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FOR MOST SENIORS, purchasing Medicare Part D prescription drug insurance is the right move—even if they don’t require any expensive medicines right now. The coverage insures against the risk of someday needing prescription medication that costs thousands of dollars and might be otherwise unaffordable.
The federal government subsidizes Part D, so it’s cheaper than purchasing stand-alone private drug insurance. Another good reason to enroll in Part D at the first opportunity: You avoid the penalty associated with a late sign-up.
Part D has an initial open enrollment window that runs from three months before to three months after your 65th birthday month. After that, there’s a late enrollment penalty unless you have “creditable coverage”—meaning that, up until that point, you had equivalent drug insurance from, say, your current or former employer. You’d also avoid the penalty if you’re enrolled in Medicare Advantage, a comprehensive health plan that typically includes prescription drug coverage.
If neither applies, Medicare imposes a penalty on those who sign up late. It’s trying to squelch moral hazard—free riders who only buy coverage after being prescribed costly medicine. The math on the Part D penalty is complex. But here’s Medicare’s official explanation: “Medicare calculates the penalty by multiplying 1% of the ‘national base beneficiary premium’ ($32.74 in 2023) times the number of full, uncovered months you didn’t have Part D or creditable coverage. The monthly premium is rounded to the nearest $.10 and added to your monthly Part D premium.”
Scratching your head? Here’s the boiled-down version: In 2023, delaying signing up by one month adds 33 cents to the Part D premium. That may not sound like much until you consider some delay signing up for months or even years—and the penalty persists for as long as they’re enrolled in Part D. In a hypothetical example, Medicare calculates that someone who was 29 months late enrolling would pay an extra $9.50 a month for coverage or $114 a year—for life.
Still, Part D might not be right for everyone. Who might choose not to enroll? Two groups come to mind. As I mentioned, those who enroll in a Medicare Advantage plan usually have prescription drug insurance bundled into their overall coverage. In fact, if your Medicare Advantage plan covers prescription drugs, you can’t have Part D, too.
A second, smaller group could be those fortunate few who are both healthy and wealthy. They might choose to self-insure—pay drug costs from their pocket—to avoid a substantial surcharge owed by high-income individuals who enroll in Part D.
The Part D surcharge is $70 a month per person in 2023 for joint filers earning between $366,000 and $750,000 annually. For those making more than $750,000, the monthly surcharge ramps up to $76.40 a month. These are known as income-related monthly adjustment amounts, or IRMAA for short. IRMAA surcharges are levied not only on Part D, but also on Part B—and the Part B charges are even higher.
Healthy and wealthy people can avoid the Part D cost by self-insuring. Under the worst-case scenario, they’d pay for up to 12 months of prescriptions before enrolling in Part D at the next opportunity, at which point the charge would include the penalty for late enrollment.
Part D can be purchased each year during an open enrollment period that runs from Oct. 15 to Dec. 7. It’s not underwritten—meaning no one is turned away from coverage based on health.
Individuals paying the highest income-based Part D IRMAA fee of $76.40 a month—on top of the average Part D premium of $32.74—would save $1,309.68 by not signing up for one year. They would pay a penalty for delaying if and when they signed up, however.
If they delayed signing up for Part D by one year, I estimate it would take 28 years before the late enrollment penalty exceeded the savings of delaying Part D coverage for one year. I’m assuming that a wealthy person could afford to pay out-of-pocket for prescriptions for one year.
To be sure, if you’re not wealthy, this is living dangerously. The most expensive prescription drug, Zolgensma, a one-time infusion to treat spinal muscular atrophy, costs $2.1 million in 2022, according to GoodRx. The site lists 10 drugs that cost more than $600,000 over the length of therapy, none of them commonly used. Still, if you couldn’t afford them, be sure to enroll in Part D when it’s available.
James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. Check out his earlier articles.
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Lots of good points here. We fortunately retired with plenty of money and we do not have major health problems or a need for expensive meds. As pointed out here, we cannot see what down the road will bring, so we got a part D plan anyway with Wellcare. The premium is a little over $8 a month. It actually went down this year. We figured ‘why take the risk?”.
Zolgensma is for children under 2 years of age. Probably not helpful to quote prices for random drugs that retired adult can’t possibly need.
