Medicare Part D (Prescription Drug Plans): A Beginner's Guide

Quick summary

You've probably heard your parents complain about the outrageous cost of prescription drugs. These costs soar every year, hitting older people -- who tend to use more medications -- particularly hard. In 2006, Medicare finally began covering some prescription drugs taken at home. It introduced Part D drug plans, though the plans are actually operated by private insurance companies with very little oversight by Medicare itself. Part D does nothing to slow the skyrocketing cost of drugs, but the plans do offer a bit of financial relief for most seniors.

Here are the basics you need to know about Medicare Part D prescription drug plans:

Who's eligible for Medicare Part D coverage?

If your parents are entitled to Medicare Part A or enrolled in Medicare Part B, they can join a Medicare Part D prescription drug plan. This can be a stand-alone plan that complements Medicare Part A and Part B coverage, or it can be part of a Part C Medicare Advantage managed care plan that rolls together hospital, medical, and prescription drug insurance.

Enrolling in a Part D plan is voluntary for most people; about 55 percent of those eligible for the plans have enrolled in one. If your parents don't enroll when first eligible for Medicare (usually at age 65) but later do join a plan, they each pay a penalty of 1 percent per month on the premiums for every month they've delayed. This higher premium cost applies to any plan they enroll in, and it's permanent.

If your parents receive Medicaid (Medi-Cal in California) benefits, they're automatically enrolled in a low-cost Part D plan.

Who runs the Part D drug plans?

The federal government's Medicare program sets the basic rules for Part D prescription drug plans, but private insurance companies issue the individual plans themselves. Different plans are offered in every state. Some are called stand-alone plans, meaning they cover prescription drugs only and complement separate coverage under Part A for hospital insurance and Part B for medical insurance. People who opt for a Part C Medicare Advantage managed care plan can get Part D drug coverage through that plan instead.

The specific terms of payment and coverage are set by the company issuing the Part D plan, subject only to Medicare's general rules. If your parents want to enroll in a plan, they do so directly with the insurance company that offers it, whether it is a stand-alone Part D plan or part of a Part C managed care plan.

How much will it cost my parents to join a plan?

Monthly premiums for stand-alone Part D plans, and for Part C Medicare Advantage managed care plans that include drug coverage, run from about $10 to $75 per month, depending on which plan your parents choose and where they live. The average cost of a plan is about $25 per month; a few plans have no premium at all. Generally, plans with the broadest coverage and lowest copayments have the highest premiums.

What drugs do Part D plans cover?

No plan covers every prescription drug, or even comes close. First, by law some drugs are not covered at all: these include certain sedatives, tranquilizers, sleeping pills, drugs used for weight loss or gain, and over-the-counter medications.

Medicare only requires each plan to cover two drugs -- either brand-name or generic -- in each "therapeutic class" of medications. That means that for any disease or condition, a plan covers some but not all drugs. The specific drugs a plan does cover are included in a list called a formulary. A plan pays its share only of the drugs listed on its formulary and purchased from a pharmacy -- either a store or a mail-order service -- that participates in that plan.

Unfortunately, every year each plan changes the drugs it includes in its formulary. The fact that your parents' plan now covers all their drugs doesn't mean that it will next year, which means they have to stay on their toes. Each autumn, when all plans announce changes in their formularies for the following year, your parents must check to make sure their drugs will still be covered by their current plan. If not, they'll want to consider changing plans.

Are there restrictions on coverage other than the formulary list?

Knowing that the drugs your parents take are included in a plan's formulary list doesn't tell you everything about coverage. Plans can place other restrictions on drug availability or cost; for instance, they may create drug tiers in which the copayment for brand-name drugs is more than for generic equivalents, or the copayment for one brand is more than for another.

Also, plans are permitted to do "drug substitution," in which your parents' doctor prescribes a drug but the plan covers only its generic form or a different "equivalent" drug. The plan might also require prior authorization for certain restricted drugs; or it can stipulate "step therapy," which means your parents must try a less expensive medicine within a particular class of drugs before the plan will pay for a more expensive one.

