Medicare Prescription Drug Coverage

31 May 2023

One of the most common questions we get is how to make sure that you maintain access to the drugs you need when aging into Medicare or when switching plans.

Regardless of the type of Medicare plan you have, you will be required to have prescription drug coverage, which usually takes the form of a Medicare Prescription Drug (Part D) plan.

In this article, we will introduce how Medicare covers prescription drugs, including how to manage your costs and how to find a plan that will work for you.

What Is a Part D Plan

Before the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) passed in 2003, retired Americans didn’t have a great way to get help with their prescription drug costs, other than those administered by a physician or in a hospital setting. The MMA changed that, however, establishing the Medicare Prescription Drug (Part D) program. This meant that, for the first time, Medicare enrollees had access to meaningful discounts on the prescription drugs that they received from their pharmacies.

Indeed, the MMA actually requires that all Medicare enrollees have what is known as “creditable coverage” for their prescription drugs. This means that any drug coverage that you have has to be at least as good as what Medicare would provide. Generally, if you are eligible for drug coverage through your spouse’s employer-sponsored plan, for example, that would be sufficient. If you don’t have other drug coverage, however, you will need to get a Part D plan.

Claire’s Perspective

Some of that, such as “creditable coverage” can be confusing. You don’t need to worry about it, though. The basic idea is just that you are required to have coverage for prescription drugs. Most often, that comes in the form of a Part D plan. If you are unsure or have questions, simply reach out and we’d be happy to help.

How to Find a Medicare Part D Plan

No matter where you live, you will have many choices of Part D plans that may meet your needs. Similar to Medicare Advantage (Part C) plans, Part D plans are offered through private companies, not directly through the government. This means that you will need to compare plans from some combination of national and regional plans to find the one or ones that will best meet your needs. If you need help, a licensed Medicare agent can be a great resource for you, as it is their job to understand what options are available and to work with you to find those that best meet your needs.

Medicare Part D Quality & Star Ratings

It sounds a little cliché, but not all Part D plans are created equal. In fact, each year, the Centers for Medicare & Medicaid Services (CMS, the government institution that oversees Medicare) releases ratings for every Part D plan in the country. Stand-alone Part D plans (those that only include the prescription drug component) are rated on 12 metrics in 2023, covering topics such as medication adherence, member ratings, and member complaints. Plans that bundle a Part D plan with a Part C (Medicare Advantage) plan, also known as MA-PD plans, are rated on 38 metrics in 2023.

CMS combines all of these data into a star rating system, giving each plan between 1–5 stars, with higher stars correlating to higher quality, generally. In 2023, the average star rating for stand-alone Part D plans is 3.25 and for MA-PD plans, it is 4.15.

Claire’s Perspective

Medicare Star Ratings are an incredibly important metric for helping you compare prescription drug plans. They are not, however, the only metric. Even if a prescription drug plan is rated 5 stars, the highest possible, it may not be the best plan for you if it doesn’t cover the drugs you need or if your out-of-pocket (OOP) costs are too high. A licensed Medicare agent can help you sort through not only star ratings but also what drugs you take and how much you can afford each month to help find a plan that will work for you.

Medicare Prescription Drug Costs

One of the most important considerations when looking for Medicare prescription drug coverage is to understand your costs. A drug plan doesn’t do you any good if you can’t afford the drugs you need, after all. This is why it can be helpful to understand how Medicare drug costs work, even though it can be a bit confusing. (Don’t worry, we’ll try to simply it for you!)

Medicare benefits and costs reset at the beginning of the calendar year, meaning that you start with a blank slate on January 1 each year. As you fill prescriptions each year, you move through four phases of coverage, which affects how much you pay for your drugs.

Phase 1: Deductible

In Phase 1, Medicare beneficiaries are required to pay 100% of the costs of their drugs up to a maximum deductible, which is $505 in 2023. Once the beneficiary has reached the deductible, they then move onto the next phase.

For example, if a plan has a $505 deductible, but each month, the beneficiaries drugs only retail for $101, it will take five months for them to hit their deductible limit (5 months x $101 = $505). If, however, the retail for the prescriptions is $505 per month, they will hit their deductible in January, moving them into the next phase immediately after that.

Note: Not all plans have deductibles, meaning that some plans effectively start you out in Phase 2. You can talk with a licensed Medicare agent to learn more about the specifics of any plan you are considering.

Phase 2: Initial Coverage

In Phase 2, beneficiaries pay whatever co-payment or co-insurance amounts are defined by their plan. These amounts will vary, depending on the plan and the tier on which the drugs are found.

For example, a plan may have one statin on Tier 1, with a $5 copay and another statin on Tier 2 with a $20 copay. The amount that you pay will be dependent on which statin you are prescribed and which tier it is on, which will vary from plan to plan.

In 2023, the Initial Coverage Limit is $4,660, meaning that you will move into the next phase once you hit that amount.

Phase 3: Coverage Gap

Once you hit $4,660 of coverage in 2023, you enter what is known as the coverage gap, where you will pay (no more than) 25% of the costs of your prescription drugs. (Previously, this was also known as the “donut hole,” though recent rules have lessened the impact of reaching the coverage gap on beneficiaries).

