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Medicare Part D is a prescription drug program subsidized by the federal government. This program was enacted as part of the Medicare Modernization Act of 2003 and went in to effect on January 1st, 2006.
There are two types of Medicare Part D plans administered through private insurance companies: Part C health plans (MAPD) that include drug coverage and stand-alone prescription drug plans (PDP) that offer drug coverage only.
Individuals on Medicare who are eligible for Part A and/or Part B may obtain drug coverage through a plan. Typically, individuals can enroll during their Open Enrollment Period or once a year during the Annual Enrollment Period (AEP), which is Oct. 15th – Dec. 7th.
Participation in Part D is voluntary, but most Medicare beneficiaries choose to enroll in a plan. If you choose not to enroll, a 1% late enrollment penalty will be added to your plan premium for each month you were not enrolled in a plan.
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Part D plans have four phases: deductible phase, initial coverage phase, coverage gap phase (donut hole) and the catastrophic phase.
Deductible Phase
This is the first phase of the drug plan. In 2023, the maximum allowable prescription deductible is $505. Depending on the plan, the deductible may be lower or there may be no deductible at all. You will pay the full cost of the drug until you satisfy the deductible, then you enter the initial coverage phase.
Initial Coverage Phase
During the initial coverage phase, you are responsible for 25% of the prescription drug costs up to the initial coverage amount of $4,660. Each plan has a formulary with five drug tiers. Drugs in a lower tier will generally cost less than drugs in a higher tier. Each tier will have different co-pays or coinsurance and you will pay these costs until you and the insurance company have spent a combined $4,660.
Coverage Gap (Donut Hole)
Once you’ve reached the initial coverage limit ($4,660) for the year, you will enter the Coverage Gap or Donut Hole phase. During the donut hole, you will be responsible for 25% of the cost of brand name drugs and generic drugs. In most cases, drug co-pays typically increase during the donut hole and the only way out of the donut hole is to pay your way through. You will remain in the coverage gap until your out-of-pocket spending reaches $7,400. The coverage gap can be tough, but it’s important to remember that there was no prescription coverage before 2006. (Note: Medicare will phase out the coverage gap in 2020.)
Catastrophic Phase
The catastrophic phase is the last final phase of the drug plan. In the catastrophic phase, your plan will begin to pay 95% of the cost of your drugs for the rest of the year. You will be responsible for $4.15 for generics or $10.35 for brand name drugs or 5% coinsurance, whichever is greater. Once you reach the end of the year, your plan starts over from phase one the following year.
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