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Medicare Part D, also called the Medicare prescription drug benefit, is a United States federal-government program to subsidize the costs of prescription drugs and prescription drug insurance premiums for Medicare beneficiaries. It was enacted as part of the Medicare Modernization Act of 2003 and went into effect on January 1, 2006.

Eligibility and Enrollment

Individuals on Medicare are eligible for prescription drug coverage under a Part D plan if they are signed up for benefits under Medicare Part A and/or Part B. Beneficiaries obtain the Part D drug benefit through two types of plans administered by private insurance companies: the beneficiaries can join a standalone Prescription Drug Plan (PDP) for drug coverage only or they can join a public Part C health plan that jointly covers all hospital and medical services covered by Medicare Part A and Part B at a minimum, and typically covers additional healthcare costs not covered by Medicare Parts A and B including prescription drugs (MA-PD). About two-thirds of all Medicare beneficiaries are enrolled directly in Part D or get Part-D-like benefits through a public Part C Medicare Advantage health plan. Another large group of Medicare beneficiaries get prescription drug coverage under plans offered by former employers.

Generally, not all drugs are covered at the same out of pocket cost to the beneficiary. This gives participants incentives to choose certain drugs over others. This is most often implemented—as is the case for drug coverage for those not on Medicare—through incentives to use generic drugs over brand-name drugs. The incentive is also often implemented via a system of tiered formularies in which some brand-name drugs are less expensive than others.

Medicare beneficiaries must enroll in a Part C or Part D plan to participate in the federal-government-subsidized drug program. They can enroll directly through the plan’s administrator, or indirectly via an insurance broker or the exchange run by the Centers for Medicare and Medicaid Services (CMS) for this purpose; the beneficiary’s subsidy and other assistance payments and rights are the same no matter which enrollment channel they choose. Beneficiaries already on a plan can choose a different plan or choose to drop Part C or Part D during an annual enrollment period or during multiple other times during the year. Currently, the annual enrollment period lasts from October 15 to December 7 of each year.

Medicare beneficiaries who were eligible for but did not enroll in a Part D when they were first eligible and later want to enroll, pay a late-enrollment penalty, basically a premium surtax, if they did not have creditable coverage through another source such as an employer or the U.S. Veterans Administration. This penalty is equal to 1% of the national premium index times the number of full calendar months that they were eligible for but not enrolled in Part D and did not have creditable coverage through another source. The penalty raises the premium of Part D for beneficiaries, when and if they elect coverage.

Plan administrators are required to offer at least the “standard” minimum benefit or one actuarially equivalent, or they may offer more generous benefits. This previous sentence relates to how the administrator of the drug insurance designs the deductible/co-pay/formulary/donut-hole/pharmacy-preference aspects of each plan and has no direct relevance to the beneficiary. Each plan is approved by the CMS before being marketed.

Medicare has made available an interactive online tool called the Medicare Plan Finder that allows for comparison of coverage and costs for all plans in a geographic area. The tool allows one to enter a list of medications along with pharmacy preferences and Social-Security-Extra-Help/LIS and related status. It can show the beneficiary’s total annual costs for each plan along with a detailed breakdown of the plans’ monthly premiums, deductibles, and prices for each drug during each phase of the benefit design. Plans are required to update this site with current prices and formulary information every other week throughout the year.

What is the donut hole?

Most Medicare Prescription Drug Plans have a coverage gap (also called the “donut hole”). This means there’s a temporary limit on what the drug plan will cover for drugs.

Not everyone will enter the coverage gap. The coverage gap begins after you and your drug plan have spent a certain amount for covered drugs. In 2015, once you and your plan have spent $2,960 on covered drugs (the combined amount plus your deductible), you’re in the coverage gap. In 2016, once you and your plan have spent $3,310 on covered drugs, you’re in the coverage gap. This amount may change each year. Also, people with Medicare who get Extra Help paying Part D costs won’t enter the coverage gap.

Once you reach the coverage gap in 2015, you’ll pay 45% of the plan’s cost for covered brand-name prescription drugs. You get these savings if you buy your prescriptions at a pharmacy or order them through the mail. The discount will come off of the price that your plan has set with the pharmacy for that specific drug.

Although you’ll only pay 45% of the price for the brand-name drug in 2015, 95% of the price—what you pay plus the 50% manufacturer discount payment—will count as out-of-pocket costs which will help you get out of the coverage gap. What the drug plan pays toward the drug cost (5% of the price) and what the drug plan pays toward the dispensing fee (55% of the fee) aren’t counted toward your out-of-pocket spending.

Example

Mrs. Johnson reaches the coverage gap in her Medicare drug plan. She goes to her pharmacy to fill a prescription for a covered brand-name drug. The price for the drug is $60, and there’s a $2 dispensing fee that gets added to the cost. Mrs. Johnson will pay 45% of the plan’s cost for the drug ($60 x .45 = $27) plus 45% of the cost of the dispensing fee ($2 x .45 = $0.90), or a total of $27.90, for her prescription. $57.90 will be counted as out-of-pocket spending and will help Mrs. Johnson get out of the coverage gap because both the amount that Mrs. Johnson pays ($27.90) plus the manufacturer discount payment ($30.00) count as out-of-pocket spending. The remaining $4.10, which is 5% of the drug cost and 55% of the dispensing fee paid by the drug plan, isn’t counted toward Mrs. Johnson’s out-of-pocket spending.

In 2015, Medicare will pay 35% of the price for generic drugs during the coverage gap. You’ll pay the remaining 65% of the price. What you pay for generic drugs during the coverage gap will decrease each year until it reaches 25% in 2020. The coverage for generic drugs works differently from the discount for brand-name drugs. For generic drugs, only the amount you pay will count toward getting you out of the coverage gap.

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