Understanding Your Prescription Drug Plan Under Medicare Part D

It’s a fact of life: The older you get, the more likely you are to need prescription drugs. And Medicare’s prescription drug coverage, commonly known as Part D, can be a big help in keeping costs down. But navigating and understanding the details of your prescription drug plan can be confusing. This simple and straightforward information can help you get the most out of your prescription coverage.

To download and save this article in PDF format, click here.

Two ways to get prescription drug coverage

It’s hard to believe, but when Medicare was created in 1965, it covered only drugs administered in a doctor’s office or hospital. Then, in 2003, the Medicare Modernization Act established Medicare Part D. Part D allowed beneficiaries to buy a government-regulated, stand-alone prescription drug plan from private insurers and to finally get some relief from increasingly high drug costs.

Fast-forward to today. Now you have the option of buying either Medicare Part D — a plan that includes prescription drug coverage that can be added to Original Medicare — or a Medicare Advantage plan that includes prescription drug coverage, which is Medicare’s version of managed care. Ninety percent of Medicare Advantage plans cover prescription drugs, and one in five beneficiaries with a Medicare Advantage prescription drug plan pays a premium, which averages $65 a month, according to a 2019 report by the Kaiser Family Foundation.

But you can’t combine a Medicare Advantage plan that includes prescription drug coverage with traditional, or Original, Medicare. Your Medicare Advantage Plan (Part C) will disenroll you and you’ll go back to Original Medicare if both of these apply:

  • Your Medicare Advantage Plan includes prescription drug coverage
  • You join a Medicare Prescription Drug Plan (Part D)

You also have the option of going it alone with no drug coverage, but that could be risky: According to a 2019 study by the Kaiser Family Foundation, nearly nine in 10 adults age 65 and older take at least one prescription medication, and more than half of them take four or more.

Going without drug coverage also includes the risk of paying a penalty if you decide to sign up for coverage at some later date. The late enrollment penalty is an amount added to your Medicare Part D monthly premium that you’re typically required to pay every month for as long as you have coverage.

How and when do I sign up?

If you already receive Social Security benefits, you’ll get Medicare Part A and Part B automatically when you’re first eligible. Medicare will send you a “Welcome to Medicare” packet three months before you turn 65.

If you’re over 65 (or turning 65 in the next three months) and not already receiving Social Security benefits, you need to sign up to get Medicare Part A (hospital insurance) and Part B (medical insurance). You won’t get Medicare automatically.

Apply online for Medicare here.

If you want drug coverage, you can join a separate Medicare Prescription Drug Plan (Part D). Part D plans are offered by several companies. Compare Part D plans offered by Mutual of Omaha here.

Sign up during your initial eligibility enrollment period (the seven-month window that begins three months before your 65th birthday). If you don’t enroll during this initial eligibility period you may be charged a penalty when you try to sign up later.

What’s covered?

All plans cover the same categories of drugs, but each plan decides which drugs to cover in each category. The list of drugs each plan covers is called a formulary, which you should check before you choose a plan to make sure your current medications are covered. If you take a drug that’s not covered, you will have to pay more or ask your doctor to switch you to a covered medication.

Plans might also use coverage rules such as prior authorization, step therapy, and limits on the amount of medication you can get with each prescription to ensure proper use.

What does it cost?

The copays and cost sharing vary between prescription drug plans, as do the premiums, which depend on your income. If your modified adjusted income from two years ago is above $85,000, you’ll pay a higher premium, according to 2020 Medicare Costs, issued by the Centers for Medicare and Medicaid Services. Compare plans in your area here.

Doesn’t Part B cover drugs?

Medicare Part B, which pays for outpatient services like doctor visits, only covers certain high-cost medications like chemotherapies and other specialty medications, most of which are administered in a doctor’s office or clinic. You pay a 20-percent copayment for these drugs. Vaccines for flu, pneumonia, and hepatitis B are also covered under Part B with no coinsurance.

How do Medicare Part D prescription drug plans work?

While the drug coverage you get through a Medicare Advantage prescription drug plan is similar to what you’re used to with your private insurance (just a copayment for your medication), coverage is a bit different in the stand-alone Part D prescription drug plans.