For example, if you are on a prescription drug that retails for $400 but that is on Tier 3 with a $20 copay on your plan, you will pay $20 during Phase 2 (the Initial Coverage period) and $100 (25% x $400 = $100) once you hit the coverage gap.

In 2023, the maximum out-of-pocket (MOOP) threshold for prescription drug plans is $7,400, after which you will enter the final phase of drug coverage.

Interestingly, while you will pay no more than 25% of the costs of drugs while in the coverage gap, how it affects your out-of-pocket (OOP) costs will vary depending on whether it is a generic or brand name drug.

Generic Drugs in the Coverage Gap

Generic drugs are pretty simple to understand in the coverage gap. Here, Medicare will pay 75% of the costs of the drug and you will pay the remaining 25%. The amount that you pay will count toward your total out-of-pocket (OOP) costs.

Brand Name Drugs in the Coverage Gap

Brand name drugs are a bit more complicated. Here, Medicare will pay only 5% of the cost of the drug, the manufacturer will pay another 70% (or more), and you are left with the remainder, which is 25% or less, depending on how much the manufacturer pays. Most importantly, the amount that you pay as well as the amount that the drug manufacturer pays are both counted toward your maximum out-of-pocket (MOOP) costs, meaning that you will move out of the coverage gap even faster.

Phase 4: Catastrophic Phase

Once you’ve hit the maximum out-of-pocket limit (MOOP), which is $7,400 in 2023, you’ll enter the final phase of Medicare Part D drug coverage, known as the catastrophic phase. (Don’t worry, it isn’t a bad thing, despite how it sounds.) During the catastrophic phase, you pay the greater of 5% for your drugs or $4.15 for generic drugs and $10.35 for brand name drugs.

For example, if you are on a brand name drug that retails for $200, you will only pay $10 for the prescription (5% x $200 = $10, which is less than the $10.35 copay). Or, if you’re on a generic drug that retails for $100, you’ll pay $5 (5% x $100 = $5, which is more than the $4.15 copay). These amounts will continue until the benefit reset on January 1 of the following year.

Claire’s Perspective

Four phases is almost certainly a bit confusing. Even more confusing is that the amounts you pay change each year. If you are like many people and are concerned about managing your drug costs, you can reach out to Ask Claire or your license Medicare agent for help.

“Extra Help” and the Low-Income Subsidy

People with Medicare who have limited income and assets may qualify for the Low-Income Subsidy (LIS), also known as “Extra Help”, which can help with the costs of their prescription drugs. The Social Security Administration (SSA) and the Centers for Medicare & Medicaid Services (CMS) work together to provide the benefit.

Some people get Extra Help automatically. These include people who are enrolled in both Medicaid and Medicare (often called dual eligibles), those receiving Supplemental Security Income (SSI), and those who qualify for a Medicare Savings Program (MSP).

Anyone else who is not already enrolled in the benefits noted above must apply to the Social Security Administration to receive Extra Help.

How Does Extra Help Work?

The amount of Extra Help a beneficiary receives depends on their income and resources. Beneficiaries will receive either a full-subsidy or a partial-subsidy. Most people who qualify for Extra Help will pay:

No premiums,
No deductibles (unless receiving the partial subsidy), and
No more than $10.35 in 2023 for each brand name drug their plan covers and no more than $4.15 for each generic drug.

In addition to lower out-of-pocket costs, beneficiaries with Extra Help have the following protections:

A quarterly Special Enrollment Period (one time every three months between January – September and once during Annual Open Enrollment) to join or switch Medicare Part D drug plans during the year. These opportunities allow people who get Extra Help to not wait for the Annual Open Enrollment Period (15 Oct – 7 Dec) to change plans. Any plan changes made outside the Annual Open Enrollment Period will become valid for the following month.
No Part D late enrollment penalty, even if the beneficiary enrolls late (that is, after they were first eligible to join a Part D plan and if they did not have other drug coverage).

How Do I Apply for Medicare Extra Help?

To apply for the Medicare Low-Income Subsidy (LIS), you’ll need to fill out an “Application for Extra Help with Medicare Prescription Drug Plan Costs” (SSA-1020) form with the Social Security Administration (SSA). You can apply and submit this form by:

Applying online at www.socialsecurity.gov/extrahelp.
Calling Social Security at 1-800-772-1213 (TTY 1-800-325-0778) and requesting an application be mailed to you or applying over the phone. Social Security representatives are available by phone Monday through Friday, from 7AM to 7PM.
Applying in person at your local Social Security office.

After you submit your application, the Social Security Administration will review it and send you a notification in the mail if you are eligible. If you qualify for Extra Help and are not yet enrolled in a Medicare Part D Prescription Drug Plan, you can enroll in a plan at that time.

Claire’s Perspective

Medicare’s Extra Help program is an amazing benefit that can dramatically help cut the costs of your prescription drugs. If you are wondering if you qualify, please reach out to Ask Claire or you licensed Medicare agent and we can help.