Medicare Part D – Prescription Drug Coverage

Medicare Part D is prescription drug coverage. Anyone who is eligible for Medicare is eligible for Part D; however, it is voluntary. In addition, it can be obtained through Original Medicare or through a Medicare Advantage plan. Part D is not financed through payroll taxes and therefore, requires a monthly premium. However, unlike Part B, premiums vary widely depending on the coverage level you choose. On the other hand, similar to Part B, higher-income beneficiaries have to pay an additional premium amount. Regardless of how the beneficiary pays the regular premium, the additional fee is taken out of the beneficiary’s Social Security check in most circumstances (or billed in other ways in certain other circumstances). Whatever level of coverage a Part D beneficiary has chosen, if they are in a higher-income category, they are still required to pay additional fees as determined by the Social Security Administration. In addition, these income thresholds are frozen until 2019 and not increased annually for inflation in order to gradually increase the number of beneficiaries who will fall into these income categories (KFF, 2013; Medicare and health reform, 2011; SSA, 2014a).

Individual Income Married Filing Jointly Part D 2014 Part D 2015
Up to $85,000 Up to $170,000 Plan Premium (PP) Plan Premium (PP)
$85,001-$107,000 $170,001-$214,000 PP + $12.10 PP + $12.30
$107,001-$160,000 $214,001-$320,000 PP + $31.10 PP + $31.80
$160,001-$214,000 $320,001-$428,000 PP + $50.20 PP + $51.30
$214,001 or more $428,001 or more PP + $69.30 PP + $70.80

 

Part D prescription costs can be complicated and many worry about reaching the donut hole and what they will have to pay once that occurs. The donut hole threshold is the dollar amount determined by the government that is spent and causes a beneficiary to reach the donut hole. The costs that go towards reaching the donut hole threshold include your deductible, coinsurance, copayments, and the amount spent by your drug plan. This threshold amount is $2,850 in 2014 and $2,960 in 2015. While you are in the coverage gap/donut hole, the calculations are more complex and are based on whether or not the prescription is generic or brand-name. To “exit” the donut hole and start paying low copayments for prescriptions, one has to reach a “catastrophic coverage threshold”. In 2015, total retail drug costs to reach catastrophic coverage is $6,680; however, you actually need to reach true out-of-pocket costs (TrOOP) of $4,700 in 2015, and increase from $4,550 in 2014. This means that the portion that your drug plan paid to reach the donut hole does NOT count towards reaching catastrophic coverage. However, the brand name pharmaceutical manufacturer provides a 50% discount that IS counted towards TrOOP. To clarify, let’s say you have a brand name drug that has a retail cost of $100. Before reaching the donut hole, you pay 25%, or $25 and your plan pays 75%, or $75 (after the deductible is met). The entire $100 counts towards reaching the donut hole but only the $25 counts towards reaching catastrophic coverage. Once you reach the donut hole, you pay 45% of the cost of the drug, or $45. The drug manufacturer provided your plan a 50% discount, which would be equal to $50 (Half of $100). This leaves $5 that your drug plan would be required to pay. Your $45 plus the $50 discount counts towards your TrOOP to reach catastrophic coverage. On the other hand, if it is a generic drug, you pay 65% of the cost in 2015 while in the donut hole and this is no manufacturer discount. Therefore, for a $100 generic drug, while in the donut hole, you pay $65, your plan pays $35, and $65 goes towards your TrOOP.

Things to keep in mind: Your premium payments do not count towards your TrOOP or towards reaching the donut hole. In addition, prescriptions now have a $2 dispensing fee. Whatever percentage you pay for your prescription (i.e. 25%) is also the percentage you pay for the dispensing fee. So if you have three drugs with a total retail cost of $300, you actually pay 25% of $306 ($300 + $2 x 3 scripts). What you pay for the dispensing fee does go towards your TrOOP.

In order to determine whether or not to choose Part D and what Part D plan is right for you, it is important to understand (1) if the prescriptions you take are covered; (2) how much they cost; (3) if the plan premiums are worth it for your situation; and (4) if you want an upgraded plan that may not have a deductible or has better coverage than the Standard Medicare Part D plan. This can be difficult, but worth the extra work in the long run. Something else to consider is generics versus brand names. This is because they are treated very differently when calculating your catastrophic coverage threshold; however, they are treated the same when calculating your donut hole threshold. Therefore, it is possible for generics to be cheaper before the donut hole, but more expensive after the donut hole, depending on the actual retail price compared to their brand name counterpart. Furthermore, if you pay coinsurance (i.e. 25% for all your prescriptions) instead of a co-pay (i.e. $10 for generic and $30 for brand name), this could also have an effect on your costs both before and after reaching the donut hole. The best way to illustrate this is through concrete examples.

