What Does Medicare Part D Cover? - dummies

What Does Medicare Part D Cover?

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Part D, Medicare’s program for covering prescription drugs, is a complicated benefit that resembles no other type of drug coverage ever devised. That’s why understanding how it works before plunging in is really important.

Here are some of the peculiarities of Part D coverage — how it can fluctuate during the year, how different plans have their own lists of drugs they cover, and which drugs are excluded from Part D and which must be covered.

It sounds crazy, but you may find yourself paying different amounts for the same medicines at different times of the year. That’s because Part D drug coverage is generally divided into four phases over the course of a calendar year.

Whether you encounter only one phase or two, three, or all four depends mainly on the cost of the prescription drugs you take during the year — unless you qualify for low-cost Extra Help. Here’s the breakdown:

  • Phase 1, the annual deductible: If your Part D drug plan has a deductible, you must pay full price for your drugs until the cost reaches a limit set by law ($325 in 2013; $310 in 2014) and drug coverage actually begins. Many plans don’t charge deductibles or charge less than the limit. But if your plan has a deductible, this period begins on January 1 or whenever you start using your Medicare drug coverage.

    Note: Yes, the cost threshold amounts for Phase 1 (as well as Phases 2 and 3) actually went down between 2013 and 2014 — the first time such a reduction has ever happened. The reason? Government spending on Part D was lower in 2013.

  • Phase 2, the initial coverage period: This stage begins when you’ve met any plan deductible. Otherwise, it begins on January 1 or whenever you start using Medicare drug coverage. You then pay the co-payments required by your plan for each prescription, and the plan pays the rest.

    This period ends when the total cost of your drugs — what you’ve paid plus what your plan has paid — reaches a certain dollar limit set in law ($2,970 in 2013; $2,850 in 2014).

  • Phase 3, the coverage gap: This gap — often called the doughnut hole — begins when you hit the limit of initial coverage and ends if and when the amount you’ve spent out-of-pocket on drugs from the beginning of the year hits another dollar limit set in law ($4,750 in 2013; $4,550 in 2014).

    Until 2011, you would’ve had to pay 100 percent of the cost of your drugs in the gap. Now you pay a lot less because under the Affordable Care Act, the gap is gradually shrinking. In 2013 and 2014, you get a discount of 52.5 percent on brand-name drugs in the gap.

    For generic drugs, you get a discount of 21 percent in 2013 and 28 percent in 2014. These discounts, which come partly from the drug manufacturers and partly from the government, get larger until by 2020, you pay no more than 25 percent of the cost of any drugs in the gap.

    What’s more, the discounts count toward the dollar out-of-pocket limit that gets you out of the gap; that is, you get credit for having paid full price even though you’re receiving the discount.

  • Phase 4, catastrophic coverage: If your drug costs are high enough to take you through the gap, coverage kicks in again. At this point, your share of the costs drops sharply. You pay no more than 5 percent of the price of each prescription. Catastrophic coverage ends on December 31.

    The next day, January 1, you return to Phase 1 (or Phase 2 if your plan has no deductible), and the whole cycle starts over again.

This figure is a quick way of looking at the same cycle of coverage.

Phases of Part D drug coverage and dollar limits.
Phases of Part D drug coverage and dollar limits.

The figure shows this information in a different way. Here, you can see examples of brand-name drugs costing (for the sake of simplicity) $100, $200, or $300 per one-month prescription — and what you’d pay for them in each phase of coverage. These examples assume co-pays during the initial coverage period of $45 for each prescription, although co-pays vary widely among Part D plans.