How much of their drug costs will my parents have to pay?

The rules for how much a plan pays can be complicated, so you may need to sit down with your parents and compare plans carefully. The figures here are for 2008.

• Deductible: With most plans, your parents pay out-of-pocket for the first $275 of their prescription drug costs for the year. A few plans that charge a high monthly premium waive some or all of this deductible.
• Partial coverage: After the deductible is reached, a plan pays 75 percent of costs for drugs covered in the plan's formulary. Your parents are responsible for the other 25 percent. Their portion comes in the form of a copayment for each prescription; the amount of the copayment may vary depending on the plan's drug tiers. This 75-25 split continues until each parent's total prescription drug costs for the year reach $2,510.
• No coverage (the "doughnut hole"): Once each of your parent's total prescription drug costs for the year reach $2,510 (combining what the plan pays and what your parent pays), the plan pays nothing more for his (or her) drugs unless and until he reaches the catastrophic limit. A few high-premium plans pay some percentage of costs while your parent is in this expensive "doughnut hole."
• Catastrophic coverage: If the total amount one of your parents pays out-of-pocket for prescription drugs during the year reaches $4,050, his plan will again begin coverage at the rate of 95 percent of further costs for covered drugs, with your parent paying the remaining 5 percent.

Can my parents get help with the cost of a plan?

If your parents' income is low (up to 150 percent of the federal poverty level) and they have few assets (up to roughly $12,000 for an individual, or $25,000 for a couple) other than a home, they might be eligible for a low-income subsidy (LIS) that provides significant help with the costs of a Part D plan. Depending on exactly how much income and how many assets they have, the deductible, coverage gap, and copayments could all be eliminated or reduced. Applying for an LIS is done separately from enrolling in a plan, and it's done with the Social Security Administration, not directly with the plan or with Medicare. Get information on the Social Security Administration website, call toll-free at (800) 772-1213, or make an appointment with any local Social Security office.

How do my parents choose the right plan for them?

Having as many of your parents' drugs as possible included in a plan's formulary, even though the list changes every year, is the single most important factor in choosing a plan. If more than one plan with all drugs on the formulary is available, choose the plan that has the fewest restrictions on access to those drugs and the lowest total costs (not just the lowest monthly premium). Check whether the plan waives any of the deductible, and total up the copayments they'd pay per prescription. If your parents spend a lot on medications, also consider whether there's any coverage within the "doughnut hole." Finally, check to see whether the pharmacy your parents prefer participates in that plan.

Can my parents switch plans?

A plan that at first seems good for your parent may turn out not to be the best. It may have restrictions that didn't seem especially important when your parents signed up for it, but they've proved to be a problem. The plan might change its formulary more than most from one year to the next, change its rules or restrictions, or raise its premiums. Or maybe a new plan is now offered that has better terms. In any of these situations, your parents can leave their current plan and enroll in a new one. They can do so by signing up during the open enrollment period from November 15 to December 31 each year.

Where can my parents or I get more information about joining a Part D plan?

Medicare's website has information about Part D drug plans available where your parents live, including the medications currently in each plan's formulary. Or you can contact Medicare by phone at (800) 633-4227. You can also get free, independent expert help in choosing a plan from your local State Health Insurance Assistance Program (SHIP) or Health Insurance Counseling and Advocacy Program (HICAP). You can find the phone numbers under SHIP and HICAP in the white pages of your local phone directory. And you can get independent help online from the Medicare Rights Center.

Once you and your parents have gathered information about plans and narrowed their choices, it's time to directly contact the plans that seem the best. It's only from the plans themselves that you can be sure to get the latest information -- in writing -- about coverage, costs, and restrictions. Once you decide on a particular plan, you enroll directly with it, not with Medicare.