Medicare Drug Plans: Understanding Your Options
A new generation of Americans is heading into Medicare. If you’re one of the 10,000 seniors every day who qualifies for this federal program, then you need to know your options, especially when it comes to prescription drug plans. Medicare has undergone several significant changes in its 50-year history, including those implemented under the Affordable Care Act (ACA or Obamacare). There will be more changes in the years to come, such as closing the donut hole in Part D. Newcomers need understandable definitions, facts and choices written in plain language. Simple explanations eliminate confusion and allow Medicare enrollees to understand their rights. Let’s start with what Medicare is all about.
The government established Medicare in 1965 to insure Americans who were on Social Security. Being on a fixed income, many senior citizens needed more affordable healthcare. As of 2021, more than 63 million people are enrolled in Medicare and Medicare Advantage, and that figure is expected to increase substantially as the Baby Boomer generation retires and turns 65.
Eligibility for Medicare starts at age 65 for most people. There are notable exceptions. People who are receiving benefits from Social Security or the Railroad Retirement Board, as well as those with end-stage renal disease (ESRD), don’t have to be 65 to qualify for the program. If you qualify based on age, then you can actually sign up for Medicare three months before the month that you turn 65.
You have a total of seven months to sign up – three months before you turn 65, the month you turn 65 and three months after the month you turn 65. This is known as your initial eligibility or enrollment period. If you miss your initial enrollment window, then you can sign up late general enrollment, which runs from January 1 through March 31. There are also special enrollment periods for certain life events.
Medicare is a benefit for seniors because it covers practically all medical care that private insurance would cover. There are even provisions for seniors traveling out of the country who have medical emergencies. Most plans offer beneficiaries the chance to see their usual doctors, people they know and trust already. Beneficiaries can also use their usual pharmacies as well. And thanks to the Affordable Care Act, Medicare enrollees now have greater access to preventive care and wellness programs to manage their everyday health.
The ACA brought other changes to the Medicare program. Not only is preventive care completely covered (without the need for copays or coinsurance), but screenings are also covered. This means that conditions like high blood pressure, diabetes and even certain types of cancers can be caught well in advance, and treatment can start early. Smokers can get help if they want to quit. Prescriptions also now cost less for many beneficiaries.
Perhaps the biggest change to the Medicare program under the ACA is the closing of the Part D donut hole or coverage gap. The Part D donut hole is a major problem for some seniors, especially those who have expensive prescriptions that they need every month. Once you reach your coverage maximum, which is the maximum amount that your plan will cover for drugs, you’re responsible for the cost of your medication until you reach the out-of-pocket spending limit.
In 2022, the coverage limit is $4,430. The out-of-pocket threshold for 2022 is $7,050. The ACA relieved the burden of seniors who are stuck in the donut hole between the coverage limit and the out-of-pocket spending cap. Under the law, Medicare recipients now pay a portion of the cost of prescription drugs while they’re in the gap. As of 2020, seniors pay 25 percent of the cost for brand-name drugs and generics. This technically means that the donut hole gap is closed on prescription drugs.
One of the goals of the Affordable Care Act was to make sure that people gained access to quality health care services, not just affordable treatments. Under Obamacare, Medicare Advantage plans (Medicare Part C) will offer more services or better options. The downside to this is that MA plans may increase their premiums to account for the added features. On the plus side, seniors will have more choices when it comes to controlling their care. In essence, the ACA wants doctors to collaborate and work as a team to ensure better long-term care for their patients. This is especially important when it comes to an aging population. Doctors who consult with one another to keep their patients healthy receive financial incentives from Medicare or the government.
This collaborative system affects prescription drug plans in two ways. First, patients are more likely to get better advice on lifestyle changes that could improve any ongoing or underlying medical conditions, which would eliminate the need for certain types of prescriptions. Second, doctors can work together to lower dosages or wean patients off of medication over time.
Now that you know a bit about Medicare as a whole, we’ll discuss one of the trickier aspects of this program: Medicare Part D, or prescription drug coverage. Part D took root in the Medicare Prescription Drug, Improvement and Modernization Act in 2003. Fully implemented in 2006, it gave seniors the right to have their prescription medications covered by insurance. Specifically, 25 percent is paid by seniors and 75 percent is paid by the plan, which is carried by private insurance companies.
