Have you come across the term creditable drug coverage and wondered what it means? If this term is unfamiliar to you, you’re not alone. But understanding what creditable coverage is could help you keep more money in your pocket.

What is creditable drug coverage?

In simplest terms, creditable drug coverage is when a person’s insurance coverage for prescription drugs matches or exceeds the standard set by Medicare. The designation is made by the Centers for Medicare and Medicaid Services (CMS).

Not everyone decides to join a Medicare drug plan when they reach their 65th birthday. Some people keep non-Medicare drug coverage instead, commonly through an employer- or union-sponsored plan.

If that drug coverage is creditable, it means the plan pays as much toward prescription drugs as a Medicare drug plan would. (Some plans even pay more than Medicare, and that coverage is creditable too.) If coverage is non-creditable, it covers less than Medicare does.

Do I need to worry about having creditable coverage?

Maybe. If you plan to get prescription drug coverage from Medicare Part D as soon as you’re eligible (or from a Medicare Advantage plan that includes prescription coverage), you don’t need to worry about creditable drug coverage. These plans have creditable coverage by definition because they are part of the Medicare system.

However, if you do not plan to sign up for Part D when you’re eligible—because you will have drug coverage from another source—you need to know whether your plan provides creditable drug coverage.

Why? Having a plan with creditable drug coverage now may save you money later on. If you want to sign up for a Medicare drug plan in the future, having creditable drug coverage may help you avoid a penalty.

How will I know if I have creditable drug coverage?

Assuming you have Medicare eligibility, your health insurance plan will send you a letter every year, usually around September.1 Keep this letter, also known as a notice of creditable coverage or certificate of creditable coverage. It will say clearly whether you have creditable drug coverage or non-creditable drug coverage.

These types of entities are required to send the notice:2

  • Employer-sponsored health plans
  • Union-sponsored health plans
  • Church-provided health coverage
  • Federal, state, or local government-sponsored health plans
  • Health plans from the Department of Veterans Affairs (VA)
  • Military coverage, such as TRICARE
  • Individual health plans
  • State-sponsored plans, such as Medicaid, State Pharmacy Assistance Programs (SPAPs), or State High-Risk Pools
  • Indian Health Services, Tribe or Tribal Organizations, and Urban Indian Organizations (UIOs)
  • Some Medicare Supplement plans (Medigap) sold before 2006 (the year when new Medigap plans were no longer allowed to offer coverage for prescription drugs)

These entities will send the notice to anyone they serve who is eligible for Medicare, both current employees and retirees.

And what if you didn’t receive a notice or can’t find it? Medicare recommends that you directly contact the entity that offers your coverage to confirm if it is creditable.

What happens if I don’t have creditable drug coverage?

Not having a plan with creditable drug coverage can cost you money. If you sign up for a Medicare drug plan in the future, you’ll need to prove that you didn’t have a gap in prescription drug coverage. That’s where the notice of creditable coverage comes in.

If you can prove (via the creditable coverage letter) that you had drug coverage with no gap of 63 days or more, you won’t have to pay the Part D late enrollment penalty. If you cannot prove that, you’ll be charged the penalty for as long as you have a Medicare drug plan. How much you’ll have to pay depends on how long you’ve gone without creditable coverage.

The bottom line

If you are on a non-Medicare plan that includes prescription drug coverage but you are also eligible for Medicare, it’s important to know if your current health plan provides creditable drug coverage. Not having it could mean you’ll pay penalties down the road.

If you’re already on a Medicare drug plan, you don’t need to worry about creditable drug coverage because you have it automatically.