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Prescription Drug Plans (also referred to as PDPs or Medicare Part D) are optional Medicare plans designed specifically to help beneficiaries cover prescription drug costs. Because each PDP covers a unique list of approved prescription drugs and has its own benefit structure, it is important to understand a few relevant terms so that you can compare plans while shopping for coverage.
Here are some terms to know before you start browsing:
Also referred to as a “drug list,” a formulary is the list of prescription drugs a PDP covers. If you have a specific drug that you need covered, check a plan’s formulary before making a decision about a plan.
To simplify pricing, plans divide their drug formularies into tiers. Generally, the lower the tier, the lower the copayment (out-of-pocket cost). Many plans divide their formularies into four tiers. These are: Tier 1, Tier 2, Tier 3, and Specialty. Tier 1 drugs have the lowest copayments, while Specialty drugs have the highest.
Preferred Drug and Specialty
Generic drugs will often be placed into Tier 1 on a plan’s formulary. In a hypothetical four-tier formulary, Tier 1 drugs require the lowest copayment. Tier 2 covers preferred drugs. Preferred drugs are usually name-brand drugs that a PDP offers at a moderate copayment. Tier 3 covers non-preferred drugs. These are name-brand drugs that are covered by a PDP, but have a higher out-of-pocket cost than their Tier-2 counterparts. In our hypothetical, Specialty tier drugs are very high-cost prescriptions and coverage for this tier requires the highest copayment. To keep your costs at a minimum, investigate and choose a plan that has your required prescriptions listed in a lower-cost tier.
Under certain circumstances, a beneficiary may request an exception from their plan sponsor. If granted, an exception allows a beneficiary to obtain a given prescription for a lower out-of-pocket cost than than they would otherwise. There are two types of exceptions. A formulary exception allows a beneficiary to purchase a drug through their plan that is not listed on any tier of their formulary list. A tier exception allows beneficiaries to purchase a drug that is listed on a higher tier of their formulary list, but for a lower cost, effectively lowering the tier of the drug. Exceptions are only granted upon request, and require a verbal or written statement from the prescribing healthcare provider.
Drug Benefit Phase
Depending on which drug benefit phase you are in, your costs may vary significantly. There are four phases, also called “stages” or “periods”: deductible phase, initial coverage phase, coverage gap (also referred to as the “donut hole”), and catastrophic coverage. Which phase you are in and the length of the period is subject to the benefit structure of your individual PDP.
Deductible Phase: During the deductible phase, you will have to pay for the full negotiated price of your prescriptions until you have spent your deductible – the amount of money you must pay each year for your prescriptions before your Medicare drug plan pays its share. Some plans have no deductible, meaning your initial coverage phase would begin immediately. Plans with no deductibles often have higher monthly premiums, but do not require you to pay full price for your prescriptions during the first phase of coverage. In 2021, the maximum deductible for Part D plans is $445
Initial Coverage Phase: Once you have met your deductible, the initial coverage phase begins. During this phase, your PDP will help cover your prescription-related costs and you will pay a copayment or coinsurance. The extent to which your plan will help with these costs depends on the plan’s benefit structure. In 2021, the initial coverage limit (ICL) is reached once you have accrued around $4,130 in total drug costs (including the deductible amount) for the year.
Coverage Gap: Once you have met your ICL, you enter the coverage gap in most Medicare plans. The coverage gap refers to a temporary limit of your plan during which you are no longer covered by the plan’s initial coverage, but have not yet spent enough to receive catastrophic coverage. In 2020, this gap closed considerably. While in the coverage gap in 2021, under the standard drug benefit, beneficiaries are only required to pay 25% of their prescription costs.
Catastrophic Coverage: Once you have spent $6,550 in out-of-pocket expenses, your catastrophic coverage begins. This $6,550 limit is set to keep PDP beneficiaries from breaking the bank on their prescription drug costs by assuring they only pay a small coinsurance amount or copayment for covered drugs for the rest of the year, which is the same for all Part D plans. Once you have reached the catastrophic coverage phase, you will pay 5% of the cost for each of your drugs, or $3.70 for generics and $9.20 for brand-name drugs (whichever is greater).
Learn More About PDPs
Reach out to one of Marigold’s licensed Medicare agents to learn more about the PDPs available to Medicare beneficiaries in your area.
Information adapted from the Centers for Medicare and Medicaid Services.
Additional data and cost information adapted from the Kaiser Family Foundation and Forbes.
Medicare Part D: A First Look at Medicare Prescription Drug Plans in 2021, 2020. Kaiser Family Foundation