What is Medicare Part D?

by David Bynon, last updated

Medicare Part D plans are an optional benefit Medicare beneficiaries can use to get outpatient prescription drug coverage. Part D plans provide cost-sharing on covered medications in four different phases: deductible, initial coverage, coverage gap, and catastrophic. Each phase has a different level of cost-sharing.

Key Takeaways

  • Medicare Part D plans are regional and vary in their costs. In most areas, plan premiums start at less than $20 per month.
  • Medicare Part D plans have a monthly premium and out-of-pocket costs when prescriptions are filled.
  • Most Medicare Advantage plans include a Part D plan.
  • There are four distinct cost-sharing phases that determine how much a plan member will pay out-of-pocket for the prescriptions.
  • Beneficiaries can join a Part D plan (or Medicare Advantage plan that includes Part D) during their Initial Enrollment Period (IEP) or the Annual Enrollment Period (AEP).
  • A late penalty may apply if a Medicare beneficiary does not have creditable prescription drug coverage (Part D, employer group coverage, VA health, etc) for 63 days in a row.
  • Qualifying Part D beneficiaries can receive financial assistance, called Extra Help, with their plan’s out-of-pocket costs.

Medicare Part D plans offer cost-sharing coverage on outpatient prescription medications. Each Part D plan has a formulary that lists all medications covered and their cost tier:1Medicare.gov, “How to get prescription drug coverage“, Accessed October 14, 2021

  • Tier one: mostly generic drugs that have the lowest costs.
  • Tier two: preferred brand-name drugs with moderate costs.
  • Tier three: non-preferred brand-name drugs with the second-highest costs.
  • Specialty tier: specialty and highly protected drugs with the highest costs.

Who Qualifies for Medicare Part D?

Most people qualify to join a Medicare Part D plan at age 65 when they enroll in Medicare Part A and/or Part B. People with certain disabilities, who qualify for Social Security Disability Insurance (SSDI), can join a Medicare Part D plan on or after their 25th month of SSDI payments. Those with end-stage renal disease or amyotrophic lateral sclerosis qualify on their first month of SSDI.2Medicare.gov, “When does Medicare coverage start?“, Accessed October 14, 2021

How Medicare Part D Works with Other Insurance

In order to join a Part D plan, beneficiaries must first be enrolled in Medicare Part A and/or Medicare Part B. Part D plans can also work with Medicare Advantage plans if it does not have its own built-in drug coverage1Medicare.gov, “How to get prescription drug coverage“, Accessed October 14, 2021. If a beneficiary has purchased a Medigap policy with prescription drug coverage, they cannot have a Part D plan at the same time unless they request their Medigap insurance company to remove the drug coverage from their policy3Medicare.gov, “Medigap & Medicare drug coverage (Part D)“, Accessed October 14, 2021.

How Much Does Part D Cost?

Medicare Part D plans have multiple costs. Plan costs can be broken down into:

  • Monthly premium
  • Annual deductible
  • Copayments and/or coinsurance

Out-of-pocket costs for a beneficiary’s prescriptions will vary by plan, region, and coverage phase, as explained below. 4Medicare.gov, “Costs for Medicare drug coverage“, Accessed October 14, 2021

Late Enrollment Penalty for Part D

Medicare Part D plans are a voluntary benefit. However, not joining a Medicare Part D plan while eligible may lead to late penalties.

If a Medicare beneficiary does not have Medicare Part D or other creditable prescription drugs coverage for at least 63 consecutive days, a late enrollment penalty may be applied the next time the beneficiary joins a plan. The Part D penalty is a one percent increase to the Part D monthly premium for each month the beneficiary was not enrolled in Part D. The penalty does not apply to beneficiaries receiving Extra Help benefits.5Medicare.gov, “Part D late enrollment penalty“, Accessed October 14, 2021

If Medicare determines that a beneficiary owes a late penalty they will send a letter of determination explaining the penalty and monthly premium increase. Beneficiaries can appeal the determination. Medicare will review appeals within 60 days of receipt. In most cases, Medicare will accept an appeal that includes documented proof of other creditable coverage through an employer, employee union, or the Veteran Administration.5Medicare.gov, “Part D late enrollment penalty“, Accessed October 14, 2021

What Are The Four Phases of Part D Coverage?

Medicare Part D has four distinct cost-sharing phases. Each phase has different out-of-pocket costs for the beneficiary.

