Medicare: Planning for Out-of-Pocket Drug Costs

​Medicare: Planning for Out-Of-Pocket Drug Costs

Once you qualify for Medicare, you have some choices regarding paying for prescription drugs.

Basic Medicare (Parts A and B) does not cover prescription drug costs. You will have to either pay out of pocket, arrange outside coverage, or buy coverage via Medicare Part D or as part of a Medicare Advantage plan (Part C) with prescription drug coverage (MAPD).

​You will have to pay premiums in order to get coverage under Part D or Medicare Advantage - but the benefits are often well worth the cost. If you are low-income, you may qualify for a reduced premium. If you do not enroll in a Part D plan while enrolling in a Medigap or Medicare Supplement policy, when you are eligible, you will incur a financial penalty for the rest of your life.

Ultimately, the costs you pay out of pocket will depend on:

• The drugs you use, and whether you opt for generics, when available.
• Whether those drugs are listed on your plan's formulary.
• Your plan itself, and its premiums.
• Whether you qualify for reduced premiums or other subsidies or assistance.

Some drugs cost hundreds of dollars per dose, and occasionally even more, so without drug coverage you run the risk of paying a significant portion of these costs out of your pocket if you need prescription drugs, or of forgoing important treatments if you cannot afford to pay for them.

Medicare Part D can be broken down into these phases:

The deductible period
Some Medicare Part D plans have a deductible, which is what you must spend on covered drugs before your Medicare drug plan coverage kicks in.  The maximum deductible allowed by law in 2020 is $435 for the year. Deductibles will vary from zero to $435.

For example, if you have a Part D plan with a $200 deductible, you're required to pay the first $200 of costs for covered drugs in a calendar year out of your own pocket. Once you meet your deductible, your Part D plan helps pay for all covered drugs for the remainder of the year.
 
The initial coverage period
After you meet your Part D deductible, you enter the initial coverage period. During this phase, you pay a copayment for each covered prescription or coinsurance.

Copayment and coinsurance amounts will vary by plan. Many plans will feature different amounts for generic and brand-name drugs. You can check with your plan formulary (drug list) to learn more about what your costs might be for different drugs.

Generic drugs are typically on a lower tier and have lower costs than brand-name medications, which are typically on a higher tier.

A copay is a set amount you must pay with each new prescription after you have covered your deductible. Each plan has a different copay, but $10 to $25 per new prescription filled and covered by Medicare is not unusual.
Coinsurance is a percentage of the cost you pay for the prescription drug.

Here's how copays and coinsurance work: If you have an 80-20 plan with a $10 copay and a $435 deductible, and you pick up a prescription that normally costs $1,000 - and it's your first covered prescription of the year - you'll have to pay the following costs out of pocket:

• $435 deductible
• $10 copay
• $128 coinsurance. That is, 20% of the amount of your prescription after you pay the $435 deductible.

 
So that prescription will cost $488 out of pocket. But if you need to get it filled again before the end of the year, it will only cost you $210. That's 20% of the $1,000 drug cost, plus a $10 copay.
 
The coverage gap
Once you and your plan combine to spend for drugs during the calendar year in 2020, you enter the coverage gap.

Medicare part D has a coverage gap, sometimes called "the donut hole."
This means that once you and your plan have spent a combined $4,020 on covered prescription drugs for you (as of 2020), you will have to pick up some more of the cost.

Starting in 2020, Medicare Part D plan beneficiaries pay 25% of their brand-name and generic drug costs while they're in the coverage gap. 

The coverage gap does not apply to some lower-income individuals who qualify for a State Health Insurance Assistance Program (SHIP).
 
Catastrophic coverage
The donut hole ends when you and your plan have spent $6,350 on medications in 2020. You then enter the final phase of Part D coverage, called catastrophic coverage.

During the catastrophic coverage phase, you only pay a small coinsurance or copayment for your covered prescription drugs for the remainder of the year.
 
How to lower costs
​You may be able to lower costs by using generics rather than name-brand drugs, by choosing a plan that has more coverage if you enter the coverage gap, using a pharmaceutical assistance program or applying for a SHIP program.