Often times the most confusing component of Medicare for people to fully comprehend is Medicare Part D prescription drug coverage.
Medicare Part D works rather different from prescription drug coverage provided through most job-based or affordable care act health insurance plans.
Here are the four phases of Medicare Part D prescription drug coverage that you need to know about.
Phase One – Deductible Phase
Many, but not all, Part D plans feature an annual deductible. During this phase, you may pay as much as the entire cost of your prescriptions. Some plans may provide additional coverage for generic drugs during the Deductible Phase while others may not.
The maximum Annual Deductible for 2021 is $445.
Some higher premium Part D plans may have a lower or even no Annual Deductible.
Phase Two – Initial Coverage Phase
During the Initial Coverage Phase, technically you can pay as high as 25% coinsurance of the negotiated retail price for your prescriptions, although many Part D plans offer lower coinsurance or even flat co-pay amounts which will vary based upon the “tier” of the particular drug.
Medicare Part D plans have stated formularies (list of the drugs covered under the plan) which will indicate what tier a particular drug is on that plan.
Plans typically have either a 4 or 5 tier formulary.
Tier 1 drugs are “preferred generics” meaning they are the least expensive.
Tier 2 drugs are “nonpreferred generics” meaning they are still considered generic but are slightly more expensive.
Tier 3 drugs are called “preferred brand” meaning that they are patented as a brand prescription with moderate retail costs.
Tier 4 drugs are referred to as “nonpreferred brand” meaning that they are more expensive and not as commonly prescribed.
Tier 5 drugs are considered “specialty drugs.” These drugs are often, but not always, self-injectable biologics and are considerably more expensive than Tiers 1 through 4 drugs. Typically plans will charge a higher level of coinsurance for Tier 5 drugs.
Phase Three – Coverage Gap Phase (also known as the “Donut Hole”)
Once the retail costs of your prescriptions exceeds the Initial Coverage Limit ($4,130 for 2021) you will pay 25% of the cost of your drugs until your TrOOP (True Out Of Pocket costs) has reached the Catastrophic Coverage Limit ($6,550 for 2021.)
While in Phase Three you receive a combined 75% Donut Hole discount on the total cost of your brand prescriptions. A 70% discount is paid by the brand-name drug manufacturer while a 5% discount is paid by the Medicare Part D plan.
The 70% paid by the drug manufacturer combined with the 25% you pay counts towards the TrOOP and Phase 4 or Catastrophic Coverage threshold.
For generic prescriptions, only the 25% the enrollee pays counts towards the TrOOP calculation.
Phase Four – Catastrophic Coverage
Once your TrOOP exceeds the Catastrophic Coverage level ($6,550 for 2021) then your costs will decrease significantly.
When in the Catastrophic Coverage phase, you will pay $3.70 for generics drugs that cost less than $74 or 5% for drugs that have retail prices greater than $74.
For brand drugs, you will pay $9.20 for drugs with a retail cost of less than $184 and 5% for those brand drugs that cost more than $184.
Annual Review Recommended
Since your prescriptions may change from year-to-year and the available Part D plans do often change, we recommend reviewing your prescription drug coverage during each AEP (Annual Enrollment Period) which is from October 15 through December 7th. Changes you make will be effective January 1st.
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