Understanding Medicare Part D Costs

Medicare Part D is a medication insurance program administered through private insurance companies. It’s essential to know Part D has:

• different levels of coverage and costs.
• a specific list of drugs available for each plan.
• a list of in-networkIn-network refers to the doctors, hospitals and other providers that are inside of your provider network. This is the group of providers that has agreed with your health insurance company to treat its customers. pharmacies that you are required to use after enrollment.

You pay a monthly premium for prescription drug coverage in addition to your Medicare Part B premium. The average Part D premium in 2020 is $32.741, ^[1] though the cost can vary with different plans.

Part D costs depend on:

• The prescription drugs you need
• The plan you join 
• Whether you use a pharmacy in your plan’s network
• Whether the drugs you use are on your plan’s formulary
• Whether you’re eligible for Extra Help (a financial assistance program)

Other costs to consider:

• Medicare Part D monthly premiums
• Medicare Part D annual deductibles
• Co-paymentsA co-payment is the fixed amount you pay directly to your provider for medical services or prescription drugs covered in your plan. For example: If your plan includes a co-payment of $20 for office visits, you'll pay $20 to your doctor whenever you have an appointment. or co-insuranceCo-insurance is the percentage of your medical costs that you pay after you meet your deductible. The remaining amount is paid by your insurance company. For example: If you have a $1,000 medical bill and your co-insurance is 20%, you'll pay $200. Your insurance company will cover the final $800.
• Late enrollment penalty

Your income plays a role in determining your Part D premium. You’re required to pay more for your prescription drug plan if you made more than $87,000 as an individual or $170,000 as a couple when filing your most recent tax return. The calculation is known as the income-related monthly adjustment amount (IRMAA).Income-Related Monthly Adjustments determine the premium costs for Medicare Part B and Part D based on your income. If you have a higher income and are enrolled in Medicare Part B or D, you are likely to have higher premiums. The IRMAA amounts change each year. 

Medicare Part D plans have different levels of “tiers,”Drug tiers are the categories health insurance companies use to categorize the prescription drugs they cover. The tiers typically range from One to Five. Tier one is the lowest and usually includes the least expensive generic drugs. Tier Five includes specialty drugs that are usually very expensive, and some carriers include a Sixth Tier. which determines the cost of certain prescription drugs on the plan’s formulary list.A Prescription Drug Formulary is a list of all the prescription drugs covered by your health insurance. These drugs can be name brand or generic and are broken up into four categories for pricing. Medications that fall into the first tier have the lowest co-pays or co-payments. The price goes up with each tier.  

• Tier 1 has the lowest co-pay for generic drugs. To receive approval from the Food and Drug Administration, generic drug makers must prove that their product performs the same way as the corresponding brand name drug. Generic drugs use the same active ingredients as brand name drugs to achieve desired results.
• Tier 2 has a medium co-pay for preferred brand name drugs. Preferred brand name drugs are medications manufactured by one manufacturer that are typically lower-cost among all brand name drugs. This is partly because these medications have been in the market for some time and are widely accepted).
• Tier 3 has a higher co-pay for preferred brand and non-preferred brand name drugs. Non-preferred brand name drugs, on the other hand, tend to cost more because they are new to the market. You may have heard the term “designer drugs.” These high-cost drugs fall into the same category.
• Tier 4 has a higher co-pay for non-preferred brand drugs and non-preferred generic drugs.
• Tier 5, or the Specialty Tier, has the highest co-pay. It contains very high cost brand and generic drugs, which may require special handling and/or close monitoring.

Medicare Part D Payment Stages

There are four stages of costs for Medicare Part D: annual deductible, initial coverage, coverage gap or “donut hole” and catastrophic coverage. You’re responsible for paying different amounts in each stage.

Stage 1: Medicare Part D Annual Deductible

• What does it mean? You pay 100% of prescription drug costs until you reach a certain amount set by your plan. The maximum deductible for 2020 is $435. However, some plans don’t have a deductible. If that’s the case, you will skip the first phase and start in initial coverage.
• When’s the next stage? This phase continues until you reach your deductible. Then, you move into the initial coverage stage.
• Example: Let’s say your annual deductible is $400 and your retail medication costs $250. You pay $250. You need to spend $150 more to reach your deductible.

