Sensible Perspectives

Medicare Part D: Prescription Drug Coverage

Posted by on June 27, 2017

Medicare Graph

Welcome back to Sesame Street (for seniors). Today, we are going to talk about the letter “D”. (Sorry, but I couldn’t resist).

Medicare Part D covers outpatient prescription drugs. You can obtain Part D coverage through stand-alone drug plans or Medicare Advantage plans that include drug coverage as part of their benefits package. (Medicare Advantage is the subject of a future article.)

The “D” in the name presumably stands for Drugs, but it might as well stand for Doughnut because Part D is infamous for its “doughnut hole” pricing structure – the pricing phase that requires you to pay a higher share of your medication costs until you reach a certain out-of-pocket dollar amount. More on that later.

Scope of drug coverage under Part D
As I mentioned in an earlier Medicare article, Part D isn’t the only Medicare drug benefit. Part A (hospital coverage) covers drugs administered when you are a patient in a hospital or a skilled nursing facility (short-term stay, such as post-surgery rehab). Part B (doctor coverage) covers drugs administered in a doctor’s office, hospital outpatient departments, and in some circumstances, by hospice professionals.

Part D covers outpatient prescription drugs that you administer to yourself, a caregiver administers to you at your home, or you receive if you live in a nursing home.

Some drugs are not covered by any part of Medicare, such as over-the-counter or cosmetic-related medications, and drugs related to promoting fertility and treating sexual disorders.

Who should enroll, and when
To qualify for Part D, you must be at least age 65 (or younger with a qualifying disability) and enrolled in Medicare Part A or Part B (or both), or in a Medicare Advantage plan that does not include prescription drug coverage.1

If you have opted for traditional Medicare (Parts A and B) and do not have drug coverage as part of a former employer retiree health plan, then you will most likely want to enroll in Medicare Part D.

Part D is voluntary, but if you intend to enroll, you should do so at the time you enroll in Medicare Part A or Part B, or Medicare Advantage if it doesn’t include prescription drug coverage.

If you are late to enroll in Part D, you will be penalized in two ways: First, your premium will be higher for life; and second, you will have to wait until the Fall open enrollment period (October 15 to December 7) . Although the latter may seem like a mere inconvenience, it could be financially burdensome should you unexpectedly need expensive drugs for a serious illness and find yourself without coverage.

How Part D works – drug tiers and formularies
Many insurance companies offer Medicare-sponsored prescription drug plans. Each plan must adhere to Federally mandated Part D guidelines. For example, all plans must cover at least two drugs in each drug class. A class is defined as all the similar drugs that are used to treat the same medical condition. In some classes, drug plans must cover all drugs in that class. Anticancer, anticonvulsants, antidepressants, HIV/AIDS, and immunosuppressants are some examples.

However, plans differ in the specific drugs they cover, out-of-pocket costs, and certain other provisions and restrictions.

Central to each Part D drug plan is its Formulary, a list of prescription drugs that the plan will cover. Each plan sets its own formulary. The formulary divides the plan’s covered medications into four tiers, as follows:2

Drug plans change their formularies often, sometimes more than once per year. They will move a drug from one tier to another, or remove a drug from the formulary altogether. If your plan moves a drug you take to a more expensive tier mid-year, or removes it from the formulary for non-safety-related reasons, you have the right to keep taking the medication and paying your current co-pay for the rest of the calendar year.

It is very important to check your plan’s formulary at least once, preferably twice per year, to ensure that your medications are still covered, and that the co-pays are still affordable. If they are not, you may need to consult with your doctor about alternative medications, or change to a more suitable prescription drug plan during open enrollment.

Determining your out-of-pocket costs
Part D out-of-pocket costs consist of a monthly premium, a yearly deductible, and co-pays / co-insurance. The premium varies by the prescription drug plan you choose, as well as your income. The higher your income, the higher your premium. Within a given drug plan, the amount of your co-pays and co-insurance varies by the medication you take.

The chart below illustrates how your 2017 monthly premium would be calculated based on your income as reported on your 2015 IRS tax return (income 2 years’ prior). If your income is above a certain limit, you’ll pay an Income-Related Monthly Adjustment Amount (IRMAA) in addition to your plan premium, as shown below:4

Your total monthly premium in 2017 depends on your tax filing status and yearly income in 2015

File individual tax returnFile joint tax returnFile married & separate tax returnTotal monthly premium (2017)
$85,000 or less$170,000 or less$85,000 or lessyour plan premium
above $85,000 up to $107,000above $170,000 up to $214,000not applicable$13.30 + your plan premium
above $107,000 up to $160,000above $214,000 up to $320,000not applicable$34.20 + your plan premium
above $160,000 up to $214,000above $320,000 up to $428,000above $85,000 up to $129,000$55.20 + your plan premium
above $214,000above $428,000above $129,000$76.20 + your plan premium

Your prescription drug plan’s other out-of-pocket costs divide into four phases:

Until 2011, Medicare beneficiaries were responsible for paying 100% of their drug costs between the ICL and the Coverage Gap limit (the doughnut hole, basically). However, over the years, this percentage has declined, thanks to the Affordable Care Act (Obamacare). By 2020, plan participants will be responsible for only 25% of the costs of their medications in this phase.

It is important to note that in phase 3, you receive credit toward the dollar limit for the full retail price of a drug even if the drug manufacturer is offering discounts on your purchase. This helps you escape the doughnut hole faster.

Trying to understand tiers, phases, and constant changes to formularies, is enough to give anyone a headache. (Unfortunately, Medicare does not cover aspirin!)

In my next article, I will walk you through the process of choosing a Medicare Part D prescription drug plan (although I won’t be able to recommend which plan you should choose – the best plan for you will depend on many factors unique to you). Until then, go easy on the doughnuts!

 

Footnotes
1 Most Medicare Advantage plans now include prescription drug coverage as part of their benefits package.
2 Medicare for Dummies, by Patricia Barry, AARP, page 306.
3 Prescription drug plans can divide their covered drugs into fewer or more tiers if they want.
4 https://www.medicare.gov/part-d/costs/premiums/drug-plan-premiums.html

Rick Fine is a Senior Financial Advisor and CERTIFIED FINANCIAL PLANNERTM at Sensible Financial. Got a question for Rick about Medicare Part D? Ask in the comments section below. To speak with someone from our dedicated team about how we can help you plan for your financial future, click here!