Medicare Prescription Drug Coverage: Understanding How it Works

Health insurance is a tough subject to understand … and the story is no different when it comes to the government-backed Medicare program. One of the most confusing parts of the program is Part D – optional coverage that’s designed to pay for a portion of your required prescription drugs. So, let’s start with the basics …

First, Medicare prescription drug coverage is only available from private companies that have been approved by Medicare. All private companies that are approved to offer Medicare’s prescription drug benefit must offer a minimum drug benefit, known as the Standard Medicare Prescription Drug Benefit (or “creditable” coverage).

But while plans have to offer prescription drug coverage at least as good as that standard benefit, many have designed their offerings differently, generally offering more benefits.

Second, there are two ways to access prescription drug benefits paid for by Medicare –by enrolling in either a stand-alone prescription drug plan or a Medicare Advantage plan.

Third, understand that the details of what Medicare Part D covers are confusing. But don’t let that trip you up because you have too much to gain. The most important thing to understand is that the prescription drug benefit provides security and peace of mind since your catastrophic drug costs are covered.

Even if you may not depend on medications now, it’s crucial to view this new coverage as insurance protection against future prescription drug costs. The benefit is also appealing because the government pays for a good portion of the coverage for all beneficiaries.

There are basically four levels to the coverage:

Level 1 – Deductible: You’ll need to spend $405 on drugs before coverage kicks in. However, you’ll most likely get your prescriptions at a lower price then you pay now. That’s because a Part D provider will probably have negotiated discounts with suppliers.

Level 2 – Co-insurance: You’ll then have to pay a portion of the next $3,750 in drug expense you incur. In this level of the benefit, the government pays 75% of the costs, while you’re responsible for 25%. The maximum you’ll have to pay is $836.

Level 3 – Coverage “Gap”: After that, you’ll have to pay the full amount of the next $1,250 in drug costs you incur. But again, you’ll likely pay lower rates for your drugs than you otherwise would, thanks to discounted prices your plan has negotiated.

Level 4 – Catastrophic Coverage: Once you’ve moved through levels 1 through 3, you’ll then pay a maximum of $3.35 for each generic or $8.35 for each brand-name covered drug for the remainder of that calendar year. Or in other words, once you’ve spent $2,491 out of pocket … on $5,000 worth of drugs … you’ll reach Level 4, where catastrophic coverage kicks in. This graphic should help make this whole coverage situation easier to understand:

Standard Medicare Prescription Drug Benefit

Don’t forget: In 2018, you get a 44% manufacturer-paid discount on covered brand-name drugs and a 56% discount on covered generic drugs. And even though you’ll pay 35% of the price for that brand-name drug, the entire price will count as out-of-pocket costs. That will help you get out of the coverage gap. The gap will be closed by 2020.

So, if you’re shopping for private coverage, make sure you understand whether it’s just standard, creditable coverage your provider is offering – or something more generous. Be sure to also check the Weiss Safety Rating of any insurer you do business with by clicking here.

There are two other final caveats to consider: First, if you have employer or union retirement coverage that’s considered to be at least as good or better than the required standard benefit, chances are you’ll want to stick with it.

Contact your former employer’s or union’s benefits administrator to determine whether it is “creditable,” if you’re not sure. If it is and you decide to enroll in Part D later, you won’t face a late fee or higher premium — though if you drop your current drug coverage, you may not get it back.

Second, if your state has and will continue to support a State Pharmacy Assistance Program, you could be eligible for assistance to help you with the out-of-pocket costs that Medicare’s prescription drug program doesn’t cover.

But no two states’ programs are alike. For example, one state may help qualifying residents cover some of the monthly premiums they might face when enrolling in a drug plan. Another state may help pay for drugs only after a senior pays a certain amount out of pocket for them. To find out more, contact your State Pharmacy Assistance Program.

Think Safety,

Gavin Magor