The max price of random drugs is also useless information. If there is a $100 generic for each of those $600,000 drugs, or an alternative drug that’s equally effective; why would anyone care that the more expensive options exist? It would be much more helpful to know the cheapest option to treat an expensive condition that a retired adult could potentially have. That way they can make an informed choice on the risks of self insuring. Otherwise, this just seems like fearmongering, intentional or not.
I’m not aware of any cheap drugs to treat cancer , which certainly isn’t uncommon among retired adults.
I’m thankful that the process I followed to gradually accumulate a sufficient nest egg was comparatively simple as opposed to choosing the optimal form of healthcare coverage in retirement! Even so, my wife and I have been very satisfied with traditional Medicare, plan G supplements and part D insurance for the past 5 years. Thanks for a helpful article reminding those of the lifetime penalties they must pay for delaying enrolling in a part D policy.
I’m turning 63 this year and I’ve really appreciated the clarity and real-world discussion of Medicare in this article, was well as others recently. I’m going to have to figure Medicare out in less than two years and these sorts or discussions are goign to be very helpful.
Same here—almost 63. I find the Medicare discussion pretty confusing. I get the basic parameters of traditional vs. Advantage, but we have an interface with our former employer’s coverage that I don’t quite understand despite having attended a webinar on the topic. Hopefully we’ll figure it all out in the next two years!
As usual, I recommed “Medicare for Dummies” (I believe a new edition is due soon) and a free consultation with a SHIIP counsellor. (May be called something else in your state.) I had Medicare A and B and employee retiree group coverage for several years and it worked very well.
An important thing about getting Part D not mentioned is the tool at MyMedicare.gov that tells you fairly accurately which Plan D company you should choose each year to obtain the lowest out-of-pocket cost for your drugs.
This is my 12th year on Part D. I have used 10 different insurance companies over that period. To use the tool, you need a list of your prescriptions, including dosages. You need to know which drug store or mail vendor you want to use. Then, after you have registered at MyMedicare.gov, you enter your drugs and dosages and source, and the tool tells you which company has the lowest cost including deductibles, premiums and co-pays.
If what you take doesn’t change from one year to the next, MyMedicare retains your old information, and you get your lowest price option with little effort.
If during a given calendar year, you have to start a new expensive drug, you know that at the next open enrollment, you will have an opportunity once again to find the best deal for the following year.
You don’t have to take an exotic drug to have high costs. Rheumatoid arthritis drugs routinely cost more than $6,000/month. Next year you will not have a co-pay after reaching catastrophic coverage (usually you pay 5% of retail in this phase) and the following year co-pays will be capped at $2,000. Will it be worth the IRMAA to get that cap?
The article specified for someone who is healthy and not on medication. My assumption is that there is usually some advanced warning for most medications. If I had rheumatoid arthritis I would definitely sign up for Part D with the IRMAA tax too.
Advance warning? Many diseases appear without warning . I was just diagnosed with a cancer found by accident and I have no symptoms at all . And I have no risk factors for this type of cancer, and no family history. You can have amazing health- until you don’t. I’m sure glad I didn’t get an Advantage Plan.
My RA had been in remission so long – 30 years – I had forgotten I ever had it when it recurred. Diseases, not to mention accidents, can occur without warning.
Thanks for the info. I also think that eventually at any later age Part D would be highly advised.
“Medicare calculates that someone who was 29 months late enrolling would pay an extra $9.50 a month for coverage or $114.00 a year for life.”
There is no cap on the Part D penalty. The national base premium may change every year, so your penalty is recalculated every year.
The dollar amount will therefore change every year with the base beneficiary premium for every month you were eligible and did not enroll.
added: There are a few good Medicare Part D late enrollment penalty calculators to calculate penalties found on cams.gov and other sites. NerdWallet has a simple one.
Oops..cms.gov
I will begin paying Part D and IRMAA surcharges next month. As for all my insurance policies, I view Part D coverage as money well spent on something I hope to never to use. Essentially, I am insuring peace of mind, and am thankful that the coverage exists. Where I live, “placeholder” Part D policy premiums can be found for as little as $5 a month.
