How Do Prescription Drug Plans Work?

Original Medicare does not provide coverage for Prescription Medications in most cases. Because of that, a separate Part D Prescription Drug Plan (PDP) is needed if you are not enrolling in a Medicare Advantage Plan that includes the coverage.

PDPs provide important coverage for prescription medications that are prescribed by a doctor and filled by a pharmacy.

Even if you do not take prescription medications, you should still purchase a plan when you first become eligible for Medicare because if you don't you will receive a Part D late enrollment penalty if you choose to enroll later.

Although every prescription provides unique formulary coverage and is allowed to place medications on whichever tier they want, they all work in the same way.

• Annual Deductible — All plans included a deductible, but the deductible amount can range from $0 to hundreds of dollars. Each year CMS (Centers for Medicare & Medicaid Services) sets the maximum Part D Drug Deductible for the calendar year. Plan providers are allowed to set a deductible between $0 and the Calendar Year Maximum. After you have met your deductible, you begin initial coverage stage.

• Initial Coverage — During the Initial Coverage Stage, you pay a copay for your medications based on your plan’s formulary and the drug tier until you reach the Initial Coverage Cap. The coverage cap amount is set by CMS every calendar year.

  Each prescription drug plan separates its medications into tiers. The lower the tier, the lower the cost of the medication. Each tier has a copay amount for which you are responsible for. It is typically separated by generic drugs (tier 1), preferred name brands (tier 2), even more specialized medications all the way up to tier 6. After you and the insurance company together have paid the coverage cap amount, then you enter the coverage gap stage.

• The Coverage Gap – During the coverage gap phase, you will have significant discounts for generic medications. However, you will pay 25% for name brand medications and 37% for generics. Your gap spending will continue until you reach the total-out-of-pocket (TrOOP) limit for the calendar year.

  The TrOOP limit is set by CMS every calendar year and historically has increased year after year.

• Catastrophic Coverage – Once the amount spent on medications by you and your insurance company reaches the TrOOP limit, you will enter the catastrophic coverage stage. In this stage your plan will begin to pay 95% of the costs of your formulary medications for the rest of the year.