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Q: What are the costs of Medicare Part D prescription drug coverage?
A: When you enroll in Medicare Part D (prescription drug plan) coverage, you will – depending on your plan – likely pay a monthly premium, an annual deductible, and coinsurance (a percentage of cost of your prescription drugs) or copays.
Premiums vary by plan and by geographic region (and the state where you live can also affect your Part D costs) but the average monthly cost of a stand-alone prescription drug plan (PDP) is about $42/month in 2020, weighted by 2019 enrollment, and including both basic and enhanced plans. [Part D premiums are higher for people with incomes above $87,000 or $174,000 for a married couple; this is based on income tax returns from two years prior, since those are the most recent returns on file at the start of the plan year. There’s an appeals process you can use to contest the income-related premium adjustment if you’ve had a life-change event that has reduced your income since then.]
The maximum annual deductible in 2020 for Medicare Part D plans is $435, up from $415 in 2019. But not all plans have deductibles, and some have deductibles that are lower than the maximum allowed (most plans do use this standard deductible amount though, so $435 in initial out-of-pocket costs is the norm for most enrollees in 2020).
After the deductible is met, PDP policyholders pay copays or coinsurance (typically 25 percent of the cost of their drugs) during their initial coverage period until the total of their prescription drug costs (including what they’ve paid and what the plan has paid, which is typically the other 75 percent of the cost of the drugs) reaches $4,020 in 2020 (up from $3,820 in 2019). The deductible is included in the portion that the beneficiary pays, so if your deductible is $435, that counts towards the $4,020 initial coverage threshold.
In 2020, if the PDP plan holder’s total prescription drug costs exceed $4,020, they have hit the Part D “donut hole.” At this point, they’ll pay coinsurance of no more than 25 percent for both generic and brand-name drugs (ie, the same as it was during the initial coverage period for plans with standard benefit designs). Since the maximum amount you pay is 25 percent of the cost both before and during the donut hole, the hole is considered “closed.” But it’s still relevant in terms of how your drug costs are counted towards reaching the catastrophic coverage threshold.
While in the donut hole, 95 percent of the total cost of brand-name drugs counts towards the enrollee’s out-of-pocket costs (even though they’re only paying 25 percent), along with 25 percent of the cost of generic drugs. For brand-name drugs, 70 percent of the cost is covered by a manufacturer discount, which is included when the patient’s out-of-pocket costs are counted (the drug plan itself pays 5 percent of the cost of brand-name drugs and 75 percent of the cost of generic drugs while the beneficiary is in the donut hole).
After total out-of-pocket drug spending reaches $6,350 in 2020 (including the manufacturer discount while in the donut hole), the plan holder has reached the “catastrophic coverage” level, during which the plan holder pays 5 percent of prescription drug costs, or a nominal premium ($3.40 for generics, and $8.50 for brand-name drugs), whichever is greater.
So although there’s no upper limit on total out-of-pocket costs under Medicare Part D, costs are sharply reduced once an enrollee reaches the catastrophic coverage level. But the threshold for reaching the catastrophic level is significantly higher in 2020 than it was in prior years, and people who need very expensive drugs can still be on the hook for substantial out-of-pocket costs, even when they only have to pay 5 percent of the cost.