Stages of a Medicare Part D Plan

There are 4 stages to a Part D drug plan:

1. Annual Deductible – in 2021, the allowable deductible is $445. Plans may charge the full deductible, a partial deductible, or waive the deductible entirely. You will pay the network discounted price for your medications until your plan tallies that you have satisfied the deductible. After that, you enter initial coverage.
2. Initial Coverage – during this stage of Part D drug coverage, you will pay a copay for your medications based on the drug formulary. Each drug plan will separate its medications into tiers. Each tiers has a copy amount that you will pay. For example, a plan might assign a $7 copay for a Tier 1 generic medication. Maybe a Tier 3 is a preferred brand name for a $40 copay, and so on. The insurance company tracks the spending by both you and the insurance company until you have together spent a total of $4,130 in 2021.
3. The Coverage Gap – after you’ve reached the initial coverage limit for the year, you enter the coverage gap. During the gap, you will pay only 25% of your brand name medications, and 25% of generics. (This is so much better than in 2006 when many people had to pay 100% of their drugs in the gap.) Your gap spending will continue until your total out of pocket drug costs have reached $6,550 in 2021.
4. Catastrophic Coverage – after you’ve reached the end of the coverage gap, your plan will kick in to pay 95% of the costs of your formulary medications for the rest of the year. This feature in Part D drug plans helps you limit your potential spending if you have expensive medications.

It’s important to note that Medicare itself tracks your True Out of Pocket Costs (TrOOP) for each year. This can protect you from paying certain costs twice. For example, if you pay the deductible on one plan, and then later switch to a different Medicare Part D plan because you moved out of state, your new plan will already see that you have paid the deductible for that year. The costs for coverage gap and catastrophic coverage work the same way.

Part D drug plans also have changes from year to year. Your plan’s benefits, formulary, pharmacy network, provider network, premium and/or co-payments/co-insurance may change on January 1st of each year. Medicare gives you an annual election period during which you can change your plan if you desire to do so.