If you need prescription coverage, then you can enroll in Part D when you first become eligible for Medicare at age 65, during your initial eligibility window that we talked about earlier. That’s the best time to enroll. Not every senior signs up for Part D right away, but there’s a fee assessed for late enrollment. If you don’t sign up when you’re first eligible, you can do so during the open enrollment period of October 15 through December 7. There’s also a special sign-up period for people who meet certain conditions; it runs from April 1 through June 30. There are two ways to get prescription drug coverage and three ways to pay for it, which we’ll discuss in the following sections.
Medicare Plan D
Each Part D plan has its own list of covered drugs, which varies by plan type and carrier. In order to maximize your coverage, you’ll need to compare the medicines you take against the list of covered prescriptions on a plan that you’re interested in. The list is arranged in levels or tiers. The least expensive drugs, including generics, are on the lowest level. Next, you’ll find the slightly more expensive name brands. The highest level contains the most expensive name brand prescription drugs. Tier only refers to the price of the drug, not necessarily the medicinal value or benefit.
Like with covered drugs, Medicare Part D costs vary by plan type and carrier. Medicare does set a cap on how much a plan can charge for the yearly deductible, and some plans don’t charge a deductible at all. In 2021, the maximum annual deductible for Part D coverage was $445. That increases to $480 in 2022. Your deductible must be paid before Medicare pays its portion. Regarding premiums, how much you pay depends on your income. For the purposes of calculating premium rates, Medicare looks at your tax returns from two years before. So for 2022, how much you earned in 2020 determines your monthly premium rate. Here’s what you’ll pay for Medicare Part D premiums in 2022:
|If your individual annual income is…||If your joint annual income is…||This is what you’ll pay for Medicare Part D:|
|Up to $91,000||Up to $182,000||The plan’s premium|
|Above $91,000 to $114,000||Above $182,000 to $228,000||$12.40 plus the plan’s premium|
|Above $114,001 to $142,000||Above $228,000 to $284,000||$32.10 plus the plan’s premium|
|Above $42,000 to $170,000||Above 284,000 to $340,000||$51.70 plus the plan’s premium|
|Above $170,000 to <$500,000||Above $340,000 to <$750,000||$71.30 plus the plan’s premium|
|$500,000 or more||$750,000 or more||$77.90 plus the plan’s premium|
If you file a separate tax return as a married couple and earn between $91,000 and under $409,000, you’ll pay a surcharge of $71.30 on top of your plan’s premium. If you earn $409,000 or more and file a separate return as a married couple, your surcharge is $77.90.
In addition to monthly premium costs, you may have coinsurance and copayments depending in your plan. For instance, you might pay a flat $10 copay for prescriptions in certain tier levels, or you might have to pay up to a certain percentage while the plan covers the rest of the cost. We discussed the concept of the donut hole in an earlier section. You can see how some seniors – particularly those with expensive medical problems or costly drugs to buy each month – would find it difficult to pay for their prescriptions. Here are a couple things to keep in mind:
- If you don’t need a lot of medication or costly prescriptions, then it may be better to go with a plan that has lower copays and premiums but no catastrophic coverage. Since you’re less likely to fall into the donut hole, you don’t need to pay for the coverage that goes along with it.
- It may be tempting to choose a plan based on lower monthly premiums, but picking a plan with a higher monthly premium usually means one with little to no deductible. Weigh the overall costs of your medication before choosing a plan based on surface cost.
Medicare Part C (Medicare Advantage Plans)
Known as Medicare Advantage, Medicare Part C plans cover the same services and benefits as Parts A and B under original Medicare with the addition of extra features. You must be enrolled in Parts A and B to be eligible for Medicare Advantage plans, which cover hospitalization, skilled nursing homes, and nearly everything else that Part A covers. The one exception is hospice care. Medicare Advantage plans are not required to cover hospice.
Under Medicare Part C, you’ll also be covered for Part B offerings, such as doctor’s visits, lab tests and durable medical equipment, among others. Preventive care and diagnostic services are also covered. Some Advantage plans also cover emergency treatments for people who are out of the country, and many plans include prescription drug coverage. Medicare Advantage plans may offer prescription drugs in Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs) and Private Fee-for-Service (PFFS) plans. Special Needs Programs or SNPs also offer prescription drug coverage. If you’re enrolled in a Medicare Advantage plan, then you can’t enroll in a standalone Part D plan.
