Did you know you’ll spend more money on medication than anything else in health care? That’s right, medication costs are statistically the #1 expenditure in health care today. Now even though you may be spending little to nothing on medication right now, statistically speaking, medication will be a main health care expense for you in the future. Since that’s the case, it’s crucial to make sure you’re on the right drug plan.
That’s why today’s topic is all about helping you choose the right drug plan for your Medicare coverage. Let’s get started.
Medicare Drug Plans Are Different Than Other Drug Plans
Medicare plans are structured differently than any other plans you’ve been on before. To illustrate this, let’s make a quick comparison between non-Medicare plans (like individual plans and group plans from your employer coverage) and Medicare plans.
Non-Medicare drug plans have two stages, meaning your out-of-pocket cost typically varies only two times. The first stage is the deductible stage. You’ll often have to pay your deductible (however, sometimes there is no deductible), but once you’ve met the deductible, you’ll move on to the second stage, which is co-pays. Co-pays are very reasonable costs, and once you’re in this co-pay stage, the costs will be fixed all year. So from January to December, you may never see your co-pay costs change throughout the year. This two-stage structure is typical of most individual and group work plans.
Now let’s talk about how Medicare plans are structured. Medicare plans have four stages, which is what makes them so confusing for a lot of people. Most Medicare plans start off with a deductible stage (very similar to individual or group work plans). Once you’ve satisfied your deductible, you move on to the co-pays stage. Here in the co-pays stage, the similarities between non-Medicare plans and Medicare plans end. How are Medicare plans different? In Medicare, your co-pay costs can change four different times throughout the year.
Four Stages of Medicare Plans Explained
Now we’re going to briefly talk about each Medicare stage so you have a better understanding of how they work.
Stage 1
Stage #1 is your deductible stage, as we already mentioned. Now, Medicare deductibles usually go up a little bit every year. This year (2021), the deductible is $480. Typically, the deductible will continue to increase a little bit each year.
In this deductible stage, you’re paying either the retail cost or just the tiered cost of the medication (this varies from plan to plan). Now let’s just say you’re taking two medications, one for your cholesterol and another for your thyroid. One common cholesterol medication is Atorvastatin, which is a tier 1 medication at a $2 co-pay. Another common thyroid medication is Levothyroxine, again, a very low-cost mid-dollar co-pay.
Now let’s say these are your only medications for the whole year (they both cost just $2 per month), so you spend $48 that year. Will you ever reach your deductible? The answer is no. If you never reach your deductible, you’ll stay in this first stage the whole year. This scenario we just described is true for around 80 percent of you. You’re not on very many meds, or the meds are pretty low cost so you’ll stay in stage one the entire year.
For some of you, however, you’re going to meet your deductible pretty quickly. Let’s use another example. Say you’re taking Eliquis or some other expensive medication that retails for $500 per month. Now, remember, this year’s deductible is $480, so you’ll easily meet your deductible the very first time you pick that medication up from the pharmacy.
With your deductible now met (because you reached the $480 requirement), you’re done with the first stage and have moved on to the next. Again, only about 20% of you will move on to this next stage.
Stage 2
Stage #2 is the co-pay stage. In this stage, every medication covered by the plan is given a tier number. The tier number establishes what your co-pays are going to be. Let’s go back to our real-life scenario to make this simpler.
You’re on Eliquis, which is always a tier-three preferred brand medication (tier one and tier two medications are usually generic meds). Brand name medications typically require you to pay about a $50 copay, meaning you end up paying right around 10 percent of the retail cost. So every time you get a prescription filled in the copay stage, you’ll pay the specific amount assigned to your medication based on its tier. Remember, you’re in this stage because you’ve already met your deductible and now Medicare is helping with the drug costs.
However, here’s where things get a bit more challenging. Medicare is tracking the retail costs every time you get a prescription filled. Now even though you’re just paying the co-pay and the Medicare plan is covering the retail cost difference, Medicare is constantly keeping track of that cost difference and adding it up.
So let’s say your medication is $500 and each month you go in and fill your prescription and pay a $50 co-pay. Medicare will have to cover $450 of the med cost. Now Medicare keeps track of the difference they’ve paid, and once it adds up to a certain amount (or threshold), you are then moved on to the third stage of your Medicare plan. The threshold amount (much like the deductible) changes every year. This year (2020) the threshold is $4,020. Keep in mind, you aren’t required to pay the threshold amount (you’ve already covered your co-pays), this is just the total retail cost of your medication that Medicare has covered for you.
While most of you will never reach this threshold amount, some of you will. For example, if you take a lot of medications or are a dependent diabetic taking Novolog or some other pen-type insulin, you’re going to reach that threshold pretty quickly. Once you’ve met the threshold, you’re moved on to the third stage of Medicare.
Stage 3
The third stage of Medicare is called the “doughnut hole” or the “coverage gap”. In this stage, you are no longer paying a set co-pay based on a tier number assigned to your meds. Instead, you’ll pay a percentage of the retail cost. So again, if you’re on Eliquis which is $500 a month at retail cost, you’ll pay 25 percent (or $125), of the full retail price. This can add up pretty quickly.
Just like in the second stage, Medicare is keeping track of the cost of your medications. If the cost ever reaches the set threshold, which is $6,350, you’ll be moved on to the fourth and final stage. Keep in mind, this $6,350 threshold is a new number and not connected to your previous stage’s threshold. In other words, when you enter the doughnut hole stage, your medication costs are reset to $0, and you work up from there. Again, very few people (only about 1 percent, actually) meet the $6,350 threshold and move on to the next stage, but some of you will so you need to understand it.
Stage 4
You’ve reached your $6,350 threshold in stage three (paying 25 percent of the retail cost of your meds), so now you’re in the fourth and final stage. This stage is called catastrophic coverage, and while it sounds dismal, it actually is a good stage to reach if you’re on expensive medication. Why? In this final stage, you only have to pay 5 percent of the retail cost of your medication. So if your medication costs $500 per month, you’re only paying $25 out of pocket.
You’ll stay at this stage (paying only 5 percent) until the end of the year. Once January 1 rolls around, you’ll start back at stage one and begin the four-stage process all over again.
Brief Review
So let’s review the medicare drug plan process. In the first stage of medicare drug coverage, you have to meet your deductible. This year’s deductible is $480. Once you’ve met the deductible, you move on to the next stage which requires you to pay a certain co-pay amount, based on a tier number (1-5) assigned to your medication. If your medication’s retail costs add up to reach the $4,020 threshold, you’re moved on to stage three.
Stage three is called the doughnut stage, and in this stage, you’re required to pay a certain percentage (25%) of your medication’s retail cost. Usually your out-of-pocket costs in this stage can add up quickly. If the total medication retail costs reach the $6,350 threshold amount, you’re now moved on to stage four. In this final stage, your out-of-pocket costs are relatively low, at only 5 percent of the medication’s retail cost. Again, you’ll stay in this fourth stage until the end of the year when the process is reset back to stage one on January 1st.
As you can see, Medicare prescription drug plans are structured differently than anything you’ve had before, so it’s critical that you choose the right drug plan for your needs.
We understand how difficult making the right Medicare decisions can be. To take the next step, watch our full course or schedule a one-on-one call with a certified Medicare School Guide who can answer your questions, compare plans options and even help you enroll. Click here to schedule an appointment.
