Medicare Part D is a federal program that allows people 65 and older, and some younger people with disabilities, to get coverage for prescription drugs. You can buy Part D plans, also known as Prescription Drug Plans (PDPs), alongside Medicare Part A and Part B or as part of a Medicare Advantage (Part C) plan. Even with Part D coverage, you’ll have certain costs associated with prescription drugs. Read below to understand these costs, from premiums to deductibles to costs in the coverage gap, or “donut hole.”
What you pay for Medicare Part D premiums
Most plans include a premium cost, which is a monthly fee that you pay for the Part D plan. The premium may be included as part of your Advantage Plan, or you may pay a separate fee for a stand-alone plan.
Exact premium costs for Part D vary from plan to plan and depend on the amount of coverage you purchase.1
You don’t pay your Medicare Part D premiums to the federal government; you pay the insurance company directly. Contact the plan to find out payment details, such as whether you can pay the premium automatically using your checking account.
What you pay for Medicare Part D deductibles
Your Part D plan may include a yearly deductible. The deductible is the amount you must pay each year before the Part D plan “kicks in” and starts to help cover the costs of prescriptions.
Deductibles vary between plans, and some plans may have a very small or even no deductible. The Centers for Medicare and Medicaid Services (CMS) sets the maximum deductible amount at $400 for new plans in 2017. The deductible limit was $360 in 2016.
CMS may adjust the maximum deductible amount from year to year due to national health care costs and the needs of Medicare beneficiaries. Once you meet your Part D deductible, you begin the initial coverage phase of your plan, during which you’ll pay a coinsurance or copayment for prescriptions.
Part D copayments vs. coinsurance
A copayment is a set dollar amount—such as $10—that you pay for covered prescription drugs after you meet your Part D deductible.
Coinsurance is a percentage of the cost—like 20%—for prescription drugs that you pay after your deductible is met.
Each plan has its own copayments and coinsurance amounts for prescriptions in the initial coverage phase. You’ll continue to pay the copayments and coinsurance until you reach the initial coverage limit.
What is the Part D initial coverage limit?
Once the value of the prescriptions you buy reaches your plan’s initial coverage limit (ICL), the initial coverage phase ends. The maximum ICL in 2017 is $3,700 and is set by CMS.
Some Part D plans may have lower limits to provide members with higher levels of coverage. In addition, the maximum ICL may change from year to year if CMS deems it necessary.
Take note that your plan adds up the total value of the prescriptions you purchase during the initial coverage phase—not just what you pay. For example, if you buy a prescription valued at $60, but you pay only a $10 copayment, the full $60 counts toward meeting your ICL.
After you meet the ICL, the next phase of Part D coverage begins: the coverage gap.
What is the Part D coverage gap/donut hole?
The phase after you reach your initial coverage limit is referred to as the coverage gap, or “donut hole.” During the Medicare Part D donut hole phase, your coverage for prescription drugs is reduced until you reach your out-of-pocket threshold.
The costs you pay while in the coverage gap differ depending on whether you buy brand-name or generic drugs.
Cost of brand-name drugs in the donut hole
While in the coverage gap, you pay no more than 40% of the plan’s cost for brand-name prescription drugs that are covered. Some plans may offer more coverage than this minimum level of coverage set by Medicare.
Cost of generic drugs in the donut hole
Purchasing generic drugs in the Medicare Part D donut hole results in you paying up to 51% of the price. Again, you may be able to purchase a plan that offers more coverage.
Out-of-pocket costs in the donut hole
Medicare sets different rules for what counts toward your out-of-pocket costs during the coverage gap. Here are the included costs:
- Your payment (up to 40% of price) for brand-name drugs
- Your payment (up to 51% of price) for generic drugs
- The mandated manufacturer’s discount (50%) that is automatically applied to brand-name drugs. Drug makers agree to this discount when they agree to participate with Medicare.
These costs are not included in the coverage gap out-of-pocket costs:
- Plan’s payment for generic drugs
- Plan’s discount on the price of brand-name drugs
- Plan’s payment for pharmacy dispensing fee
- Costs related to non-covered drugs
Donut hole example #1
You purchase a brand-name drug valued at $200 with a $2 dispensing fee, for a total of $202. You pay $40.80—40% of the cost—and your plan pays 60% of the cost, or $61.20. Your out-of-pocket cost includes your $40.80 payment and the 50% manufacturer’s discount of $100, for a total of $140.80.
Donut hole example #2
You purchase a generic drug priced at $120 with a $2 dispensing fee, or $122 total. You pay 51% of the price—$62.22—and the plan pays the remaining $59.78. Your $62.22 payment counts toward your coverage gap out-of-pocket costs.
What is the out-of-pocket threshold?
Once your out-of-pocket costs reach a set amount—the out-of-pocket threshold—you exit the coverage gap. For new plans in 2017, the maximum out-of-pocket threshold is $4,950 (it was $4,850 in 2016). After the donut hole, you enter catastrophic coverage.
