Medicare Part D: What It Is, How It Works, Example

What Is Medicare Part D?

Medicare Part D refers to a prescription drug benefit from the federal Medicare health insurance program. The program is for persons 65 and older, certain younger people with disabilities, and people with end-stage renal disease. Private insurance companies administer Part D plans, which are available to anyone with Medicare.

How Medicare Part D Works

Medicare offers two ways to get prescription drug coverage—Part D and Medicare Advantage. Medicare Part D is one component of the national Medicare program's health insurance. While Medicare extends to various medical treatments, Part D focuses on making drug prices more affordable for Americans 65 and older.

Generally, you enroll in Part D when first eligible for Medicare. Otherwise, you might incur a late enrollment penalty unless you meet specific criteria, such as having other creditable prescription drug coverage.

The government categorizes "creditable prescription drug coverage" as paying at least as much as Medicare's standard prescription drug coverage. For this reason, those already covered by creditable plans, say, through an employer, may not opt into Medicare Part D.

The Coverage Gap (Donut Hole)

Medicare prescription drug plans have a coverage gap. This gap temporarily limits the drug plan's coverage, often called the "donut hole." It kicks in after you and your insurer have spent a certain amount on medications in combined costs. In 2024, that amount is $5,030, up from $4,660 in 2023.

Once that sum's been exceeded, you must pay at least a portion of your drug costs out of pocket. But, most plans limit the amount you must pay on your own in a given year, called the out-of-pocket threshold. Once you've exceeded that sum—$8,000 in 2024—your coverage kicks in again. This next phase is known as catastrophic coverage.

In the past, you were required to pay a minimum toward your catastrophic coverage medications. In 2024, this is no longer the case.

Monthly Premiums

People opting into Part D are charged the same costs found with standard insurance plans, such as monthly premiums, annual deductibles, and various copays. In exchange, you get additional coverage for prescription drugs as compared to what is already offered by the broader Medicare program.

Subscribing to Medicare Part D must make economic sense, given your health needs and financial circumstances.

According to the Centers for Medicare & Medicaid Services, the Medicare Part D premium will decrease from $56.49 in 2023 to $55.50 in 2024.

Medicare Advantage

Many Medicare Advantage plans include Medicare Part D coverage and vision, hearing, and dental care benefits. Medicare Advantage is a type of Medicare health plan offered by private insurance companies that are Medicare-approved.

One of the best Medicare Advantage Plans can be a viable alternative for those uninterested in purchasing Medicare Part D to supplement their existing Medicare policy.

The average premium in Medicare Advantage plans, which includes Medicare Advantage-Prescription Drug plans, is $17.86 in 2023, less than the average of $18.50 in 2024.

2022 Inflation Reduction Act

The Inflation Reduction Act of 2022 aims to lower prescription drug costs through changes to the Part D benefit, including the donut hole. Part D changes include:

2023 Changes:

• Insulin at $35 per month or under, out-of-pocket
• Adult vaccines covered with no cost sharing.

2024 Changes:

• Expansion of the Part D Low-Income Subsidy (LIS) ("Extra Help") Program to offer full benefits to Medicare recipients whose income is up to 150% of the poverty level
• Premium increases are limited until 2030
• Cost sharing was eliminated in the catastrophic phase

2025 Changes:

• Out-of-pocket spending will be capped at $2,000, down from $3,300 in 2024. The spending cap will rise every year after 2025.
• The donut hole no longer exists as you move from the 25% initial coverage to catastrophic coverage.
• Medicare beneficiaries can repay out-of-pocket costs over the year versus all at once

In 2026–2029, the government must negotiate prices for certain high-cost drugs.

Example of Medicare Part D

Daniel is a veteran considering whether to opt into Medicare Part D. As an older American, Medicare already covers Daniel for various medical expenses. However, some of his prescription medications are not covered by Medicare, causing him to seek additional coverage.

In researching his options, Daniel examines several plans offered by private insurers under the Medicare Part D program. In doing so, he realizes that he is already entitled to prescription drug coverage through the Veterans Affairs (VA) program because of his prior military service.

When comparing this VA plan against the terms and conditions offered by private insurers under Medicare Part D, he concludes that his best option is to rely on his VA benefits.

For this reason, Daniel decides not to opt into Medicare Part D. Because the government recognizes his VA plan as a form of creditable prescription drug coverage, he will not be penalized for failing to do so.

The Bottom Line

Medicare Part D helps pay for necessary and often life-saving medications, including drugs for chronic disease management and serious diseases like cancer. Finding the best Part D plan may have you seeking $0 copays, low premiums, or high star ratings. Research your options before open enrollment, when you can switch plans.