***DISCLAIMER: In the following examples, coinsurance and copays are for example purposes only and are NOT Medicare determined amounts. Coinsurance and copays are determined by the drug plan you choose. In addition, the $2 dispensing fee is not calculated for simplicity purposes. Furthermore, retail costs are made up amounts for example purposes and can vary by plan (i.e. the same prescription can have a different retail price between different drug plans). Real Medicare determined amounts for 2015 include: deductible of $320, donut hole/coverage gap threshold of $2,960, catastrophic coverage threshold of $4,700, and calculation formulas. Medicare Advantage Part D plans may have better coverage, such as lower or $0 deductible, or additional coverage while you are in the donut hole. The examples below do not include all months in the year, as once you hit catastrophic coverage, this remains the same until January 1st of the following year.

 

EXAMPLE 1: Mr. Smith takes both generic and brand name drugs. The retail prices of those prescriptions are $800 for the brand name drugs and $400 for the generic drugs per month. His plan requires the standard $320 Original Medicare Part D deductible and he is required to pay a 25% coinsurance after the deductible. His costs per month are outlined below. The shaded area is the time period in which he is actually in the donut hole.

What this example shows is that Mr. Smith will have $980 in expenses, NOT including his premium, until he reaches the donut hole in early March. He will exit the donut hole in early July after paying a total of $3,289.47 out-of-pocket to exit the donut hole and reach catastrophic coverage. The illustration above also shows that the calculations for generics and brand names are very different while in the donut hole. You will pay a higher percentage of retail costs for generics (65%); however, a larger percentage of the retail price of brand name drugs will count towards exiting the donut hole (95%) than generic drugs (65%). It is also important to see how a different dollar amount is counted towards entering and exiting the donut hole. For example, if you look at Mr. Smith’s February expenses, he pays $300 out-of-pocket, yet $1,200 counts towards reaching the donut hole, while only $300 counts towards catastrophic coverage. These differences are further illustrated in the examples that follow.

 

EXAMPLE 2: Mr. Smith from example one had changes to his Medicare plan and his brand name prescriptions are no longer covered. His coinsurance of 25% is the same, but now his retail costs amount to $1,000 per month for just generics.

 

This example has one major difference – there are only generic drugs involved. $980 is still required out-of-pocket to enter the donut hole; however, since the calculations for generics and brand names are different, this time Mr. Smith has to pay $4,700 out-of-pocket in order to reach catastrophic coverage in September. Not only is he paying more actual out-of-pocket costs, but he is reaching the donut hole in the same month (March), but exiting it two months later in September.

 

EXAMPLE 3: Mr. Jones only takes brand name prescriptions, with a total retail cost of $1,000 per month. His plan requires the standard $320 Original Medicare Part D deductible and his is required to pay a 25% coinsurance after the deductible. His costs per month are outlined below and the shaded area is the time period in which he is actually in the donut hole. (NOTE: This example to show comparison between brand name and generic in Example 2 with all costs being equal).

 

This example clearly illustrates the difference between brand name and generic prescriptions. Example 2 and this example have the same exact retail costs of $1,000 per month; however, this example is only brand name drugs and example two is only generic drugs. Again, $980 out-of-pocket is required to reach the donut hole and again it occurs in March. However, in this third example, Mr. Jones exits the donut hole in July after only paying out-of-pocket costs of $2,742.11 – almost $2,000 less than the previous example.

 

EXAMPLE 4: Mrs. Johnson’s Part D plan requires her to pay the standard $320 deductible; however, due to the many prescriptions she takes, she opted for a plan with a high premium so she only had to pay a 10% coinsurance. The retail costs of are scripts per month are $800 for generics and $1,500 for brand names. Due to the large number of scripts she is required to take and because some of them do not come in generic form, she is wondering if she should get them from Canada, or other outside country. However, costs incurred for prescriptions from other countries do NOT count towards entering or exiting the donut hole, nor does her higher premium costs. Her costs are as follows to help her decide what to do, and the shaded area is the time in which she is in the donut hole.

 

 

This is the only example with a different coinsurance of 10% to illustrate that $980 is not always required to enter the donut hole. Entering the donut hole is based on retail price; therefore, Mrs. Johnson needed $584 in out-of-pocket costs to reach the donut hole. In addition, despite her high-cost prescriptions, she only paid $3,128.95 out-of-pocket to reach catastrophic coverage – almost $1,600 less than the second example. This is because a large portion of her prescriptions are brand name and brand names are calculated differently when trying to exit the donut hole. In this example, Mrs. Johnson needs to be sure she is able to cover the costs of her scripts through the donut hole since she will incur a large amount of costs in a short period of time (February through April); however, she will have catastrophic coverage with minimal copays for most of the year if she does not choose to buy prescriptions from another country.

