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When you first sign up for Medicare, you need to choose a plan for Part A (in-hospital care) and Part B (care outside hospitalization). But there’s still one gaping hole in coverage: prescription drugs.
That’s where Medicare Part D comes in, offering separate coverage options to help pay for prescription meds. Some Medicare Part D plans don’t charge a premium, while the average for those that do was around $40 in 2021.
Do You Need Medicare Part D Coverage?
Medicare Part D is optional coverage when you enroll in Medicare. If you are healthy, or you only use a few cheap generic medications, you might be tempted to skip buying a Medicare Part D plan when you first sign up for Medicare for drug coverage.
That can be a costly mistake.
If you don’t sign up for Medicare Part D when you first enroll in Medicare, you can only add a plan during the annual enrollment period—from October 15th to December 15th each year. Coverage won’t kick in until January of the following year.
“We never know what’s around the corner,” cautions Medicare expert Diane J. Omdahl, co-founder of Sixty-Five Incorporated. “If you don’t have Medicare Part D coverage and you get sick in January, you are going to pay out of pocket for all your medications until the following calendar year.”
There is also a penalty for missing your initial sign-up window for Medicare Part D (more on this later).
There’s one caveat to be aware of. If you are still eligible for prescription drug coverage through an employer or former employer, and it’s as good as a standard Medicare Part D plan—what’s referred to as “creditable” coverage—you can switch to Medicare Part D within two months of losing workplace coverage without running into the late-signup penalty.
How Does Medicare Part D Work?
Medicare Part D covers prescription drugs that you use at home. Chemotherapy drugs and other medications that are administered intravenously are covered by Medicare Part B.
Your out-of-pocket costs depend on the formulary of a given plan and the specific tier a drug falls in. Welcome to the world of Medicare-speak! Here’s the translation:
- Formulary. This is a plan’s list of drugs and medications a Medicare Part D plan covers. The formulary includes generic and brand-name drugs.
- Tier. Medicare Part D plans sort drugs in their formulary into different groups. These groups determine how much an enrollee pays out of their own pocket.
A common tier structure you might encounter looks like this:
- Tier 1: Generic drugs. According to the Kaiser Family Foundation in 2021 about half of plans charge no copayment for Tier 1, and the other half charge a copay of $6 or less for each prescription.
- Tier 2: Brand-name prescription drugs the plan prefers you use. For a stand-alone Medicare Part D plan in 2021, 82% charged a copay of $47 or less, and 18% charged coinsurance of less than $25. For Part D included in a Medicare Advantage plan, nearly all charged a copay of $47 or less.
- Tier 3: Brand-name prescription drugs absent from the plan’s preferred list. For a stand-alone plan in 2021, coinsurance is most common. More than 7 in 10 plans charge coinsurance of at least 40%, with the rest charging a lower coinsurance rate. For Part D included in a Medicare Advantage plan, copayments are the norm. In 2021, more than 80% of plans charged a copay of $90 to $100.
- Tier 4: Specialty drugs. For a stand-alone plan in 2021, two–in–three charged coinsurance of 25%, a fifth charged between 25% and 33%, and a minority of plans charged the maximum allowable 33% coinsurance rate. For Part D included in a Medicare Advantage plan, more than half charged the maximum allowable 33% coinsurance rate, and another 40% charged between 25% and 33%.
“You have to consider more than just the premium for your Part D coverage,” says Omdahl. “You need to look at what you will be paying for your specific prescriptions.”
A Medicare Part D plan with a $60 monthly premium that doesn’t have a copay for the two drugs you refill each month, for example, would cost you less than a zero-premium plan that charges you a $40 copay for each of those two drugs.
And just to keep you on your toes, a drug that is Tier 1 in one plan can be Tier 2 in another. Moreover, plans are within their rights to shift a drug’s tier at any time. The somewhat good news: they have to give you advance warning of changes, and every year during the annual enrollment period you can shop for a new plan that works better with your meds.
There Are Two Paths to Medicare Part D
When you first enroll in Medicare you must choose between original Medicare or Medicare Advantage. That decision impacts how you can get prescription drug coverage through a Part D plan.
