Medicare Prescription Drug Plans Explained
Medicare prescription drug plans, known as Medicare Part D, are available to every Medicare beneficiary. They are offered as an optional add-on to Medicare Part A, Part B and Part C plans, and while they can vary in coverage and premium costs, Medicare prescription plans must adhere to minimum standard coverage levels, which are determined by Medicare. This includes specific prescription drugs that must be covered by the plan.
While Medicare has been helping U.S. citizens since 1965, the prescription drug coverage part of it is a relatively new offering. Originally proposed by Bill Clinton in 1999, the Medicare Part D bill didn't pass until 2003 when it was officially signed by George W. Bush. As of 2019, more than 45 million Americans were enrolled in Medicare Part D plans.
Medicare Part D
Medicare Part D is an optional add-on to Original Medicare Parts A and B. This plan covers the cost or a portion of the cost of prescription drugs for its participants. These plans generally cover the cost of generic prescription medications. Plan D does not cover the cost of prescribed durable medical equipment; however, Medicare Plan B may insure beneficiaries against these costs.
In addition to generic prescription medications, Medicare Part D may cover other drug-related expenses, including drug management programs that help enrollees ensure safe use of opioid and benzodiazepine prescription drugs and medically necessary vaccines.
Some individuals who participate in Medicare prescription drug plans may be eligible to participate in the Medication Therapy Management (MTM)1 program, which is designed to help beneficiaries and doctors make sure that medications are working effectively. In this program, prescription medications and their uses are thoroughly reviewed by a physician, a pharmacist or another health professional, who will analyze how efficient the drug has been in treating the problem it's prescribed for as well as side effects, drug interactions and whether or not the cost to the participant can be reduced.
How Much Do Medicare Prescription Drug Plans Cost?
The cost of Medicare Part D varies depending on several factors, including the plan itself, medications prescribed and whether the enrollee uses an in-network pharmacy2. There are also several costs involved in Medicare Part D, including premiums and annual deductibles3. While yearly deductibles for Medicare Part D plans vary, as of 2020 no plan may have a yearly deductible that exceeds $435.
It's also important to note that Medicare participants who don't enroll in Part D when they're first eligible may be required to pay a late enrollment penalty4, which is calculated based on the national base beneficiary premium, which in 2020 was $32.74, and the number of months the beneficiary went without Part D coverage.
Monthly Medicare Part D premiums5 vary depending on the enrollee's income, as well as the insurance provider. While premiums are paid to the insurer, individuals whose income is above a certain threshold are required to pay an Income-Related Monthly Adjustment Amount (IRMAA) directly to Medicare. Those who are required to pay IRMAA may contact Social Security to have this amount deducted from their monthly benefit payment. These payments are based on income and, as of 2020, range from $12.20 per month for an individual earning more than $87,000 annually to $76.40 per month for an individual earning more than $500,000 annually.
Older adults become eligible for Medicare Part D three months prior to their 65th birthday. It's recommended that beneficiaries enroll in Part D at the same time as Original Medicare Part A and B to avoid paying late enrollment fees.
There are no income requirements to qualify for Medicare Part D; however, monthly costs may increase for those with moderate to high incomes.
How to Enroll
To enroll in Medicare Part D, individuals can search the Medicare Plan Finder6 online to find a provider in their area. Once they've chosen a plan, they can enroll online, by telephone or by submitting a paper form in-person or via mail. Alternatively, older adults can call Medicare at (800) 633-4227 for assistance.
The Donut Hole: Medicare Coverage Gaps
The donut hole, or coverage gap7, refers to a temporary limit that's in place on Medicare Part D plans once beneficiaries have used their plan. This gap starts once a certain dollar amount has been spent on prescription drugs within the plan. As of 2020, that limit is $4,020. Individuals who receive Extra Help with Medicare Part D costs, which we explain below, don't enter the donut hole.
Once enrollees enter coverage gaps, certain limitations apply to their plan. This includes:
- Brand name prescription drugs are covered at a minimum of 75%
- Medicare only pays 75% of generic drugs during the coverage gap
When it comes to spending, there are some expenses that don't count toward the coverage gap. This includes:
- Drug plan premiums
- Dispensing fees
- Out of pocket prescription costs
Where to Find Extra Help With Prescription Drug Costs
The Medicare Extra Help program8 provides financial assistance to low-income Medicare Part D beneficiaries. The program may cover costs such as premiums, deductibles and coinsurance.
To qualify for Extra Help, Medicare beneficiaries need to submit proof of qualification to their plan administrator. Acceptable documents include proof of Supplemental Security Income, Extra Help Notice of Award letters from Social Security and Extra Help qualification letters from Medicare. Alternatively, proof of one's eligibility for or participation in Medicaid can be provided to prove eligibility.
In some cases, older adults may be dually eligible9 for both Original Medicare and Medicaid. This typically means that they're eligible for Medicare based on their age and/or disability status and eligible for Medicaid based on income. Dual-eligibility is often complicated; therefore, it's often best to seek assistance with benefits coordination from Medicare's State Health Insurance Assistance Program (SHIP)10, which is available in all states.
