Turning 65 is a big deal when it comes to health insurance. Beginning three months prior to your 65th birthday, and lasting three months after your birth month, you are officially eligible for Medicare, the United States’ federal health insurance program.
If you’re not familiar with how Medicare works, you’re not alone. Medicare has many moving parts, and it can become especially confusing when you add prescription medication coverage into the mix.
How Medicare Works
Medicare primarily provides health insurance to Americans who are 65 years and older, but also to younger individuals with certain disabilities, including end-stage renal disease (ESRD) and amyotrophic lateral sclerosis (ALS or Lou Gehrig’s disease).
Medicare acts as a useful replacement to employer-based health insurance, as 69% of Americans retire by the age of 66. Medicare can be broken up into four parts:
- Medicare Part A (Hospital Insurance)
- Medicare Part B (Medical Insurance)
- Medicare Part C (Private Insurance)
- Medicare Part D (Prescription Medication Insurance)
Parts A and B are known collectively as “Original Medicare.” They help you cover the costs of services like hospital visits, medical equipment, and more.
Part D was created to help cover the cost of prescription medications, given that Original Medicare only covers a very limited number of drugs.
Part C – known as “Medicare Advantage” – is a private-insurance alternative to Parts A, B, and D that bundles Medicare-based hospital, medical, and prescription insurance benefits into one comprehensive package.
The primary differences between Original Medicare and Medicare Advantage are convenience and coverage. Medicare Advantage plans are required to offer all of the same benefits of Original Medicare, but they may also include additional benefits such as dental, vision, hearing and prescription drug coverage.
Note: To be eligible for a Medicare Advantage plan, you must first be enrolled in Parts A and B (Original Medicare) and live in the plan’s service area.
Whether you enroll in stand-alone coverage as part of an Original Medicare plan or in combined coverage with a Medicare Advantage plan, prescription medication insurance works in the same way.
How Medicare Part D Works
Medicare Part D coverage has four benefit phases, beginning with a deductible period and progressing into different levels of coverage thereafter.
- Annual Deductible
- Initial Coverage
- Coverage Gap
- Catastrophic Phase
Phase 1: Annual Deductible
Medicare Part D plans have different deductible structures. Some may charge you the full deductible, others a part of the deductible, and a few may even charge no deductible.
Zero-deductible plans begin at Phase 2, but be aware that you may have to pay a higher monthly premium.
During Phase 1 (for full and partial deductible plans), you pay full-price for in-network prescriptions until the set deductible amount is reached. In 2022, the annual deductible for Part D is $480.
Phase 2: Initial Coverage
After meeting the annual deductible, you transition to the initial coverage phase. During initial coverage, you will most likely have to pay a copay (a fixed dollar amount) for your prescription. However, some plans may use a coinsurance structure in which you pay a percentage of the negotiated cost of a certain drug.
Copay amounts vary from plan to plan and from drug to drug. Insurance companies use a drug formulary (a tiered list of drugs) to categorize and price different types of prescription medications – for example, generic and brand-name, in-network and out-of-network.
During the initial coverage phase, both you and your insurance company contribute to the cost of prescription medications on this formulary. If your combined contributions meet the “initial coverage limit” – which is $4,430 in 2022 – you transition to the third coverage phase.
Phase 3: Coverage Gap
The coverage gap phase, also known as “the donut hole,” is a period in which you have to pay 25% of the retail price for your prescription medications.
However, keep in mind that some plans offer “gap protection” for generic prescriptions, meaning you only have to pay the fixed copay for certain prescriptions even though you are in the coverage gap phase.
During this phase, all eligible medications are priced at a set percentage, and you, your insurance provider, and the drug manufacturer all contribute to the coverage limit.
The contribution limit for Phase 3 is known as the “coverage gap limit” – and in 2022 is set at $7,050. It is relatively rare to hit the coverage gap limit and transition to the fourth and final coverage phase, but if you have expensive medications it is possible.
Phase 4: Catastrophic Phase
Despite it’s intimidating name, the catastrophic phase has great coverage for those who enter it. During this phase, you only have to pay a small coinsurance percentage or copay dollar amount on eligible drugs for the remainder of the year.
In 2022, this cost equates to $3.95 for generic medications and $9.85 for brand-name, or 5% of the total drug cost (whichever is higher).
Once the new year begins, you will return back to the first phase (annual deductible) and the process repeats.
When Can I Enroll in Medicare Part D?
There are three periods throughout the year in which you can enroll in Medicare Part D:
- Your Initial Enrollment Period (IEP)
- Annual Enrollment Period (AEP)
- Special Enrollment Period (SEP)
Initial Enrollment Period takes place when you first become eligible for Medicare (the seven month total period prior to, during, and after your 65th birthday). If you are already retired, or plan on retiring soon, this is the best time to enroll in Medicare.
Annual Enrollment Period takes place between October 15th and December 7th of each year. This is the ideal time to review your current Medicare plan coverage and change plans for the following year if needed.
Need help reviewing your Medicare Part D coverage? Schedule a free Part D plan-review consultation with Community Pharmacy here.
Special Enrollment Period is the third opportunity you have to enroll in Medicare Part D. It is reserved solely for individuals with special circumstances, such as moving out of state or losing creditable coverage from a group plan.
Late-enrollment Penalty for Medicare Part D
If you do not enroll in Medicare Part D during your Initial Enrollment Period, you may receive a late-enrollment penalty on your monthly premium once you eventually enroll.
This late-enrollment penalty increases the longer you go without coverage. After your enrollment window ends, Medicare will multiply 1% of the national base beneficiary premium ($33.37 in 2022) by the number of months you go without creditable coverage.
Medicare then adds this number to your Part D monthly premium after you enroll, and you will have to pay the increased premium cost for the reminder of your time under Medicare coverage in most instances.
If you do not enroll in Part D during your IEP, there are only two ways to avoid a late enrollment penalty:
- If you show proof of existing, creditable coverage (such as a group plan) and enroll during the Special Enrollment Period (within 63 days after leaving your coverage)
- If you qualify for a Low Income Subsidy (also known as “Extra Help”)
Medicare Part D Coverage Limitations
Unfortunately, Part D plans often have red tape that beneficiaries are unaware of. Most plans will have coverage limitations (also known as utilization rules) that can affect which plan is best for you, the following three being the most common:
- Quantity Limit
- Prior Authorization
- Step Therapy
This limitation type restricts the amount of prescription medication you can purchase at once. If you surpass this limit, you may have to pay out-of-pocket for the prescriptions which exceed the limit.
This limitation type may require that your doctor show proof that certain prescription medication is medically necessary for you, and that an alternative one (usually a cheaper or weaker version) is not a viable alternative.
If your plan has a prior authorization rule, you may have to receive prior authorization from your insurance agency before purchasing a certain prescription medication. This rule is common for pain medications, narcotics, and opiates.
This limitation type is similar to prior authorization but slightly stricter. With prior authorization, it is possible to receive coverage on a certain medication with help from your doctor.
However, with step therapy, you are required to try a less expensive (or less potent) alternative to said medication before your insurance provider will consider covering the cost. If the alternative medication does not work, your doctor will then have to file a “drug exception request.”
There are many moving pieces in Medicare, but especially in Medicare Part D. Coverage and restrictions differ from plan-to-plan, drug-to-drug, and year-to-year. On top of this, you have to enroll in Part D at the right time to avoid the possibility of a permanent premium increase.
We hope that this article has helped you understand how Medicare Part D works so you can receive the prescription medication coverage you need.