If you enroll in original Medicare, you need to purchase a separate Medicare Part D plan from a private insurer. If you choose to enroll in a Medicare Advantage plan, your Part D coverage is typically included. In cases where it’s not included in Medicare Advantage plans, you can purchase a separate Medicare Part D plan.
Regardless of which Medicare program you opt for—original or Advantage—you typically have at least two dozen different Medicare Part D plans to choose from.
Medicare Part D’s Inescapable Cost Sharing Structure
There is currently no annual maximum out-of-pocket limit on what you can owe in a given year. There’s a four-step maze that determines your share of the costs of medication.
- Deductible period. Some plans charge an annual deductible before coverage kicks in. The maximum deductible allowed in 2021 is $445.
- Initial coverage period. Once your insurance kicks in, you will owe whatever coinsurance or copay your plan imposes. But once the combined total of individual payments and insurer payments reaches $4,130 in 2021 (the limit is reset each year), you officially enter the Medicare Part D donut hole.
- Coverage gap. Otherwise known as the Medicare Part D donut hole, during this stretch you owe 25% of your medication costs. In 2021, enrollees stay in the donut hole until their out-of-pocket spending plus discounts they received for brand name drugs reaches at least $6,550. Then it’s on to the final cost-sharing stage.
- Catastrophic coverage. After your out-of-pocket spending (not including premiums) hits the maximum for the coverage gap, you leave the donut hole and your cost sharing drops to 5% for the rest of the year.
The non-profit Kaiser Family Foundation estimates that since 2010, the annual number of Medicare Part D enrollees whose spending lands them in the catastrophic coverage stage has grown from 400,000 to nearly 1.5 million. It also found that between 2010 and 2019, enrollees cumulatively spent nearly $10 billion when in the catastrophic stage.
There are currently bills circulating in Congress to limit the annual out of pocket costs for Medicare Part D coverage.
Which Medicare Part D Plan Is Right for You?
Medicare’s free online tool enables you to search for plans offered in your area. You can enter the specific drugs you currently take and then get a cost comparison across plans based on each plan’s specific formulary, tier system, and whether they charge copays or coinsurance.
As noted earlier, if you opt for Medicare Advantage, your Part D coverage will most likely be included in the plan you choose. But here too you want to carefully comparison shop for the plan with the best drug coverage based on your individual needs. Hint: you and a spouse might choose different Medicare Advantage plans based on your medication needs.
Independent insurance agents that specialize in Medicare can also help you sort through all the moving pieces for plans offered in your area.. Free counseling is also available through your State Health Insurance Assistance Program (SHIP).
When to Sign up for Medicare Part D
If you don’t have prescription drug coverage through an employer or former employer, you should sign up for Medicare Part D right when you sign up for Medicare Part B during your initial enrollment period (IEP).
If you don’t sign up for Part D during your initial enrollment period, you can sign up during the annual enrollment period (Oc.t 7-Dec.15) for coverage that starts the next year. But keep in mind, there’s a penalty for missing your IEP.
Beware The Medicare Part D Late-Sign Up Penalty
Every month you delay, you will owe an additional 1% of the base monthly premium rate tracked by Medicare. The 2021 base rate is $31.47. Granted that’s a penalty of less than 33 cents a month, but it can add up fast.
Let’s say someone who became eligible in 2016 waited until 2021 to sign up for Part D, for example. That’s a 60-month lag. This someone would owe a late-sign up penalty equal to 60% of the base rate. In 2021, that works out to a monthly penalty of $18.88 on top of any premium ($31.47 x 0.60). The penalty percentage stays with you for life and is recalculated each year according to that year’s base rate.
If you have creditable coverage (see above), you won’t be subject to the penalty at the point you decide to switch to Medicare Part D. But timing is crucial here. Your “special enrollment period” for Part D lasts for just two months after your creditable coverage ends. After that, you have to wait for the annual enrollment period, and a penalty fee will be levied for each month you’re late.
How to Sign up for Medicare Part D
You must be enrolled in both Medicare Part A and Part B to be eligible for Medicare Part D. The government’s Medicare finder tool will link you to available plans in your area.
You can buy directly from insurers, or work with an independent Medicare insurance agent (agents are paid by the insurer, not you).