Unlike most health insurance, where the insurer starts paying after you meet your deductible, the amount you pay for medications in a Part D prescription drug plan varies based on how much you’ve already paid. Here’s how it works: (The chart below includes information from Medicare.gov; the 2020 edition of The Official U.S. Government Medicare Handbook: Medicare and You; and Your Guide to Medicare Prescription Drug Coverage, from the Centers for Medicare and Medicaid Services.)

Understanding Prescription Drug Plan Benefits
Term Definition 2020 Amount
Annual deductible The amount you must pay out of pocket before the plan starts paying for your drugs. No more than $435
Initial coverage limit The amount the plan covers until you reach the out-of-pocket limit. $4,020 (this is the standard amount; some plans may set a lower amount)
Annual out-of-pocket threshold Amount you must spend yourself since the beginning of the year before catastrophic coverage kicks in. $6,350 (this is the standard amount; some plans may set a lower amount)
Catastrophic coverage The small copayments you pay until the end of year.
  • $3.60 for generic drugs
  • $8.95 for brand name drugs

 

Do I qualify for a subsidy?

You might qualify for a low-income subsidy, also called Extra Help, depending on your income and assets. If you qualify: You will pay no more than $3.60 for each generic drug and $8.95 for each brand-name drug all year; you can get help paying other plan costs; and you’ll have no late enrollment penalty, according to the 2020 edition of The Official U.S. Government Medicare Handbook: Medicare and You. You automatically qualify if you have Medicaid coverage; if you get help from your state Medicaid program paying your Part B premiums; or if you get Supplemental Security Income (SSI) benefits. You must live in one of the 50 United States or the District of Columbia. The chart below is based on information in the 2020 edition of The Official U.S. Government Medicare Handbook: Medicare and You.

Do You Qualify for Extra Help?
Yearly Income* Other Resources†
Single person Less than $18,735 Less than $14,390 per year
Married person living with a spouse and no other dependents Less than $25,365 Less than $28,720 per year
*You may still qualify with a higher income if you still work, have dependents living with you, or live in Alaska or Hawaii.
†Includes money in a checking or savings account, stocks, bonds, mutual funds, and Individual Retirement Accounts.

 

Can’t I get prescription drug coverage through my Medigap plan?

Medigap plans are separate insurance policies that help cover Medicare deductibles and copayments/coinsurance. Some policies used to cover prescription drugs, but that ended in 2006. So, no, you can’t get prescription drug coverage through Medigap plans.

We know it can all be confusing. But you don’t have to go it alone. A Mutual of Omaha agent/producer can help find your best option. Find a Mutual of Omaha agent here.


Medicare Part D Glossary

Catastrophic coverage The point at which you have met the out-of-pocket limit to leave the coverage gap. Your copays are less than $10 for brand-name and generic drugs.

Coverage rules Policies put into place to ensure appropriate medication usage.

Deductible The amount you must pay for prescriptions before the plan starts paying for your drugs.

Extra Help A Medicare program to help people with limited income and resources pay Medicare prescription drug program costs, like premiums, deductibles and coinsurance.

Initial coverage limit The amount the prescription drug plan covers until you reach the out-of-pocket limit.

Low-income subsidy See “Extra Help.”

Medicaid A joint federal and state program that helps with medical costs for people with limited income and resources.

Medicare Advantage A type of Medicare health plan offered by a private company that contracts with Medicare. Medicare Advantage plans provide all of your Part A and Part B benefits. Most also cover prescription drugs.

Medigap Medicare supplement insurance sold by private insurance companies to fill “gaps” in Original Medicare coverage. Some Medigap policies sold before January 1, 2006, have prescription drug coverage. Policies sold on or after January 1, 2006, don’t have prescription drug coverage.

Modified adjusted income Your household’s adjusted gross income with any tax-exempt interest income and certain deductions added back.

Out-of-pocket threshold Amount you must spend each year before catastrophic coverage kicks in.

Prior authorization You must show you meet certain criteria for the particular drug before the plan agrees to pay for it.

Step therapy The plan requires that you try certain less-expensive drugs on the plan’s formulary before moving up a “step” to a more expensive drug.

 

#461093