Throughout my career, the most challenging part of Medicare for my clients to understand has always been Medicare Part D. Medicare Part D, also known and PDP, is an essential part of your overall Medicare planning. If overlooked, it can also be a blind spot where you can lose a lot of money. Medicare Part D covers outpatient prescription drugs. That’s it, folks. But if you take a look at a standard PDP plan, it’s full of confusing concepts. Let’s break it down so that you can get a handle on it.
Part D plans are private insurance policies. They are the only way to get prescription drug coverage with Medicare because original Medicare does not cover outpatient prescription drugs. Insurance companies that sell Part D plans get subsidies from the federal government to keep the cost low for Medicare beneficiaries and to give the insurers an incentive to sell this type of insurance. As part of that arrangement, Part D plans must all follow a specific model of coverage, to remain contracted with Medicare. Insurers can match the model or offer more coverage, but they can never provide less coverage than the standard model.
The PDP Model of Coverage
Part D plans have prescription drug formularies. A formulary is a fancy word for the list of prescription drugs covered by the plan. According to the model, all formularies must include at least two medications for every known Medicare-approved therapy. The formulary is divided into tiers by order of cost. It looks similar to this:
Tier 1: generics
Tier 2: preferred brand name prescriptions
Tier 3: non-preferred brand name prescriptions
Tier 4: high cost prescriptions
Some plans have slight variations within the parameters established in the model.
All Part D plans are divided into coverage periods or phases.
The Deductible Phase
In the deductible phase, you pay the full price of your prescriptions until you reach the plan deductible. Some plans exclude tier one and two generics from the deductible so that your coverage starts immediately for lower-tier drugs.
The Initial Coverage Period
After the deductible, you enter the initial coverage period where the insurance company steps in, and they will pay the lion’s share of the cost of your prescriptions. You will be responsible for the remainder, which can be in the form of a copay or coinsurance. See the example below.
Tier 1: $3 copay for a 30 day supply
Tier 2: $12 copay for a 30 day supply
Tier 3: $45 copay for a 30 day supply
Tier 4: $90 copay for a 30 day supply
Tier 5: 25% coinsurance for a 30 day supply
The above is an example, and it does not refer to a particular plan. You must refer to the benefits summary of the plan you select for exact details about your coverage. The initial coverage period continues until the total cost of your prescriptions reaches the Initial Coverage Limit, which is a dollar amount that can change yearly.
The Coverage Gap
When the total cost of your prescriptions reaches the initial coverage limit for the year, you enter the coverage gap. During this time, the insurance company takes a step back, and you will pay 25% of the cost of generics and 25% of the undiscounted cost of brand name prescriptions. The coverage gap continues until the total cost of your prescriptions reaches the coverage gap limit. The coverage gap limit includes the total cost of your drugs for the entire year; it consists of the deductible phase and the initial coverage phase.
Catastrophic Coverage Phase
After the coverage gap, you enter the Catastrophic Coverage Phase. During this time, you will be responsible for $3.60 for generics, $8.95 for brand-name drugs, or 5% of the medication’s cost, whichever is higher. Catastrophic coverage phase will continue for the rest of the year.
Although PDP plans are required to cover at least two prescriptions for every known Medicare-approved treatment, that doesn’t mean they all include the ones that you are using. It’s crucial to check the plan’s formulary against your list of medications before selecting a plan.
PDP plans are required to follow a coverage model that covers a certain percentage of your prescription costs for the entire year. All insurance companies that wish to continue their Medicare Part D contract must adhere to this model, or their plan will not pass Medicare’s review. Plans can always offer more coverage than the model, but never less, so you will see some plans with lower deductibles, or more coverage during the coverage gap. But you will never see less coverage than the model.
Some people with limited income and resources may qualify for Low-Income Subsidy (LIS), also known as Extra Help. LIS can potentially subsidize your Medicare Prescription Drug Plan even further, bolstering your benefits and substantially reducing your out of pocket costs. Call the Social Security Administration, or visit SSA.gov for more details and to apply for LIS.
Some plans have lower deductibles, copays, and coinsurance in exchange for a higher premium. Sometimes it’s easy to take the cheaper plan. However, if you take a lot of prescriptions, check your list of medications against the formulary of a higher premium plan, you might save money during the year, even when you add the cost of the premium.