There are no set costs for Medicare Advantage because these plans are sold through private insurance companies. You could have any combination of premiums, coinsurance rates, copayments and deductibles depending on the type of plan that you choose. Your out-of-pocket costs will vary based on a variety of factors. Since MA plans differ, it’s critical to speak with an insurance agent ahead of time to make sure that you understand your plan’s costs. You can change your MA plan during open enrollment, which runs from October 15 through December 7, but it’s best to pick a plan that works for you from the start if you can.
Medicare Part D Supplement plans
Aside from traditional Medicare and Medicare Advantage, there are private plans available called supplemental plans or Medigap insurance. Medigap coverage, as its name implies, fills in gaps left over by traditional Medicare (Parts A and B). There are 10 types of Medigap policies, labeled with letters. With the exception of three states (Wisconsin, Massachusetts and Minnesota), every Medigap plan is standardized in terms of what it covers. Not only do Medigap policies offer additional coverage, but they may also cover out-of-pocket costs like deductibles, copays and coinsurance. It’s important to note, however, that Medigap policies sold after January 1, 2006 cannot cover prescription drugs.
For an outline of the different Medigap policies and more information on how supplemental Medicare insurance might help you, see our article on Medigap insurance. You can also visit the Medicare.gov website for additional explanations of these policies and their legal requirements.
Cost Assistance for Prescription Drugs
Federal and state governments work together to offer programs that help lower-income seniors afford their prescriptions. These efforts are called Medical Savings Programs (MSPs). Each state has income limits. If your income falls below your state’s limits, then you’re automatically eligible for MSPs. Federal law now requires that seniors who meet the income requirements be enrolled in the Part D Extra Help program. Seniors who are enrolled in Extra Help don’t pay a premium or deductible. They receive prescription drugs at a low copay, and they don’t have to worry about the donut hole. An added bonus is that if you qualify for Extra Help but don’t enroll in Part D on time, then the program will cover your late fees as well.
Medicaid, Supplemental Security Income (SSI) and Program for All-Inclusive Care for the Elderly (PACE) are some of the other programs designed to help seniors and those with disabilities afford prescription drugs. Each state has a Medicaid office and website seniors can visit to either get more information or to sign up. These sites and offices have further information regarding help paying for prescription drugs.
Don’t overlook help from the source itself, either. In some cases, pharmaceutical companies that manufacture name brand as well as generic medications have programs designed to help cover the cost of prescriptions. Examples include:
- Pfizer RxPathways
- Sanofi Patient Assistance Connection
- Novartis Patient Assistance
- GlaxoSmithKline GSK For You
- AstraZeneca Affordability Programs
Some states, but not all, also have dedicated programs for helping people pay for prescription drugs. The National Conference of State Legislatures offers a detailed breakdown of states with pharmaceutical assistance programs. Some programs that are currently available include:
- Indiana Hoosier Rx Assistance
- Massachusetts Prescription Advantage
- Maryland SPDAP Subsidy
- Maine DEL and RX Plus
- Missouri Rx Plan
- Montana Big Sky Rx Program
- New Jersey Senior Gold and PAAD
- New Mexico MEDBANK Program
- Nevada Senior RX Program
- New York EPIC Rx Assistance
- Pennsylvania PACE Rx Assistance
- Rhode Island RIPAE Rx Assistance
- Vermont VPharm and Healthy Vermonters
- Wisconsin SeniorCare Rx Assistance
This article is designed to help you understand your options when it comes to prescription drug coverage under Medicare. Part D can be an overwhelming aspect of the program since there are a lot of rules and caveats attached. However, knowing what you can get ahead of time will save you time, money and frustration in the long run. Our site is dedicated to answering questions about Medicare, and insurance agents should help guide you through this process. For those who need cost assistance, there are programs available to ease the burden on your health care budget. There’s a Medicare plan for everyone, and there’s financial assistance for those who need it. Don’t be afraid to ask for help from a variety of sources as you create a healthcare plan that works for you.