I agree the “placeholder” Part D plans are the best to cover the penalty and catastrophic. I used the “national base beneficiary premium” for purposes of uniformity.
Not sure why a healthy and wealthy person would be concerned about paying $1,309.68 in premiums to take the risk of that savings easily being wiped out with one 30-day script.
Not sure how you use “wealthy” here but worrying about a $70 a month income based premium with a retirement income of over $366,000 doesn’t seem credible to me.
I know many average retires with Part D currently paying over $500 or more a month for their (multiple) medications so it’s not a matter of spending on A drug, but the aggregate. 40% of seniors take 5 or more prescriptions.Nearly 20 percent take ten drugs or more. Of course, Part D is changing to limit OOP spending.
A far more difficult matter for Part D selection is the formulary it uses and its changes coupled with choosing the right combination of deductible and co-pays aligned with drug tiers.
Part D beneficiaries are skewed-many have a lot of medications and the healthy have few. The ones I know who eschew Part D have Long Term Care Insurance for the highly likely future expense which does have underwriting. I do think the better bet for the “healthy wealthy” would be to delay signing up for Part D either until you start on any medications or turn age 80.
Does Long Term Care Insurance cover drugs? I thought you had to be unable to perform at least two “activities of daily living” for it to go into effect, and even then I didn’t think it covered drugs. Plenty of conditions for which you take expensive drugs but can still live independently.
I have never seen an LTC policy that includes drugs .
I mention Long term care insurance because many readers want to self-insure for this even though the expense of having no LTC insurance far outweighs a 1-year drug expense.
Not always .
Generally yes, but not always
I “assume” LTC for 1 year would be $100000 (ballpark) and the odds of needing that are fairly high- 50%. I also assume it could last multiple years. I also “assume” an annual drug expense exceeding $100000 is fairly low- less than 10% and then ONLY 1 year.
The probability of a stay lasting multiple years is 10% .
Yes, there’s a roughly 50% chance of seniors needing nursing home care. But I view that as a statistic designed to scare people. While a minority of folks will indeed be in nursing homes for an extended period, most stays are relatively brief, often in skilled nursing facilities following a hospitalization, with the cost covered by Medicare:
https://humbledollar.com/money-guide/nursing-home-costs/
There is also a difference of receiving long term care at home versus being “dragged” to a nursing home. I know of many situations where an elderly person is being “looked in on” at home by relatives because they don’t have the finances to pay for care or do not want to go to a nursing home.
According to HealthyAging.org 25% of people admittted stay 3 months or less. About 21% stay five years or more. I am “self-insuring” by moving to a CCRC that promises not to throw me out if I run out of money. However, if it looks like I’m going to be in skilled nursing for five years I’m buying a one-way ticket to Switzerland and Dignitas instead.
I was offered LTCi insurance by my employer when I was in my 40s. I wonder how much I would have paid in premiums over the ensuing 30 years.
My source shows 14% for stay >= 5 years .
It’s seems to me that if you sign up for any Part D plan at age 65, you can switch to a different plan later without paying a surcharge. Is this correct? If so, you could sign up for a cheap plan with limited coverage early in retirement, and switch later.
Ormode…you are correct. Most people at age 65 don’t require a lot of medication but best to sign then up to avoid penalties later on. Your strategy is a practical one. You can always change during open enrollment period.
Depends on how you define “a lot” and if you are talking $ or # of Scripts 40% of seniors taking five or more drugs sounds like quite a bit of use.
if you mean the late enrollment penalty, you are right. I researched any risk of changing plans during open enrollment and found none.
Of course, your premiums will be higher with a better plan. The risk is for a year because you could start a new expensive drug early in a year and have limited or no coverage for a year possibly wiping out savings. It all boils down to risk and getting what you pay for.
But then again…you could be paying big $$$ for a “better” Part D plan, and get put on an expensive med early in the year, and still have no coverage if that particular drug doesn’t happen to be in that plan’s formulary. Worse still, that drug could be part your plan’s formulary at the beginning of the year, and the plan changes the formulary during the year, dropping that drug, and you lose yet again. Talk about a moving target! No wonder seniors get so frustrated with this aspect of Medicare, you can actually plan ahead, do everything right, and still get the rug jerked out from under you. Not cool.