In most cases, the beneficiary's Medicare plan covers costs first, leaving Medicaid to cover costs that aren't typically covered by Original Medicare or paying leftover balances if they apply. The exact coverage rules for dually eligible beneficiaries vary by state.
Comparing Prescription Drug Plans
The Medicare Plan Finder11 is the easiest way to view the available Medicare Part D plans in each state. Using this tool, older adults can search for Part D plans that are available in their county and compare them based on cost, provider and coverage. The Plan Finder can also help those logging on to access their current income status and drug costs to find the best plan to suit their needs.
Medicare Part C
Medicare Part C, also known as Medicare Advantage, is a health plan offered by private insurance companies that provides seniors with Original Medicare plus other coverages under a single plan. These additional coverages often include prescription drug coverage, as well as dental, vision and hearing services. Medicare Advantage providers are required to follow rules and minimum coverage amounts that are set forth by Medicare.
While most Medicare Part C/Medicare Advantage plans include some level of prescription drug coverage, it's important to note that these plans normally cannot be combined with Medicare Part D plans. In most cases, Medicare Advantage beneficiaries who enroll in Part D risk being automatically disenrolled from their Medicare Advantage benefits and placed on Original Medicare.
What's Covered by Medicare Advantage Plans?
All Medicare Advantage plans are required to cover the same services that Original Medicare Parts A and B cover12. However, Medicare Advantage may also cover additional services, including wellness programs, adult day care services and prescription medications.
Types of Medicare Advantage Plans
Within Medicare Advantage, there are several plan types13. Each plan follows different rules, which may vary depending on the insurance provider.
Health Maintenance Organizations (HMOs)
HMOs14 only allow beneficiaries to obtain care within a specific network of physicians. If an enrollee requires specialist care from a physician outside the network, their primary care physician must provide a written referral. Any out-of-network care that hasn't been referred is not typically covered by the plan.
Private Fee-for-Service Plans (PFFS)
PFFS15 plans are flexible, allowing members to obtain care from the physician or health care practitioner of their choice. These plans provide enrollees with a set fee for each health care service, and any expense beyond that dollar amount is the responsibility of the enrollee.
Preferred Provider Organizations (PPOs)
PPOs16 operate in a similar way to HMOs, having a specific network that members are recommended to seek care from. However, in a PPO, members may seek care outside of their network. While these plans give members the freedom to see any doctor they choose, receiving care from a practitioner outside of their PPO network usually costs more.
Special Needs Plans (SNPs)
SNPs17 are limited to older adults who are living with specific diseases and chronic medical conditions. The covered services and prescriptions that SNP members receive are tailored to meet the needs of their condition. Beneficiaries of SNPs are typically required to receive primary and specialty care within their network; however, most plans permit members to seek emergency and urgent care from any hospital or physician. Additionally, members with end-stage renal disease may obtain dialysis treatments outside of their network.
To participate in a Medicare Advantage plan, individuals must meet the following requirements18:
- Be enrolled in Medicare Part A and Part B
- Live within the service area of a Medicare Advantage plan administrator that is accepting new enrollees
- Not be diagnosed with end-stage renal disease unless enrolling in a special needs plan
How to Enroll
The Medicare Plan Finder can help older adults find a Medicare Advantage plan that's available in their area and suits their needs19. Once a suitable plan is found, individuals can contact the plan provider to join. Most plans provide a way for potential members to join online, by mail or over the phone.
When enrolling, insurance providers require enrollees to submit their Medicare number as well as the date their Original Medicare coverage started.
Medicare Part C Costs
The cost of Medicare Part C/Medicare Advantage20 varies depending on a variety of factors. For some beneficiaries, Part C may be free of charge because there are some plans that don't charge premiums and programs such as Extra Help that may help low-income older adults access coverage for free. Other factors that go into determining the cost include the provider's yearly deductible, whether the plan has a network and whether the beneficiary seeks care within that network and the co-pay or coinsurance that the enrollee is required to pay. Other factors that may affect the cost of Medicare Advantage plans include:
- The type of health care services needed
- Whether or not the health care provider accepts Medicare
- Whether or not add-on insurance/extra benefits have been added to the plan
- The plan's annual out-of-pocket cost limit
- If the enrollee is dually eligible for Medicare and Medicaid
When participating in Medicare Part C, Medicare pays insurance providers for services covered under Medicare Part A and Part B, and the insurance provider is responsible for covering costs that fall outside these plans.
Dual Eligibility Special Needs Plans
Dual eligibility special needs plans (D-SNPs)21 are for older adults or disabled persons who qualify for both Medicare and state Medicaid plans and have chronic health care conditions or disabilities that qualify them for Medicare SNPs. These plans have contracts in place with state Medicaid programs to provide beneficiaries with integrated care, usually covering a broader range of services including prescription drugs, long-term institutional care and specialty services.
While D-SNPs are generally less complicated than coordinating Original Medicare and Medicaid benefits, beneficiaries or their representatives may want to consider working with SHIP to coordinate services or obtain advice with regards to claims. SHIP-certified Medicare counselors can help older adults communicate with their insurance provider, coordinate their care services and benefits claims and file appeals if and when necessary.