Understanding Medicare Part D and the Coverage Gap

How Part D Is Structured

Medicare Part D operates in four phases that reset each calendar year. Understanding these phases helps you anticipate how your drug costs may change throughout the year:

• Deductible phase: You pay the full cost of your drugs until you meet the annual deductible (some plans waive the deductible for certain drug tiers).
• Initial coverage phase: You pay a copayment or coinsurance for each drug. The plan pays its share. This continues until combined spending reaches a threshold set annually by CMS.
• Coverage gap: Historically, beneficiaries paid a larger share of drug costs in this phase. Legislative changes have progressively reduced out-of-pocket costs in the gap.
• Catastrophic coverage phase: After your out-of-pocket spending reaches a defined annual limit, your costs drop significantly for the remainder of the year.

The Coverage Gap Explained

The coverage gap begins after you and your plan have spent a combined amount on covered drugs that reaches the initial coverage limit. Originally, beneficiaries paid 100% of their drug costs during this gap — hence the term "donut hole." Over the years, legislation has narrowed this gap significantly.

Recent legislative changes, including the Inflation Reduction Act, have capped annual out-of-pocket costs for Part D beneficiaries. The specifics of the cap and how costs are shared during each phase change with each year's updates from CMS. Check Medicare.gov for current-year figures.

Drug Tiers and Formularies

Each Part D plan has a formulary — a list of drugs the plan covers — organized into tiers. Lower tiers (typically generic drugs) have lower copays. Higher tiers (brand-name and specialty drugs) have higher copays or coinsurance. Not every drug is on every plan's formulary.

Before enrolling in a Part D plan, check whether your specific medications are on the plan's formulary and note which tier they fall under. A plan with a low monthly premium but high-tier placement for your medications may cost more overall than a higher-premium plan with better tier placement.

Part D and Medicare Advantage

Many Medicare Advantage plans (MA-PD plans) include Part D drug coverage as part of their bundled benefits. If you are enrolled in a Medicare Advantage plan with drug coverage, you generally cannot also have a standalone Part D plan.

If you are on Original Medicare with a Medigap supplement, you typically need a separate standalone Part D plan for drug coverage. Medigap plans do not cover prescription drugs.

Strategies for Managing Drug Costs

Several practical approaches can help manage prescription costs under Part D:

• Ask your doctor about generic alternatives when available
• Use the Medicare Plan Finder at Medicare.gov to compare plans based on your specific medications
• Check whether you qualify for Extra Help (Low-Income Subsidy), which reduces premiums, deductibles, and copays
• Review your plan annually during Open Enrollment — formularies and pricing change each year

"The cheapest Part D plan is not always the one with the lowest premium. It is the one that costs you the least for the drugs you actually take."