Managing your prescription drug costs in retirement can feel overwhelming and just a bit confusing, especially if your payments go up and down throughout the year.
There are four key stages of Medicare Prescription Drug plans that progress through each year. These stages reset every year on January 1st, and progress from one stage to the next depending on how much you pay and how fast the retail costs for your medications add up.
Stage 1: Deductible
The first of the four stages of Medicare Part D is the deductible phase. These are the initial out-of-pocket expenses you incur before your plan starts covering your medication costs. Not all Medicare Prescription Drug plans (Part D) have deductibles, but many do. The specific deductible amount will vary based on your chosen plan, with Part D deductibles being $545 in 2024.
Part D plans often waive the deductible for low-cost generic medications to encourage beneficiaries to choose those. Once you’ve met your deductible for the year, insurance will kick in for the remaining stages.
Stage 2: Initial Coverage
After reaching your deductible, you enter the initial coverage stage, during which your plan will start sharing the cost of medications according to their structure. Typically, this is a combination of copays and coinsurance:
- Copay: A copay is a fixed amount you pay for each covered medication you fill. The amount may vary based on the tier of the medication (typically categorized as brand name, generic, or specialty drugs).
- Coinsurance: A coinsurance structure means that you share the cost of the medication after you’ve met your deductible or copay (if applicable). A plan might have a 20 percent coinsurance rate, which means that you’d be responsible for 20 percent of the medication after your copay, and your plan covers the remaining 80 percent.
During this stage, you’re only paying a fraction of the total cost of your medications. Medicare tracks the retail cost of every medication you pick up during this stage. Once your copays and coinsurance total $5,030, you will move into the third stage of your drug coverage.
Stage 3: Coverage Gap (Medicare Donut Hole)
Stage Three of Part D plans is the coverage gap, also known as the Medicare donut hole. The coverage gap occurs when the full retail costs (your costs and the insurance costs together) equal $8,000 during the calendar year.
Expect to see a significant increase in your drug costs once you hit this stage. Unlike the Initial Coverage stage where you paid for your medications based on tiers, you are responsible for 25 percent of the retail cost while you’re in the donut hole. A combination of your insurance, Medicare, and the manufacturer covers the remaining 75 percent of the coverage gap.
Stage 4: Catastrophic Coverage
The final stage of the four stages of Medicare Part D is the Catastrophic coverage stage. Once you’ve reached the specific out-of-pocket spending threshold (an amount set by Medicare each year) in the coverage gap, you enter catastrophic coverage. This stage is rarely reached, but if you happen to reach this stage, your medications are $0 thanks to the Inflation Reduction Act.
Changes to the Drug Plan Stages in 2025
Part D plans have greatly improved over the years and are still improving with the Medicare donut hole going away in 2025. In addition, your costs in the initial coverage phase will be capped at $2,000. Instead of four stages in Medicare Part D, there will be three with the donut hole being eliminated in 2025. Once you’ve paid $2,000 in the initial coverage stage, your medication costs will be zero for the remainder of the calendar year.
This change, however, will pose some challenges to those wanting to delay enrolling in a Part D plan. Until now, employer drug plans have been considered creditable coverage to avoid the Part D penalty. That’s because creditable coverage is coverage that is as good as Medicare. With the new out-of-pocket max capped at $2,000, many employer plans will no longer be creditable meaning retirees may have to enroll in a Part D plan sooner than anticipated. Rest assured, your employer plan is required to disclose whether your plan qualifies as creditable coverage if you are eligible for a Part D Plan.
6 Tips to Manage the Cost of Your Medications
While it’s normal for your out-of-pocket costs and copays to vary throughout the year, there are a few things you can do to reduce the costs of your medications:
- Generic Medications: Use generic medications as much as possible. Talk to your doctor about what generic options are available to you.
- Discount Programs: There are several discount programs, such as GoodRx, which can give you discounts and coupons. Your pharmacy may even offer cash discounts.
- Low-Income Subsidies: There are programs like Extra Help from Medicare that can help significantly offset or reduce medication costs during the coverage gap for eligible individuals with limited income and resources.
- Medication Programs: Inquire with drug manufacturers if there are programs available for certain medications. Some have rebates or assistance programs that can help offset some of your medication costs.
- Price Shopping: Compare the prices between different pharmacies. Drug prices may vary between them. Use resources that let you compare medication prices in your area, such as GoodRx.
- Early Refill: Consider getting an early refill in December when you’ve already met your deductible. If you can get a 90-day supply before January, you can defer costs until later or even avoid them if the medication is temporary.
Understand Your Drug Plan Costs with Medicare School
Have additional questions about your Medicare Prescription Drug Plan? Contact Medicare School to better understand your coverage or talk to us about switching your Plan D provider. We work with several insurance companies as a Medicare insurance broker so you get the best plan for your budget.
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