If you are eligible for Medicare, you may be aware that it is available in four parts: Part A and Part B (collectively termed Original Medicare) and Part C (also called the Medicare Advantage plan) are related to services like inpatient hospital treatment and home health care, while Medicare Part D is a prescription drug benefit under Medicare. As with many things pharmaceutical, that means there’s big money involved.
In 2019, nearly 45 million Americans were enrolled in Medicare Part D drug plans, and the Congressional Budget Office estimated that $88 billion will be spent on the program in 2020. Seniors and other Medicare recipients will shoulder about 25% of that burden through Medicare Part D costs—monthly premiums, annual deductibles, copayments, coinsurance, and other costs—but the remaining 75% is subsidized by Medicare.
How much does Medicare Part D cost?
Medicare Part D was enacted as law by the federal government in 2003 and took full effect in 2006 in response to the rising use and costs of prescription drugs in the U.S. The idea behind Part D is to help cover at least some of the costs of medications that have become far too expensive for a lot of Medicare recipients to afford on their own.
Americans spend more on prescription drugs than any other country—about $1,200 per person per year, according to a 2019 Bloomberg report. We also pay more for drugs. Cancer drugs can cost more than $10,000 a month, and other prescription drugs routinely make headlines when new companies purchase them and raise the prices to outrageous levels.
There are many reasons why drug proxies are so high. One being a process associated with Medicare Part D called reinsurance, which kicks in once you’ve spent enough on prescriptions each year to receive what’s known as “catastrophic coverage.”
As part of your Part D coverage, you will need to pay a monthly premium. The average monthly premium for Part D coverage in 2020 is $32.74. The insurance company administering the plan will also expect you to use copays or coinsurance until you reach your deductible. In 2020, the maximum a Part D deductible can be is $435.
Once you and your plan combined have spent $4,020, you enter what is called the Medicare coverage gap or “donut hole.” In this phase you pay no more than 25% for both generic and brand-name drugs, and your insurance company and the drug manufacturer pay 75%, until you reach the catastrophic coverage threshold. In 2020, that number is $6,350 in true annual out-of-pocket costs. To help you get out of the coverage gap more quickly, the full price of each drug counts toward your out-of-pocket costs.
Once you’ve paid $6,350, you automatically get catastrophic coverage. That means that for the rest of the year, you pay 5% of the cost for each drug OR $3.60 for generics and $8.95 for brand-name drugs (whichever amount is greater). It’s important to note that people with low incomes who qualify for the federal Part D Extra Help program will have far lower costs for drugs.
That’s good news for Medicare beneficiaries, but reinsurance creates an incentive for drug companies to raise their prices, and it gives health insurance companies less of an incentive to negotiate the prices of drugs down, since they know that after a certain point the federal government will be picking up most of the tab.
It drives up the cost of prescription drugs and puts a large burden on American taxpayers. Though entities such as the Medicare Payment Advisory Commission have advocated for a restructuring of the reinsurance program to put more of the costs on the insurance companies and drug manufacturers, it hasn’t happened yet for fear that it will cause Medicare Part D monthly premiums to go way up.
What is the Medicare Part D premium for 2020?
Since not everyone needs prescription drugs, Medicare Part D plans are optional and cost extra each month. The Part D national base beneficiary premium—the amount Part D plans start at—can change from year to year, but in 2020 the average premium is $32.74 per month for each Part D beneficiary. There is also a Part D income-related monthly adjustment amount, or IRMAA, meaning you may have to pay more based on your income according to your 2019 tax return.
|Individuals||Couples filing jointly||Cost|
|$87,000 or less||$174,000 or less||Pay just their health plan’s premium each month|
|$87,000-$109,000||$174,000-$218,000||Pay an additional $12.20 per month|
|$109,000-$136,000||$218,000-$272,000||Pay an additional $31.50 per month|
|$136,000-$163,000||$272,000- $326,000||Pay an additional $50.70 per month|
|$163,000-$500,000||$326,000-$750,000||Pay an additional $70 per month|
|$500,000 or more||$750,000 or more||Pay an additional $76.40 per month|
Are there other Medicare Part D costs?
In addition to your annual deductible amount (if your plan has one), monthly premiums and any income-related charges, there are other costs associated with Medicare Part D, and while a few, like copays and coinsurance, are obvious, you may not be aware of some of the other costs.
A copayment, or copay, is a set amount (for instance, $10) that you pay for a prescription each time you get it filled, while your Part D plan pays for the rest. Coinsurance means that you pay a percentage of the cost (for instance, 25%) of the drug each time while the plan pays the rest. Cost-sharing is set by each plan, and some plans have different copays or coinsurance for generic drugs and brand-name drugs, which are often included in more expensive, higher tiers.
A less obvious cost that some people get stuck with is the late enrollment penalty, which affects anyone who doesn’t opt for a Medicare Part D plan in their seven-month initial enrollment period but then decides to enroll in Part D later. The penalty, which is a percentage of the Part D national base beneficiary premium, goes up for each month you went without prescription drug coverage, and you will have to pay it for the life of your Part D drug plan—except for the following reasons:
- You have “creditable” drug coverage
- You qualify for Extra Help
- You have proof that you got bad information about whether your drug coverage before getting Part D was “creditable”
Here’s an example: Fred became eligible for Medicare in 2017, and his initial enrollment period ended on Jan. 1, 2018. Two years later, Fred hasn’t been on creditable drug coverage and decides he wants Medicare Part D, and he starts on Jan. 1, 2020. So Fred will have to pay a late-enrollment penalty of 24% of the Part D national base beneficiary premium, which is one percentage point for each month. In 2020, that means Fred’s monthly premium would be $32.74 plus $7.86 (24% of $32.74). That number could go up or down each year based on the Part D national base beneficiary premium, but Fred will pay an additional 24% every month he has his drug plan in addition to any IRMAA he might be paying. However, if Fred can qualify for Extra Help, the penalty goes away forever.
Another factor that could contribute to your prescription drug costs is if you want a medication that isn’t included in your plan’s drug list, or formulary. Insurance companies compile a list of drugs related to your condition that they will cover. If you choose a drug that isn’t on the list, you could end up paying full price for it. Also, if you are using a drug for an off-label use, you could be responsible for the full cost of your drug—even if it’s in your formulary.
How to save on Medicare Part D
All told, while a Part D plan might be the most affordable option for many Medicare beneficiaries, it can still be a little expensive. To help ease the burden on those who struggle to afford their prescriptions, Medicare Part D includes a low-income subsidy known as Extra Help. For individuals who qualify, Extra Help can reduce monthly premiums, deductibles, and copays. It also will eliminate the late enrollment penalty and give people with Medicare a monthly special enrollment period. Under the program, generic drugs should cost no more than $3.60, and brand-name drugs should cost no more than $8.95 (2020 prices). To see if you qualify for Extra Help, visit ssa.gov.
You can always use SingleCare to save on your prescriptions, even if you have Medicare—if you are in the coverage gap, a medication isn’t covered, or if our price is lower than your copay. For more info on how to use our savings with Medicare, read this article.