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IF MEDICARE’S A MAZE, its Part D drug plan is a maze within a maze, with no one good path and plenty of so-so choices, along with a couple of potential “gotchas.”
Until 2006, Medicare offered no coverage for outpatient drugs, so today’s situation—however imperfect—is certainly an improvement. It’ll improve even more for people with high drug costs in 2024 and 2025, as I’ll explain at the end of this article.
What if you have Medicare Advantage, rather than traditional Medicare? Some Advantage plans include drug coverage. That coverage is typically modeled on Part D and conforms to its rules. Meanwhile, drugs administered in hospitals and doctors’ offices are usually covered under Medicare Part A and Part B.
Most Part D plans have five drug tiers and four coverage phases. Premiums, deductibles and co-pays vary. You buy coverage from an insurance company, not Medicare, and each plan sets its own prices and creates its own “formulary.” The formulary lists the drugs that the plan covers. Some drugs, such as those for HIV and cancer, must be covered, and each plan needs to have at least two drugs in the most commonly prescribed categories and classes. Still, no plan covers all drugs. The plans available to you will vary depending on where you live.
In my zip code and county, there are 24 plans, with premiums ranging from a low of $4.20 a month to a high of $132.50. The maximum deductible is set by Medicare and is $505 this year, but some plans charge no deductible. Four of the most expensive plans available to me have a zero deductible, partly offsetting their high premium cost, while the cheapest plan charges the full $505. Medicare has a good tool for comparing plans, which you should use before you choose a plan for the year ahead.
Insurance companies can set their own drug tiers. In general, those tiers are preferred generic, generic, preferred brand, non-preferred drug and a specialty tier. The latter is also known as Tier 5. The tiers—combined with the so-called coverage phases, which I’ll get to in a moment—determine your co-pay. If your plan has a deductible, you pay the full cost of your drugs until the deductible is met.
In the initial coverage phase, which you enter after you’ve met the deductible, your co-pay depends on the drug tier and your plan’s requirements. You might pay just $1 per prescription for a preferred generic, while another plan could charge $5. There may be restrictions on Tier 5 drugs, such as a requirement for prior approval or a quantity limitation. I stayed with the same drug plan for years because I’d already been approved for my Tier 5 drug.
Once you and your plan spend $4,660 on covered drugs in 2023, you reach the coverage gap, otherwise known as the “donut hole.” If you take a brand name drug, you pay 25% of retail, your plan pays 5% of retail and the manufacturer discounts the rest. There’s also a small dispensing fee. If you take a generic, you pay 25% of retail and Medicare pays the rest.
Note that “retail” refers to the price negotiated by the insurer for your specific drug at your specific pharmacy. The charge might be different at another pharmacy. The total amount you pay for your drugs, plus the manufacturer’s discount, if any, needs to add up to $7,400 this year for you to reach the catastrophic coverage phase. Once in catastrophic coverage, you’ll most likely pay 5% of retail.
Want to see what the gory details look like? This is the coverage chart for the mid-range plan I used last year. The premium for the plan is $34.60 a month and the deductible is $505 a year. If you have difficulty paying, there’s a program called Extra Help, though I doubt many HumbleDollar readers would qualify. Manufacturers often have programs to help people with the most expensive drugs, but these programs aren’t available to people on Medicare.
You can also save if the drug you need can be given in a doctor’s office. The first drug I tried for my rheumatoid arthritis was given by injection in my doctor’s office and was covered under Medicare Part B. At that time, I had original Medicare plus Medigap Plan F, and there was no charge to me.
What are the “gotchas”? The first has to do with the formulary. Each year, you sign up for a drug plan during open enrollment, which is Oct. 15 through Dec. 7 this year. The coverage goes into effect on Jan. 1 of the next year. You can’t change plans again until the next open enrollment period.
This wouldn’t matter if the insurance companies were under the same constraint, but they aren’t. They can choose to add and drop drugs from their formularies at any time. If your drug is dropped, you can have your doctor file for an exception, but it may not be granted. And, of course, you have no way of knowing when you apply to a plan in November what new drug you might need next August.
