coinsurance and/or copayment rates for your medications. You will continue to pay these rates until you reach the Initial Coverage Limit (ICL), which is set at $4,660 in 2023. Interestingly, the ICL is not based on how much you actually pay for your medications. It is based on the RETAIL cost of those drugs. That means the ICL counts what both you and your Part D plan pay for them.

Example: You take a medication with retail costs at $1,000 per month. Even if you pay a $100 copay and your plan covers the rest, $1,000 will count toward your Initial Coverage Limit.

Coverage Gap (aka the Donut Hole)

After you reach the Initial Coverage Limit, you enter this dreaded phase of Part D coverage. The Coverage Gap is commonly referred to as a donut hole because you lose so much of the tasty goodness (i.e., the more affordable coinsurance and/or copays) that your Part D plan offered before. It is an empty “hole”. In this phase, you will pay 25% out of pocket for each of your medications. For brand name drugs, the pharmaceutical company covers 70% of the cost and your Part D plan the remaining 5%. For generic drugs, your Part D plan covers the remaining 75%.

You will continue to pay at this rate until you reach the Out of Pocket Threshold, $7,400 in 2023. This includes the Initial Coverage Limit amount. What your Part D plan pays does not count during the Coverage Gap even though it counts during the Initial Coverage Limit.

Example: If a brand-name drug cost $100 for the month, you would pay $25 and the pharmaceutical company would take care of $70. Altogether, $95 would count toward your TrOOP. On the other hand, if a generic drug cost $100, you would pay $25 and only $25 would count toward your TrOOP.

How to Calculate TrOOP
(Keep in mind this is different from the Out of Pocket Threshold)

Your annual deductible
+
Any Part D copay or coinsurance you pay during the Initial Coverage Limit and Coverage Gap
+
Any pharmaceutical manufacturer discounts you get during the Coverage Gap
+
Any payments made by a Medical Savings Account (MSA), Health Savings Account (HSA), or Flexible Spending Account (FSA)
+
Any payments made by Extra Help (Part D Low Income Subsidy)
+
Any payments made by the Indian Health Service
+
Any payments made by AIDS Drug Assistance Programs, State Pharmaceutical Assistance Program, or qualifying charities

Catastrophic Coverage

Once you reach your TrOOP for the year, you enter the catastrophic phase of coverage, catastrophic because by then your wallet is likely empty! What you pay for drugs will decrease considerably in this phase. In 2023, you were set to pay $4.15 for generic drugs, $10.35 for brand-name drugs, or 5% of the retail cost of the drug, whichever cost more.

That is, until the Inflation Reduction Act was passed in August 2022. Starting in 2023, you will not pay any costs for your covered medications while you are in the catastrophic phase. Better yet, starting in 2024, your out-of-pocket costs, TrOOP will be capped at $2,000.

 

Advance Notice of Methodological Changes for Calendar Year (CY) 2023 for Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies. CMS.gov. https://www.cms.gov/files/document/2023-advance-notice.pdf

H.R.5376 – 117th Congress (2021-2022): Inflation Reduction Act of 2022. Congress.gov. https://www.congress.gov/bill/117th-congress/house-bill/5376/text

Understanding True Out-of-Pocket (TrOOP) Costs What payments count toward TrOOP costs? https://www.cms.gov/files/document/11223-ppdf

What Medicare Part D drug plans cover. Medicare.gov. https://www.medicare.gov/drug-coverage-part-d/what-medicare-part-d-drug-plans-cover