The Four Stages of Part D Prescription Drug Coverage

Just about everyone is familiar with how prescription drug coverage works in an employer group health plan. There can be a deductible and, once that’s met, you pay the same price for medications for the rest of the year. Simple, straightforward. Then, you get to Medicare. There’s nothing simple or straightforward about how Part D works, especially for those who take three or more brand-name drugs. That’s because the Medicare prescription drug benefit has four payment stages. In each of these four stages, the amount that a person pays for any one medication can vary dramatically. In order to understand how much you’ll pay out-of-pocket for any specific Part D drug plan, it’s important to first understand the four payment stages: Deductible, Initial Coverage, Coverage Gap and Catastrophic Coverage.

1. Deductible
In the first stage, the plan member pays the full cost of drugs until
reaching the plan’s limit. This limit can range from $0 up to the
standard amount set by Medicare, which, in 2019, is $415.

2. Initial Coverage
In the second payment stage, the member pays 25% of the cost of medications and the plan the remaining 75%. Most plans choose to charge set copayments (such as $5 for a generic or $25 for a preferred brand), rather than a percentage. When the cost of medications totals $3,820, the beneficiary moves into stage three.

3. Coverage Gap (Donut Hole)
The third stage is the Coverage Gap. Until 2012, the plan member was responsible for all medication costs in this stage, hence, the nickname, donut hole. As a result of the Affordable Care Act, people now receive discounts in the Coverage Gap. In 2019, an individual pays 25% of the cost of brand-name drugs and 37% of the cost of generics. (The reduction is a combination of manufacturer discounts and subsidies.) After spending $5,100 (actual out-of-pocket costs for brand name and generic drugs plus the discount on brand-name drugs), the person moves into Stage 4, Catastrophic Coverage.

4. Catastrophic Coverage

In this stage, the out-of-pocket costs for medications drop substantial A Part D beneficiary pays the greater of 5% or $8.50 for a brand-name drug and $3.40 for a generic. There is no limit in this stage. This is the final stage. Once in Catastrophic Coverage, a person stays in this stage until the calendar year ends. Then, the payment stages begin again.

No matter how you get your drug coverage (through a stand-alone plan with Original Medicare or a Medicare Advantage plan with drug coverage), you’ll deal with these payment stages.

FAST FACTS

Over 70% of all Medicare beneficiaries are enrolled in a Part D drug plan.

About 7 million people with a Part D plan fell into the donut hole in 2013.

71% of people who reach the donut hole will do so year after year.

Taking 3 or 4 brand name medications will likely land you in the donut hole.