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Medicare Part D

Medicare is a federal program that provides health insurance coverage for people who are age 65 or older. Individuals younger than 65 may qualify if they have certain disabilities or have End-Stage Renal Disease (ESRD). Medicare is comprised of four parts—Parts A, B, C, and D.

Definition: Medicare Part D is a voluntary benefit that provides outpatient prescription drug coverage to beneficiaries. The Part D benefit is provided by private plans; beneficiaries have the option of choosing either prescription drug coverage as part of their Medicare Advantage plan or as a stand-alone prescription drug plan (PDP) which can be purchased in addition to traditional Medicare (Part A and Part B). Of the 45 million Part D enrollees in 2019, 20.6 million were in PDPs.

History: The Medicare prescription drug benefit was added to Medicare as part of the Medicare Modernization Act of 2003 (MMA). Prior to the passage of the MMA, many Medicare beneficiaries lacked access to prescription drug coverage. Learn more about the history of Part D here.

How it Works: In 2020, the standard benefit structure is as follows: the beneficiary (who does not receive a low-income subsidy) pays 100% of their drug costs until the deductible of $435 is met. Once the deductible is met, in what is called the initial coverage phase, the beneficiary pays 25 percent of the costs of his/her drugs and the plan pays the other 75 percent, up to the initial coverage limit of $4,020 in total drug costs. The beneficiary is now in the coverage gap phase in which, for brand name drugs, enrollees pay 25 percent of drug costs, plans pay 5 percent, and drug manufactures provide a 70 percent discount and for generic drugs enrollees pay 25 percent and plans pay 75 percent of drug costs. The coverage gap phase ends when the beneficiary’s drug costs exceed the catastrophic coverage limit of $9,719. At this point, the beneficiary pays 5 percent, the plan pays 15 percent, and Medicare pays 80 percent of the costs for medications. There is no annual limit on out-of-pocket expenses for enrollees. In 2020, the out-of-pocket threshold for reaching catastrophic coverage threshold is $6,350. Learn more about the current benefit here.

Premiums: Medicare Part D premiums vary depending on the beneficiary’s plan choice and geography. Some plans, called “enhanced plans” provide greater coverage for prescription drugs, but usually have a higher premium. In 2020, the average Medicare Part D monthly basic premium is estimated to be $30. On average, Medicare beneficiaries have 28 PDPs to choose from for the 2020 plan year. Like Medicare Part B, individuals who lack prescription drug coverage either through a former employer, Medicaid, or some other source, will face a late enrollment penalty if they delay signing up for Part D.