 

***Please note that the above information on Part D coverage including income thresholds, donut hole/coverage gap thresholds, catastrophic coverage thresholds, deductibles, how to calculate reaching and exiting the donut hole, and Part D financing, is a compilation of a variety of resources and information to ensure accuracy. These resources are referenced in more detail later and include: Bihari, 2010; Catastrophic coverage, 2014; Costs at a glance, 2014; Costs in the coverage gap, 2014; Hoadley, Cubanski, Hargrave, & Summer, 2013; How does this donut hole, 2014; KFF, 2013; Medicare and health reform, 2011; Medicare drug benefit, 2011; What is the donut hole, 2014; Wolters Kluwer, 2010. In addition, premiums and retail costs vary by plan (retail costs are negotiated by your plan provider and can vary). Ask your plan provider what these amounts are when determining the right plan for you.

Extra help/Low-income subsidy (LIS). Some people have difficulty paying for their prescription drug costs because of their low incomes. Therefore, the low-income subsidy (LIS), also known as Extra Help, was created as a Medicare program to help low-income seniors with their Medicare prescription drugs. In order to qualify, you must meet certain income and resource limits. If you do qualify, you will receive assistance with monthly premiums, annual deductibles, co-insurance, and co-payments. In addition, you will not have a coverage gap or late enrollment penalty (DHHS, 2014; NCPSSM, 2014). It is estimated that around one-third of Medicare beneficiaries are eligible for Extra Help for an average of $4,000 per year (NCPSSM, 2014). Note that Extra Help is not available in Puerto Rico, the U.S. Virgin Islands, Guam, the Northern Mariana Islands, and American Samoa (DHHS, 2014).

In 2014, you may qualify for Extra Help if you have up to $17,505 in annual income for an individual/$23,595 for a married couple and up to $13,440 in resources for an individual/$26,860 for a married couple. Resources that count towards these amounts include money in a checking or savings account, stocks, and bonds. Resources that do not count include your home, car, burial plot, up to $1,500 put aside for burial expenses, furniture, and other household or personal items (Save on drug costs, 2014). In other words, if you own a car, a furnished home, $2,000 in a checking account, $5,000 in a savings account, and $5,000 worth of stocks, your resources for these purposes would be $12,000. Note that income and resource thresholds are expected to change for 2015, but have not been reported as of November 24, 2014. To give you an idea of how much these thresholds change by, in 2012 the maximum income threshold was $16,755 for an individual and $22,695 for a couple, and the maximum resource threshold was $13,070 for an individual and $26,120 for a couple (DHHS, 2012). Furthermore, the law has recently changed so that any assistance you receive from others, such as relatives and friends, to pay for household expenses does not count as income. Although premium and deductible amounts will vary depending on your actual income level, in 2015, most people who receive Extra Help will only pay a $2.65 copay for generic prescriptions and a $6.60 copay for brand-name prescriptions. As a reminder, there is no donut hole when you receive Extra Help (DHHS, 2014).

There are ways to automatically qualify for Extra Help. These include having full Medicaid coverage, receiving assistance from your state Medicaid program to pay your Part P program (in a Medicare Savings program), and receiving both Medicare and Supplemental Security Income (SSI) benefits. Even if you do not automatically qualify, you can still apply at any time if you think you should be eligible. You can do this by going to the social security website (www.socialsecurity.gov/i1020); calling Social Security (800-772-1213); going to your local state Medical Assistance office (Medicaid); or calling Medicare (800-Medicare) (DHHS, 2014).

State Pharmaceutical Assistance Program (SPAP). Another way to receive assistance with paying for prescriptions drugs and premiums while on Medicare is through a SPAP program. SPAP is offered through individual states. Some states offer more than one type of program, but not all states have a program. In addition, each of these programs have their own eligibility guidelines regarding income level, resources, residency, etc. For example, the SPAP program in the state of Indiana has income limits of $17,745 for an individual and $23,835 for a married couple, whereas the state of New York has income limits of $75,000 for a single person and $100,000 for a married couple (both states have other eligibility requirements and different assistance amounts). Some states also provide assistance for the disabled, as well as people with very specific illnesses, such as HIV or diabetes. In addition to many of the states, the U.S. Virgin Islands also offers SPAP (SPAP, n.d.).

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