How much do drugs cost with Medicare?

Understanding your drug costs on Medicare is an important part of getting the most out of your coverage. Drugs are typically one of the biggest costs people face while on Medicare. The average Medicare enrollee is on 5 prescriptions, and Medicare itself spends over $100 billion a year on pharmaceuticals. Even if you aren’t regularly taking expensive medications, it’s more than likely you will need to at some point during your retirement.

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For this reason, it is wise to enroll for a Medicare Part D plan during your Initial Enrollment Period whether or not you are currently reliant on any prescription medications. If you do end up needing to take prescription drugs in the future, you will face expensive, permanent penalties for not enrolling in a Medicare Part D prescription drug plan during your Initial Enrollment Period. If you need help determining when your Initial Eligibility Period is, click below to use our Initial Enrollment Finder. It’s easy (and free!) to use.

Medicare drug coverage

As a reminder, Medicare Part D plans are meant to help you pay for prescription drugs you may be taking. Part D was not part of the original Medicare program, so its rules for cost sharing work a little differently. Basically, Medicare Part D drug coverage moves through four phases as you, your insurance company, and the drug companies themselves spend money on your prescriptions throughout the year.

 

 

Remember that each drug plan has its own list of covered drugs, also known as the plan’s “formulary”. For all of the drugs you take that are included in your plan’s formulary, you’ll move through the four designated phases of drug coverage. Depending on the phase of coverage you’re in, you’ll pay a different copayment or coinsurance. However, if a drug isn’t in the formulary, you will be responsible for the full cost of the drug all year. That’s why it’s incredibly important to ensure that all of your drugs are covered before enrolling in a plan.

One more thing: perhaps you’ve heard of the “coverage gap”, also known as the “donut hole”. It’s one of the more interesting (and frustrating) quirks of Medicare Part D. Put simply, it’s the name for the third phase of Medicare prescription drug coverage.

Below, we break down the four phases of drug coverage, including how much you’ll spend during each. We will also discuss the infamous coverage gap (also known as the “donut hole”), which is one of the more interesting (and frustrating) quirks of Medicare Part D.  In this example, we’ll walk through a year of drug coverage with a Medicare Part D plan:

 

Medicare Prescription Drug Coverage

Yearly Deductible

In this first phase, you’ll pay 100% of your prescription drug costs until you reach your plan’s deductible. Many Medicare Advantage and Part D plans have a $0 deductible. If your plan does have a deductible, it will never be more than the yearly cap set by the federal government. In 2018, that yearly cap was set at $405, and it will increase to $415 in 2019. 

Initial Coverage Limit

In this second phase, you’ll pay a copay or coinsurance for covered prescription drugs. Your cost sharing amount will depend on a few factors, including:

  • which plan you are enrolled in;
  • the location your plan is sold in;
  • whether all of your drugs are covered under your plan’s formulary;
  • which tier your drugs are placed within your plan’s formulary;
  • whether your drugs are generic or brand name; and
  • how often the prescription is refilled.

You’ll stay in this phase until the total amount you and the insurance plan have spent on your drugs equals $3,750 (in 2018). In 2019, the initial coverage limit will increase to $3,820.

Coverage gap (or “Donut hole”)

In the coverage gap, or “donut hole” stage, you no longer pay a copay. Instead, you’ll be responsible for paying a percentage of the full cost of the drug (i.e. coinsurance). In 2019, you’ll be responsible for paying 25% of the cost of brand name drugs and 37% of the cost for generic drugs. You’ll usually still end up paying less for generics as they tend to be much cheaper than brand name drugs in the first place. To get out of the donut hole, you have to spend a total of $5,100 (or $5,000 for 2018 plans) on your drugs. Don’t worry – you get credit for all the money you spent while in the earlier two phases. You also get some additional credit from the drug companies if you’re taking a brand name drug.

Catastrophic coverage

This is the final phase of drug coverage. While there is no maximum cap on prescription drug costs, once you’ve reached this phase, your Part D plan will cover most (at least 95%) of your prescription drug costs for the remainder of the year. This means you’ll pay a much lower set amount for your drugs. For generic drugs, you’ll pay either 5% of the full cost or $3.40, whichever is higher. For brand name drugs, you’ll pay 5% of the full cost or $8.50, whichever is higher.

Am I likely to reach the “donut hole” and catastrophic coverage stages?

For covered drugs, you may or may not move through all four phases of coverage over the course of a year. It depends on the number of drugs you take, whether they are brand name or generic, and how much your plan charges. For example, if you’re taking mostly generic drugs, you probably won’t spend enough money throughout the year to reach the dreaded donut hole.

If you want a month-by-month estimate of your drug costs, consider creating an account with Renew and searching for plans in your area. You’ll be able to compare how much your specific drugs will cost you each year on different Medicare Advantage and Part D plans.

 

Drug cost estimates are also available on Medicare.gov.

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