Stage 2: Medicare Part D Initial Coverage

• What does it mean? You pay a portion of the costs through co-insurance or co-pays, while your Part D plan pays the rest. The tier usually determines the price of your prescription drug.
• When’s the next stage? Initial coverage continues until you and your insurance carrier reach $4,020 in 2020. Then, you move into the coverage gap stage.
• Example: Let’s say your retail medication costs $100 and your plan pays $70. Your co-pay is $30.

Stage 3: Medicare Part D Coverage Gap (Donut Hole)

• What does it mean? You can’t be charged more than 25% of your medications’ retail cost, which is likely more than you paid in the initial coverage stage. Before 2006, Medicare beneficiaries were responsible for 100% of their drug costs after reaching their initial coverage limit.
• When’s the next stage? The coverage gap continues until you’ve spent $6,350 out-of-pocket in 2020. Then, you move into the catastrophic coverage stage.
• Example: Let’s say your retail medication costs $400 and your plan pays $300. You pay 25% or $100.

Stage 4: Medicare Part D Catastrophic Coverage

• What does it mean? You pay whichever is higher: 5% of costs for your covered drugs, or $3.60 for generic drugs/$8.95 for brand-name drugs.
• When’s the next stage? Catastrophic coverage continues until the end of the year. Then, you will return to the deductible stage on January 1.
• Example: Let’s say your retail medication costs $500 and your plan pays 95% or $475. You pay the remaining 5% or $25.

You should be aware of Medicare Part D’s lifetime late enrollment penalty if you miss the Initial Enrollment Period. The penalty applies if you go for more than 63 days after your Initial Enrollment Period without creditable drug coverage.

The late enrollment penalty cost is calculated by Medicare when you enroll in a Part D plan. To calculate the penalty,  multiply 1% of the yearly average premium (which is $32.74 in 2020) by the number of eligible months you did not have Part D insurance. Then, you round to the nearest ten cents. 

Example: Let’s say your Initial Enrollment Period ended March 31, 2018. You waited until December 2019 to join a Part D plan during the Open Enrollment Period. Your policy went into effect on January 1, 2020, which means you went 21 months without creditable coverage.

Here’s how to calculate the penalty:

.21 (multiply 1% by the number of months you went without coverage even though you were eligible to enroll) X $32.74 (2020 average Part D premium) = $6.90 ($6.88 before rounding to the nearest $.10)

The cost of the penalty can change if the national premium average increases or decreases. A late enrollment penalty can remain in effect as long as your Part D plan is active.

Do you have more questions about enrollment and how to avoid the penalty? Check out our guide on how to navigate Medicare Part D enrollment.

Medicare offers a program called Extra Help to assist with Part D costs for those with limited income and resources. Extra Help is estimated to be worth $5,000 per year. ^[3] If you qualify, the program helps cover your premiums, deductibles and co-insurance costs.

Extra Help Eligibility

To qualify for Extra Help, a person must be receiving Medicare, have limited resources and income, and reside in one of the 50 States or the District of Columbia. If you’re not sure if you are eligible based on income or resources, you can apply.

Ways you can automatically qualify for Extra Help:

• You already qualify for Medicare and MedicaidMedicaid is a state-based health insurance program based on an individual's financial needs. 
• You are enrolled in a Medicare Savings Program 
• You already receive Supplemental Security Income (SSI) benefits

You’re eligible for Extra Help if both apply:

• Your resources are limited to $14,610 for individuals or $29,160 for couples. Resources include savings, investments, real estate outside of a primary residence, stocks and more.
• Your annual income is limited to $19,140 for individuals or $25,860 for couples.

How to Apply for Extra Help

If you don’t automatically qualify but meet the limited requirements listed above, you can apply for Extra Help online, by telephone (1-800-772-1213) or by visiting your local Social Security office. You will need bank account statements, investment statements, stock certificates, tax returns, pension award letters and payroll slips.