Phase 1: Deductible

The first phase of Part D coverage is the annual deductible. During the deductible phase, the beneficiary pays all costs for their prescriptions until the deductible is met. Some plans have a zero-dollar deductible ($0), while others have a deductible up to the annual maximum ($480 is 2022). Once the deductible is met the plan begins paying its share in the initial coverage phase.7Medicare.gov, “Yearly deductible for drug plans“, Accessed October 14, 2021

Phase 2: Initial Coverage

In the initial coverage phase, the beneficiary and the plan share costs up to the initial coverage limit (ICL). In this phase, the beneficiary pays a copayment or coinsurance when their prescriptions are filled. The amount is determined by the plan’s formulary and the cost tier of each medication. Lower cost tiers have lower copayments. This phase continues until total combined retail spending (beneficiary and plan) reaches the annual ICL ($4,430 in 2022). Once reached, the coverage gap phase begines8Medicare.gov, “Copayment/coinsurance in drug plans“, Accessed October 14, 2021

Phase 3: Coverage Gap

The third phase is the coverage gap, also known as the donut hole. In this phase, beneficiaries pay up to 25 percent of the retail cost for their name-brand medications. The manufacture and Medicare pay the remainder. However, 95 percent of the total retail cost counts towards getting out of the coverage gap. For generic medications, Medicare covers seventy-five percent and the beneficiary pays the remaining 25 percent. Once a beneficiary’s true out-of-pocket costs (TrOOP) reach the annual spending limit ($7,050 in 2022), the catastrophic coverage phase begins.9Medicare.gov, “Costs in the coverage gap“, Accessed October 14, 2021

Phase 4: Catastrophic Coverage

The fourth phase is catastrophic coverage. In this phase, beneficiaries pay only a small copayment or coinsurance for their medications for the remainder of the year.10Medicare.gov, “Catastrophic coverage“, Accessed October 14, 2021

How to Compare Medicare Part D Plans

To enroll in a Part D plan, the beneficiary must be in the service area of the plan they want to join. Part D plans are regional and the costs of Part D plans vary by state. When choosing a plan, beneficiaries should consider whether they only need a basic benefit plan or if they need an enhanced benefit plan.11Medicare.gov, “6 ways to get help with prescription costs“, Accessed October 14, 2021

Basic benefit plans will have lower premiums than enhanced plans but they do not cover as many drugs, usually only cover generic versions. Enhanced benefit plans have a higher premium but also have benefits like coverage for brand-name drugs and provide additional coverage during the coverage gap phase. Some enhanced benefit plans even exclude one or two tiers from the plan’s deductible so drugs in those plan tiers will be covered before the plan’s deductible is met.11Medicare.gov, “6 ways to get help with prescription costs“, Accessed October 14, 2021

Lowering Costs with Network Pharmacies and Mail-Order

A Part D plan may have one or more preferred pharmacies that it contracts to provide prescriptions with lower out-of-pocket costs. Many Part D plans also have mail-order pharmacies that allow members to order 60-day or 90-day supplies at a reduced cost.12Medicare.gov, “Using your drug plan for the first time“, Accessed October 14, 2021

Extra Help with Part D Costs

Beneficiaries who are eligible for Low Income Subsidies (LIS), commonly known as the Extra Help program, can receive additional assistance with Part D premiums and copayments. Beneficiaries who are receiving Extra Help benefits but are not in a Part D plan will be automatically enrolled in a benchmark plan in their region.13CMS.gov, “Limited Income and Resources“, Accessed October 18, 2021

Each Medicare region has one or more benchmark plans. Benchmark plans are those with premiums and shared costs at or below the regional benchmark premium and provide the standard benefit. The regional benchmark premium is based on an average of all monthly premiums for PDPs and Medicare Advantage prescription drug plans in the region. Medicare examines all plans annually to determine LIS eligibility.14CMS.gov, “Medicare Part D Roulette: Potential Implications of Random Assignment and Plan Restrictions“, Accessed October 18, 2021

Medicare Plan Comparison Tool

Medicare provides an online plan comparison tool for beneficiaries to compare Part D plans in their region. This online tool enables beneficiaries to compare Part D plans with Original Medicare, Part D plans with Medicare Advantage plans, and Medigap policies with or without Part D. There is even an option to compare Medicare options side-by-side before looking at Part D plans.15Medicare.gov, “Answer a few quick questions“, Accessed October 19, 2021

People using the tool must first select which of the previously mentioned coverages they have, enter their zip code, and specify if they are benefiting from any assistance programs for Medicare costs. They can then add any prescription drugs they want to see the costs of when comparing plans. Once the person has done this, they can select up to five different pharmacies in their area to compare, including mail-order pharmacies.15Medicare.gov, “Answer a few quick questions“, Accessed October 19, 2021

The tool will then provide the user with 25 plan options for prescription drug coverage in their region. They can check the add to compare box and compare three plans at a time. Each plan option will provide information about:15Medicare.gov, “Answer a few quick questions“, Accessed October 19, 2021

  • The plan’s monthly premium.
  • The plan’s deductible.
  • The plan’s estimated annual cost for the listed drugs and premium combined.
    • Mail-order pharmacy annual costs will also be listed if selected.
  • A one-to-five star rating of the plan’s overall quality.
  • How many pharmacies selected are in-network for the plan.
  • A plan details button that will explain:
    • Which of the drugs listed are covered by the plan
    • How much the listed drugs cost at each in-network pharmacy.


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