What is the catastrophic coverage benefit?
The last coverage phase is called the catastrophic coverage benefit. For the remainder of the calendar year, you’ll pay just a small percentage of the costs for covered prescription drugs.
How you can get Extra Help
You may be able to qualify for more assistance in paying for your prescription drugs. This program is called Extra Help, and it is designed for people with limited income and resources. Extra Help may lower your costs for Part D premiums, deductibles, and coinsurance, including during the donut hole.
To qualify for Extra Help, Social Security considers the value of your income and your resources.
According to the Social Security Administration,2 your resources in 2017 must be no higher than $13,820 ($27,600 for married couples), including the value of the following:
- Checking, savings, and CD balances
- Mutual funds
- Real estate
The income limit in 2017 is $18,090 ($24,360 for married couples). There are exceptions to the income limit, including your support for family members or whether you live in Alaska or Hawaii. Contact Social Security to find out if you qualify for an exception.
To apply for Extra Help, you can fill out this online application. You may also call Social Security at 1-800-772-1213 (TTY: 1-800-325-0778) or visit your local Social Security office.
What is the late enrollment penalty?
If you don’t enroll in coverage when you are first eligible, you may have to pay a late enrollment penalty. This penalty applies as long as you have coverage. If you qualify for Extra Help, the late enrollment penalty doesn’t apply.
The amount you pay for late enrollment penalty depends on how many months you went without “creditable”—what Medicare deems sufficient—Part D coverage. For example, if you went five months without coverage, Medicare calculates your penalty using the formula below3 (rounded to the nearest $0.10). The penalty is added to your monthly premium.
5 (months without coverage) X 0.01 (1%) X $35.63 (2017 national base beneficiary premium) = $1.80
If you don’t have proof of creditable coverage, the law requires you to pay the penalty. The best way to avoid paying the penalty is to sign up for Part D the first chance you have. For most people, this is the initial enrollment period (IEP). The IEP is a seven-month time frame that includes the following:
- The three months prior to your 65th birthday month
- The month you turn 65
- The three months following your 65th birthday month
If you’re younger than age 65 and have a disability, your IEP starts three months before the 25th month of receiving Social Security or Railroad Retirement Board (RRB). The IEP ends three months after the 25th disability benefit month.
What you may pay if you have a higher income
You may have to pay an additional amount for coverage if your income is higher than a certain amount. This amount, which is part of Medicare law, is called the income-related monthly adjusted amount (IRMAA) and is designed to help distribute the costs more evenly among income levels. Medicare uses your last-reported modified adjusted gross income (MAGI) to determine your IRMAA.
In 2017, once your income exceeds $85,000 ($170,000 for married couples filing jointly),4 you must pay the IRMAA on top of your premium. The IRMAA increases along a sliding scale for even higher incomes. The table below shows the IRMAA you’ll pay depending on your income and how you file your taxes.
|Filed As An Individual||Filed Jointly||Filed as Married & Separate||Your 2017 IRMAA
(added to your
Part D premium)
|Up to $85,000||Up to $170,000||Up to $85,000||$0|
|$85,001 to $107,000||$170,001 to $214,000||Doesn’t apply||$13.30
|$107,001 to $160,000||$214,001 to $320,000||Doesn’t apply||$34.20
|$160,001 to $214,000||$320,001 to $428,000||$85,001 to $129,000||$55.20
|More than $214,000||More than $428,000||More than $129,000||$76.20
Source: Medicare.gov, “Monthly Premium for Drug Plans”
More factors that could affect your Part D costs
The exact costs you pay for prescription drugs with a plan can vary depending on a number of factors.
- Each plan may negotiate for a different price for prescription drugs.
- Your plan may require you to use in-network pharmacies or set a different cost for using out-of-network pharmacies.
- Plans often use a set formulary, or list of covered drugs. Your plan may set different costs for different subsets, or “tiers,” of drugs.
- If you get Extra Help for Part D, your costs will generally be lower than for those without Extra Help.
There are other factors affecting the cost of prescription drugs in the United States. In fact, Americans pay much more for prescriptions than other countries. To learn why, read our infographic on whether your state is paying too much for prescriptions.
Compare Part D plans for 2017
Because the costs for prescription drug coverage vary, a great way to find out what you’ll pay is to get a quote. That’s where we can help—just speak to one of our licensed sales agents by phone to get a quote for Part D plans.
Call 855-802-1206 weekdays from 7 a.m. to 5 p.m. Mountain Time; we are closed weekends.
1. This article does not contain a complete listing of plans available in your service area. For a complete listing please contact 1-800-MEDICARE (TTY users should call 1-877-486-2048), 24 hours a day/7 days a week or consult www.medicare.gov.
2 Social Security Administration, “Understanding the Extra Help with Your Medicare Prescription Drug Plan”
3. Medicare.gov, “Part D Late Enrollment Penalty”
4. Medicare.gov, “Monthly Premium for Drug Plans”