Today, there’s no out-of-pocket annual maximum for Part D. If you spend enough to make it to catastrophic coverage, you might be charged as little as $10.35 per brand-name prescription. That’s also what’s charged by the private group Medicare Advantage plan that I’m on this year. But drug costs aren’t necessarily that low. All of the Part D plans available to me charge 5% of retail once you reach the catastrophic coverage phase.
The drug I’ve taken for the past five years for rheumatoid arthritis currently retails for more than $6,000 a month—and 5% of $6,000 is a significant amount. The good news: Last year’s Inflation Reduction Act made three key changes to improve Part D’s affordability.
First, in 2024, if you make it to catastrophic coverage, co-pays will be eliminated. Second, in 2025, there will be a $2,000 annual out-of-pocket maximum for Medicare drug coverage—assuming these changes survive Washington’s budget negotiations. Finally, starting in 2026, Medicare will be able to negotiate directly with manufacturers on the price of some expensive brand-name Part B and Part D drugs that don’t have competition.
Kathy Wilhelm, who comments on HumbleDollar as mytimetotravel, is a former software engineer. She took early retirement so she could travel extensively. Some of Kathy’s trips are chronicled on her blog. Born and educated in England, she has lived in North Carolina since 1975. Check out Kathy’s previous articles.
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Thank you for your articles re: Medicare – a totally confusing subject that is difficult to understand by even the most well informed.
One additional point to consider in trying to sort through this “gordian knot” is that if Part D/Drug coverage is not acquired at the age of 65, there will be a substantial penalty to pay if drug coverage is ever needed in the future. So even the healthiest among us, who take no prescription medications, are well advised to pick up some kind of drug coverage when making Medicare choices.
I agree with you, but last week James McGlynn wrote about the perspective of the wealthy: https://humbledollar.com/2023/06/living-dangerously/
Thank you for your well written and informative article. How will the $2k OOP max work for drugs in 2025? Will this apply to Part D and Advantage or something else.
My wife has a medigap F plan and Part D. I have a company paid supplement that includes medical and prescriptions. It also has a maximum cost to insuree of $1500 which has been great for me.
You can read the CMS fact sheet here. Key quote:
“People with Medicare prescription drug coverage will benefit from a yearly cap ($2,000 in 2025) on what they pay out-of-pocket for prescription drugs, starting in 2025. They will also have the option to pay their prescription costs in monthly amounts spread over the year rather than all at once, beginning in 2025.”
I have found that Clever RX is almost always less than Good RX – at least for the drugs my wife and I use. I have had to educate the pharmacies to use it since it is not as well known.
very informative article Kathy. In addition to the Extra Help program, many states have programs for seniors and disabled who, while not eligible for extra help, may still qualify for a state funded program. New Jersey has two…pharmaceutical Assistance to the Aged and Disabled (PAAD) and Senior Gold. Both very helpful.
Thanks, Marjorie. HumbleDollar readers may qualify before they go on Social Security, but I suspect not afterwards.
requirements are you have to be on social security, age 65 or older -or ages 18 to 64 for disability recipients, so very inclusive and income limits around $50,000.—really good options for seniors who, while not in the lowest income category, can still get a lot of help with pharmaceutical costs.
Thanks Kathy for going into the details of this maze called Medicare. I am dreading as I will be getting on Medicare for the first time this Nov and the more I read the more confused what I should do. The consultants I have reached out to make it equally hard to figure out what to do and how to navigate this maze.
Like mytimetotravel, I also strongly recommend Medicare For Dummies. It’s the clearest explanation of the Medicare alternatives in book form. That helped me decide to go the Advantage route.
I also suggest soliciting advice from wherever you’re going to get care. At the suggestion of my oncologist at the University of Washington, I sat down with one of the finance people there. They’re the folks who deal directly with the various Medicare plans and have a good idea of who covers what and who is good — or bad — to work with. The latter was important to me because responsiveness in an insurer is my top priority over finding the best price.
I was already leaning towards the United Healthcare AARP plan anyway, and as it happens, UW already had a tight working arrangement with United. It turned out to be a solid choice for me. They do a good job of explaining things. Like why my insulin pump falls into the donut hole. (!!!!)
For most people, especially those who want freedom in selecting health care providers, the choice is basic Medicare and Medigap Plan G. Initial enrollment in Part D is heavily dependent on the medication one takes and the balance between deductibles, co-pays and premiums. There are calculators where you can enter the drugs you take and compare total estimated spending for a year by plan.
