Your Coverage Options

Annual enrollment, donut holes, catastrophic coverage – oh my! Medicare Part D sure sounds frightening but don’t fret! With a little knowledge, you’ll find it’s not nearly as scary as you may think.

You probably have heard a thing or two about Medicare’s prescription drug plan over the last five years. But many of you are undoubtedly still scratching your heads and asking, “what is it exactly?”

Medicare Part D is a federal program put in place to help Medicare beneficiaries with the costs of their prescription drugs. It was launched in January of 2006 as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

Prior to the Part D program, Medicare beneficiaries paid 100% of their medication. The purpose of Part D is to make drugs affordable to those individuals and all future beneficiaries. Of course, there were assistance programs that offered relief based on individual circumstances (and some of these still exist), but none of these were nearly as comprehensive as the Part D program now in place.

Now that you understand how the program came into existence, you might be wondering, “What is the magic formula that makes Part D what it is?”

The best way to understand Part D is to compare it against the drug coverage of your individual or group health insurance. Most individual or group health insurance plans offer two types of payment options: get your medication with a co-payment or apply the out-of-pocket retail cost of your medications to your deductible. So in a nutshell, Part D is the Medicare drug plan that works with a co-payment model. Really? That’s it? Yes. The Part D program, the long-awaited prescription drug plan now offered to Medicare beneficiaries, is just a simple medication cost reduction plan for which you pay a co-payment. That’s all there is to it.

Seems simple enough, right?

Well, it is a federal program developed by government officials, so it can never be that simple. Here are some of the complexities.

In essence, the Part D program has core components that must be incorporated into every Part D Prescription Drug Plan offered by contracting insurance carriers. Keep in mind that the premiums, deductible structure (Medicare sets the maximum deductible a plan can offer each year), and drug formularies are all determined and set by the insurance carriers, not the federal government. Also, note that not every insurance carrier is contracted with Medicare Part D or offers a Part D Prescription Drug Plan.

Beyond the insurance carrier’s stipulations, let’s review the basic components of Medicare Part D.

*Please visit our resourceful article library for a more in-depth look at the following components of Medicare Part D. You will also find articles highlighting the yearly minimum and maximum cost amounts associated with the Part D Program.

  • The deductible, like most insurance, is what you pay first before your co-payment and insurance kicks in.
  • Drugs fall into categories or tiers. Tier I, Tier II, Tier III and Tier IV. You might know them as Generics, Preferred Brand, Brand and Specialty. Each Tier carries its own co-payment (again the amounts are set by the insurance carriers). Specialty drugs carry a co-insurance versus co-payment – the difference:
    • The co-payment is a set amount for a drug – example, $10 co-pay for Generic
    • The co-insurance is a percentage of the drug cost – example, 30% of a $200 drug = your payment of $60
  • Initial Coverage Limit is the combined cost of what you pay, in the form of deductible and co-payments, and what the insurance carrier (drug plan) pays for your prescriptions. How is this limit determined and by who? Medicare takes a national average of the True Retail Out-Of-Pocket Costs (TROOP) of Medicare beneficiary’s prescriptions. The representative number that Medicare comes up with is the Initial Coverage Limit. Each year the number can change.

  • Gap coverage, or the Donut Hole, is what you go into once you meet and exceed your Initial Coverage Limit. Once in the Donut Hole, should you reach it (not everyone reaches it), you start to pay for your drugs out of your pocket with no assistance from your drug plan. Based on the Affordable Care Act (ACA) of 2010, which was signed into law March of 2010 and went into effect for Medicare Part D in January of 2011, pharmaceutical companies are required to offer cost-share assistance up to 50% of the true retail costs of preferred brand and brand drugs. Once, your costs have reached and exceeded the maximum amount as set forth by Medicare you get out of the donut hole.
  • You exceeded your maximum amount while in the Donut Hole so now what? Well, according to Medicare you are now out of the Donut Hole and in to catastrophic coverage. Catastrophic Coverage is Medicare’s way of saying, “hey, we are going to offer you some relief and cut your co-payment and co-insurance costs”. But what does that mean really? Well, once you reach this level of coverage, Medicare has stipulated that the co-payment and co-insurance that you were paying at the Initial Coverage level will be reduced and standardized for each Tier level of medication that you take. You have paid a hefty sum, but now you can breathe a little easier.