Medicare Part D

Medicare Part D is the outpatient prescription drug benefit added to Medicare in 2003 and codified as Part D of Title XVIII of the Social Security Act, at 42 U.S.C. 1395w-101 and following. It is voluntary, and it is delivered entirely through private plans: someone not enrolled in a Medicare Advantage plan buys a standalone prescription drug plan, while someone in a Medicare Advantage plan usually receives drug coverage through that plan instead. Medicare.gov's consumer name for the whole thing is "Medicare drug coverage (Part D)".

Eligibility is broader than for a Medicare Advantage plan, and the difference is easy to miss. Section 1395w-101(a)(3)(A) defines a Part D eligible individual as someone "entitled to benefits under part A or enrolled under part B". Medicare Advantage requires both. So a person with premium-free Part A who has not taken Part B can still buy drug coverage.

🔴 The coverage gap is gone, and this is the single most out-of-date thing in circulation about Part D. The statute now provides for a deductible, then coinsurance of 25% of costs "above the annual deductible ... and up to the annual out-of-pocket threshold", then nothing. The provisions that created the gap, including the initial coverage limit and the separate generic and brand coinsurance rates inside it, are each written to apply only "for a year preceding 2025". They are still on the page of the code, which is part of why the old four-phase explanation survives everywhere, but they no longer describe anyone's benefit.

What replaced it is a genuine ceiling. Section 1395w-102(b)(4)(A)(i)(II) provides that once an enrollee has incurred costs equal to the annual out-of-pocket threshold, cost sharing is "$0" for the rest of the year. The threshold itself was set at $2,000 for 2025 by section 1395w-102(b)(4)(B)(i)(VII), and each subsequent year's figure is the previous year's increased by an annual percentage tied to per-capita Part D spending, rounded to the nearest multiple of $50. The deductible is indexed on the same measure and rounded to the nearest $5. Because these are set by CMS, the federal agency that administers Medicare, on an autumn cycle rather than by an IRS revenue procedure, the current amounts belong at medicare.gov rather than on this page.

🔴 The formulary decides what counts, and this is the caveat with the largest consequences. Section 1395w-102(b)(4)(C)(i) excludes from the running total "any costs incurred for covered part D drugs which are not included (or treated as being included) in the plan's formulary". A drug that is not on your plan's list therefore contributes nothing toward the cap however much you spend on it, and you reach the ceiling only on the drugs that are. Clause (ii) adds a second filter: the cost counts only if it is borne by you or by someone paying on your behalf, and not reimbursed by insurance, a group health plan or another third-party arrangement.

So the formulary, not the premium, is the number to compare. Plans are free to use tiered cost sharing and to change what they list. Section 1395w-104(b)(3) requires a formulary to be developed and reviewed by a pharmacy and therapeutic committee, a majority of whose members must be practising physicians or pharmacists, and requires the plan to publish changes to the list, including changes to a drug's tier, on a timely basis online. There is also a process for asking the plan to cover a drug it excludes or to apply a lower tier. None of that changes the practical point: two plans with similar premiums can differ enormously for one particular person, and the difference is on the drug list.

The Medicare Prescription Payment Plan smooths the timing and nothing else. For plan years beginning on or after 1 January 2025, section 1395w-102(b)(2)(E) requires every Part D plan to offer enrollees the option to pay their cost sharing in capped monthly instalments across the year rather than at the pharmacy counter. It is useful to someone whose spending is front-loaded into January, which under the current structure many people's is. It does not reduce the total owed by a cent.

What Part D does not do. Drugs administered in a hospital or a physician's office are generally Part A or Part B rather than Part D, so "Medicare covers my prescriptions" is true in different ways depending on where the drug is given. A late enrolment surcharge applies to someone who goes without Part D or other coverage at least as good for a sustained period, and it can attach to the premium permanently; the arithmetic of that belongs on its own page. And higher-income enrollees pay a surcharge on the Part D premium as well as on Part B, calculated from a tax return two years earlier.

1. You choose a private plan, either a standalone prescription drug plan or the drug coverage bundled into a Medicare Advantage plan.

2. You pay the plan's deductible, if it has one, on covered drugs.

3. You pay 25% coinsurance on covered drugs above the deductible under the standard benefit, or the plan's actuarially equivalent tiered cost sharing.

4. You reach the annual out-of-pocket threshold, and cost sharing on covered formulary drugs drops to nothing for the rest of the year.

5. The count resets on 1 January, and the plan's formulary and tiers may have changed for the new year.

A hypothetical, showing that the ceiling is conditional. Two enrollees each take one brand-name drug priced at $900 a month, and neither takes anything else.

Elena's plan lists her drug on its formulary. Her spending on it counts toward the annual out-of-pocket threshold, she reaches that threshold part way through the year, and from that point the drug costs her nothing.

Paul's plan does not list his drug. The statute excludes costs for drugs not included in the plan's formulary from the running total, so nothing he spends moves him toward the ceiling. Over twelve months he can pay 900 × 12 = $10,800 and never reach a cap at all, because as far as the cap is concerned he has spent nothing. His routes out are to ask the plan to cover the drug through its exception process, or to change plans at the next opportunity to one whose formulary includes it. Figures are illustrative; the exclusion is statutory.

Pros

• There is now a real annual ceiling on out-of-pocket drug spending, which Medicare had never had before 2025 and Original Medicare still lacks for everything else.
• The coverage gap that made the middle of the year expensive has been eliminated outright rather than narrowed.
• Every plan must offer the option of spreading cost sharing across the year in capped monthly amounts, which helps when spending lands in January.
• Enrollees can change plans annually, so a formulary change or a new prescription can be answered at the next opportunity rather than being permanent.
• Extra help with premiums and cost sharing exists for people with limited income and resources.

Cons

• The cap counts only drugs on the plan's formulary, so the protection is exactly as good as the drug list, and a non-formulary drug is uncapped.
• It is a market of private plans with differing formularies, tiers and pharmacy networks, so the comparison is genuinely laborious and has to be redone when a prescription changes.
• Formularies and tiers can change from year to year, so last year's right answer is not this year's.
• Going without it can create a premium surcharge that attaches for as long as you hold the coverage.
• Higher-income enrollees pay more for the same benefit, based on a tax return from two years earlier.