Were the consultants insurance brokers? I always recommend seeing a SHIIP counselor (may be called something else in your state) and reading “Medicare for Dummies”. The current issue is a bit dated but the bones are still good.
If you can afford it, my personal recommendation would be Original Medicare plus a Medigap Plan G, preferably not Attained Age rated, plus the cheapest Part D plan that covers your drugs and has a reasonably long formulary. I am on a Medicare Advantage plan this year because of changes my ex-employer made, but I will go back on Medigap Plan G before the end of the year as later I won’t be able to do so without underwriting, which I would fail.
Several of my friends met with SHIIP counselors (called SHINE in my state) and were very happy about their experience.
Sometimes paying RETAIL with GOOD RX is cheaper than using your Drug Plan with Medicare. The pharmacy will never tell you such. Check it out as good rx costs nothing to join
That’s true, but you have to take into account that the cost then won’t count towards your deductible.
Good point GoodRx etc. is best used after meeting your deductible.
Another informative, clear piece, Kathy. With the understanding that comes from reading these, I hope that the public comes to see who has the power when writing the rules (legislation), and it isn’t the citizens.
Thanks, Will. The amount of money spent on US elections is astounding to someone who grew up in the UK. Not to mention how long they last! The amount of money spent on health care is also astounding and much of it goes on admin and middle men.
Kathy, thanks for the informative and well written article. We have a similar plan to yours – luckily we take almost no regular meds. I have a number of friends approaching 65 and I will recommend this article to them.
Thanks Rick. When I first went on Medicare I took no drugs. Now my RA is back in remission I am taking very few, but it was a decidedly expensive interlude!
Part D is indeed a (unnecessary) maze resulting from the politicians nod to pharma to get Part D passed in the first place.
I experienced this first hand when my former employer dropped retiree drug coverage and thousands of us were forced to select a Part D plan after having decades of a good employer plan. I was fortunate because our drug spend is low, but many were hurt financially.
One thing we should make clear though is that when it’s said a plan doesn’t cover my drug, it is a reference to a specific brand. As you note each plan needs to have at least two drugs in the most commonly prescribed categories and classes.
On top of federal rule these plans, like Medigap, are subject to state insurance regulation.
At initial enrollment, it’s relatively easy to see what your drug OOP may be, but as you receive new meds during a year, one may be in for a surprise.
The so called negotiating of certain drugs in the future is a red herring. It affects few drugs and very likely will drive up other prices, the $2,000 cap will add cost to the program and while helpful for those with high costs, affects relative few. Only about 1.5 million now pay more than $2,000 for their drugs, but it can hurt if you are one of them.
The fact is offering choice of any kind when it comes to health care never works. Sooner or later the impact of adverse selection affects prices, complexity grows to cope and costs are shifted to other groups. In this case from Medicare to the private sector.
Some day Americans will realize, will demand changes to the monster we have created in the name of choice and competition; neither valid in the context of health care.
Unfortunately, all drugs are not created equal. Someone can do well on one drug for a given condition, and have unacceptable side effects, or an inadequate response, with another drug in the same class. This is especially true when switching from a brand name drug to a generic. I switched from one JAK inhibitor to another early this year, and the second one caused side effects I did not experience with the first, and didn’t work as well.
That’s true all drugs in a class are not identical. When it comes to generics the difference is color and perhaps inert ingredients. In fact, in some cases the generic is actually the brand drug sold as a generic by the same manufacturer.
I guess if I were one of the “only” 1.5 million, including several people I know, I would be grateful for the OOP max change.
If the 1.5 million is accurate, I was one of them until my RA went back into remission this year, and I would have been extremely grateful for the cap. Some of those 1.5 million are a lot worse off then I was.
It is not only people who reach catastrophic coverage who have problems affording drugs. This is an interesting, if sad, article on drug costs for seniors.
Indeed you would and so would I, but keep in mind that is out of nearly 60 million.
Very informative article Kathy. This is definitely one thing about turning 65 that I do not look forward to.
Thanks, Michael. It is so sad that the US medical system is such a mess. We spend so much money, and so much of it goes on things other than actual care. People think of Medicare as a safe haven, but it really isn’t.