27.5 Medicare Part D: Prescription Drug Coverage
Key Takeaways
Part D provides outpatient prescription drug coverage through private plans.
Plans use formularies and tiered copays with utilization management rules.
Beneficiaries choose standalone PDPs or MA-PD plans with drug coverage.
Late enrollment penalties apply without creditable drug coverage.
2025 changes include redesigned benefit phases and out-of-pocket limits.
Enrollment follows Part D-specific initial, annual, and special enrollment periods.
Medicare Part D provides outpatient prescription drug coverage through private insurance companies approved by Medicare. This coverage is essential since Original Medicare (Parts A & B) does not cover most outpatient prescription medications.
Part D Overview
What is Part D?
| Feature | Description |
|---|---|
| Coverage | Outpatient prescription drugs |
| Administration | Private insurance companies |
| Enrollment | Voluntary (but penalties for late enrollment) |
| Formulary | Each plan has its own list of covered drugs |
| Types | Stand-alone PDP or included in MA-PD plans |
Ways to Get Part D Coverage
| Option | Description |
|---|---|
| Prescription Drug Plan (PDP) | Stand-alone plan added to Original Medicare |
| Medicare Advantage with Drugs (MA-PD) | Part D included in Medicare Advantage plan |
Key Point: Medicare Advantage plans usually include Part D prescription drug coverage (MA-PD plans).
Major 2025 Part D Changes
Inflation Reduction Act Improvements
| Change | Details |
|---|---|
| Out-of-Pocket Cap | New annual limit on prescription drug spending ($2,000 in 2025, $2,100 in 2026) |
| No Coverage Gap | "Donut hole" eliminated |
| Payment Plan Option | Spread costs evenly throughout the year |
| Insulin Cap | $35/month maximum for insulin |
Before and After Comparison
| Feature | Before 2025 | 2025 and After |
|---|---|---|
| Out-of-pocket maximum | ~$8,000 (2024 threshold) | $2,000 in 2025; $2,100 in 2026 (indexed each year) |
| Coverage gap (donut hole) | Yes | Eliminated |
| Phases of coverage | 4 phases | 3 phases |
| Insulin cost | Variable | $35/month cap |
Key Point: The elimination of the "donut hole" and the new out-of-pocket cap ($2,000 in 2025, $2,100 in 2026) represent the most significant improvements to Part D since its creation in 2006.
2026 Part D Benefit Structure
Three-Phase Benefit Structure
| Phase | 2026 Details |
|---|---|
| 1. Deductible Phase | Pay 100% until the deductible is met (maximum $615) |
| 2. Initial Coverage Phase | Pay 25% of drug costs |
| 3. Catastrophic Coverage Phase | Pay $0 after $2,100 out-of-pocket |
Cost-Sharing in Each Phase
| Phase | Beneficiary Pays | Plan Pays | Manufacturer Pays | Medicare Pays |
|---|---|---|---|---|
| Deductible | 100% | 0% | 0% | 0% |
| Initial Coverage | 25% | 65% | 10% | 0% |
| Catastrophic | 0% | 60% | 20% | 20% |
What Counts Toward the Out-of-Pocket Cap ($2,100 in 2026)
| Counts Toward Cap | Does NOT Count |
|---|---|
| Your deductible payments | Monthly premiums |
| Your copays/coinsurance | Drugs not on formulary |
| Certain payments made on your behalf, like Extra Help | Drugs from non-network pharmacies |
2026 Part D Costs
Standard Part D Costs
| Cost Component | 2026 Amount |
|---|---|
| Maximum deductible | $615 |
| Out-of-pocket cap | $2,100 |
| National base premium | $38.99/month |
| Average premium | Varies by plan |
Part D IRMAA (Income-Related Adjustment)
| Individual Income (MAGI, 2024 tax year) | Joint Income (MAGI) | 2026 Monthly Surcharge |
|---|---|---|
| ≤$109,000 | ≤$218,000 | $0 |
| $109,001-$137,000 | $218,001-$274,000 | $14.50 |
| $137,001-$171,000 | $274,001-$342,000 | $37.50 |
| $171,001-$205,000 | $342,001-$410,000 | $60.40 |
| $205,001-$499,999 | $410,001-$749,999 | $83.30 |
| ≥$500,000 | ≥$750,000 | $91.00 |
Medicare Prescription Payment Plan
New 2025 Payment Option
| Feature | Details |
|---|---|
| Purpose | Spread out drug costs over the year |
| How it works | Monthly payments instead of paying at pharmacy |
| Eligibility | All Part D enrollees |
| Benefit | Avoid large upfront costs for expensive drugs |
| Enrollment | Can enroll at any time during the year |
Example of Payment Plan
| Scenario | Without Payment Plan | With Payment Plan |
|---|---|---|
| Annual drug costs | $2,100 | $2,100 |
| January payment | $2,100 at pharmacy | ~$175/month |
| Monthly after cap | $0 | ~$175/month |
| Total paid | $2,100 | $2,100 |
Formularies and Drug Tiers
Understanding Formularies
| Component | Description |
|---|---|
| Formulary | List of drugs covered by the plan |
| Drug tiers | Categories with different cost-sharing |
| Prior authorization | Some drugs require advance approval |
| Step therapy | May need to try lower-cost drugs first |
| Quantity limits | Maximum amounts that can be dispensed |
Typical Drug Tiers
| Tier | Description | Cost-Sharing |
|---|---|---|
| Tier 1 | Preferred generic | Lowest copay |
| Tier 2 | Non-preferred generic | Low copay |
| Tier 3 | Preferred brand | Moderate copay |
| Tier 4 | Non-preferred brand | Higher copay |
| Tier 5 | Specialty drugs | Highest cost (coinsurance) |
Part D Late Enrollment Penalty
Penalty Calculation
| Factor | Details |
|---|---|
| Trigger | 63+ consecutive days without creditable coverage |
| Amount | 1% of national base premium per month without coverage |
| 2026 base | $38.99/month |
| Duration | Lifetime penalty |
| Example | 24 months late = 24% × $38.99 = $9.36, rounded to $9.40/month |
Creditable Coverage
| Creditable | NOT Creditable |
|---|---|
| Employer/union drug plans (if comparable) | Plans with less value than Part D |
| TRICARE | No drug coverage |
| VA coverage | Over-the-counter only plans |
| Indian Health Service |
Exam Tip: The Part D late enrollment penalty is 1% per month, compounding to significant amounts over time. Someone 5 years late would pay a penalty of 60% of the national base premium for as long as they have Part D.
Key Takeaways
- Part D provides outpatient prescription drug coverage through private plans.
- Plans use formularies and tiered copays with utilization management rules.
- Beneficiaries choose standalone PDPs or MA-PD plans with drug coverage.
- Late enrollment penalties apply without creditable drug coverage.
- 2025 changes include redesigned benefit phases and out-of-pocket limits.
- Enrollment follows Part D-specific initial, annual, and special enrollment periods.
What is the annual out-of-pocket limit for Medicare Part D in 2026?
$1,000
$2,000
$2,100
$8,000
What happened to the Medicare Part D "donut hole" (coverage gap) in 2025?
It was reduced to a smaller amount
It was completely eliminated
It was increased due to inflation
It was converted to a percentage-based gap
A Medicare beneficiary delayed enrolling in Part D for 30 months without creditable coverage. What is their monthly late enrollment penalty in 2026?
$3.90 (10% of $38.99)
$11.70 (30% of $38.99, rounded)
$19.50 (50% of $38.99)
$38.99 (100% of base premium)
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