How does Medicare work?

What is Medicare Part D?

How does Medicare work?

Your Medicare information guide

Skip the intro and START LEARNING!

“What is Medicare Part D?”
&
“What does Medicare Part D cover?”

These are the two most common questions everybody has when it comes to their Part D benefits. A few others that always get asked and will be covered below are:

"How can I enroll in Medicare Part D?"

"What is the Medicare Doughnut Hole?"

"Do I have to pay a deductible with Medicare Part D?"

If you haven’t already, refer to my Medicare 101 guide, for a quick easy to read description of all of the different parts of Medicare.

Below is a guide that is not all inclusive. Should you have a question about whether or not something is covered, contact your health care provider to be certain.


Jump straight to:

What does Medicare Part D cover?

Your Medicare Part D coverage can be thought of as your prescription drug plan coverage. Like Medicare Advantage and Medicare Supplement plans, they are offered through a private organization and not the Government.

It will cover:

  • Costs for your prescription drug needs at the pharmacy.

Each drug plan has it’s own formulary and network of pharmacies, so it’s important to research the plan extensively before you sign up to ensure the list of medications you want to take are covered.

How much does Medicare Part D cost?

Medicare Part D coverage varies in cost depending on which plan you choose. It’s more important to find a plan that has a formulary that meets your needs, rather than to find one with the lowest premium. If you were to select a plan with a low premium and find out that your specific prescription drug wasn’t covered, you could end up taking on a lot of unnecessary out of pocket expenses through the course of the year. Thus costing you way more than selecting a modestly priced Part D plan that provides appropriate coverage.

Similarly to Medicare Part B, if your gross income exceeds a certain amount, you may have to pay an income related monthly adjusted amount (Part D-IRMAA). This is a premium amount that you pay in addition to your Medicare Part D monthly premium. This additional amount is paid directly to Medicare and not your Part D plan provider. Failure to pay your Part D-IRMAA will result in the loss of your Part D drug coverage, so it’s important to not over look this. Medicare will use the adjusted gross income (AGI) reported on your IRS tax return from 2 years ago.

Here is a helpful table that highlights the 2019 Part D-IRMAA premium by income:

And an in-depth guide about Medicare Premiums: Rules For Higher-Income Beneficiaries.

 

Medicare Part D enrollment guide

Enrolling in a Medicare Part D Plan is a lot like enrolling in a Medicare Advantage Plan. There are a few opportunities each year where you will be able to enroll, dis-enroll, and switch.

You can enroll during:

  • Initial Enrollment Period (IEP)
  • Annual Election Period (AEP)
  • Special Enrollment Period (SEP)

You can switch Part D plans during:

  • Annual Election Period (AEP)
  • Special Enrollment Period (SEP)

You can dis-enroll during:

  • Annual Election Period (AEP)
  • Special Enrollment Period (SEP)

For more detailed information on how to enroll, when you can or should enroll, and the other nuances of enrolling in a Medicare Part D Prescription Drug plan check out the article I wrote: “The Ultimate Guide to Medicare Enrollment” I cover topics such as avoiding late enrollment fees, the Annual Election Period (AEP), qualifying for a Special Enrollment Period (SEP), and so much more. It’s an extremely detailed article on everything enrollment related.

Late enrollment penalty for Medicare Part D

Once your Initial Enrollment Period (IEP) ends you may be subject to a late enrollment penalty if you have not maintained creditable drug coverage elsewhere (I.e, employer sponsored plan, Medicare Advantage Plan, etc…). Like Part B, you will pay this penalty for as long as you have Part D. The late enrollment penalty is calculated by taking the National Base Beneficiary Premium (NBBP) and multiplying it by 1% for each uncovered month. The premium is then rounded up to the nearest $0.10 and gets added to your monthly premium for for your Part D Prescription Drug Plan.

Heres an example:

Your Medicare Part D premium is $21.90. In 2019 the NBBP is $33.19 and you went 13 months without creditable drug coverage.

To calculate your late penalty:
(Months without coverage x 1%)

13 x .01 (1%) = 13%

To calculate your late fee:
(NBBP x late penalty)

$33.19x .13 (13%) = $4.31

You would round that down to the nearest $.10 cents.

To calculate your total premium:
(Medicare Part D premium + late fee)

$21.90+ $4.30 = $26.20

Your total cost for your Medicare Part D coverage is $26.20

Medicare Part D cost sharing guide

Although your cost sharing will vary depending on which plan and provider you choose, there are some similarities that you will have among each plan.

Your cost sharing will include:

  • An annual deductible
  • A co-payment per drug
  • Coinsurance amount per drug
  • Doughnut hole cost sharing
  • Catastrophic coverage cost sharing
While the overall cost sharing will vary from plan to plan, the drug plans will follow some of the same rules. In 2018 the maximum deductible a plan can carry is $405. This will increase to $415 for 2019. Drug plans also follow the same rules when it comes to entering your plan’s coverage gap and when you exit that gap.

Medicare Doughnut Hole

The amount you and your plan spend before you enter a coverage gap in your policy known as the “Medicare Doughnut Hole” is known as the initial coverage limit. In 2018 this amount is $3,750, and will increase to $3,820 for 2019. So in 2018, once you and your plan spend $3,750 on covered drugs you are now officially in your doughnut hole coverage gap. While you’re in this coverage gap your costs for prescription drugs will increase. Maybe you’ve heard that in 2020 the doughnut hole is closing. “The doughnut hole is going away!” Here’s why: the coinsurance amount you pay while in the doughnut hole is continuing to decrease through 2020 where it will finally settle down to a flat 25% for the foreseeable future.
While in the doughnut hole you will pay:
The reason they can make the claim that the doughnut hole is going away is that the CMS Standard Model uses 25% for the co-insurance amount on Part D drugs once you’ve surpassed your Part D deductible. It’s likely if you review your benefits that your co-insurance per drug is tiered and not a flat percentage except for tier 4 and 5, so you may very well find yourself in a state of heightened expenditure once you reach this coverage gap “formerly known as doughnut hole”. So… is it gone? Or did they just give you a smaller doughnut? You’ll have to look at your plan and see for yourself.

Maximum True Out of Pocket Expense (TrOOP)

 Part D plans also have a uniformed maximum true out of pocket expense, also known as the total out of pocket expense (TrOOP) which is set by Medicare. The maximum TrOOP for 2018 is $5,000. This will increase to $5,100 in 2019. Your TrOOP determines when you exit the coverage gap known as the “Medicare Doughnut Hole” and enter catastrophic coverage.
 
So, how is you TrOOP calculated? Not all of your prescription drug related expenses count towards your TrOOP.
 
Here’s what counts towards your TrOOP:
  • Annual deductible
  • Coinsurance expenses
  • Co-payments
  • Payments made by Low Income Cost-Sharing Subsidies (LICS)
  • Your cost sharing expenses during your coverage gap (doughnut hole)
  • The discounts you receive on the drugs during your coverage gap (doughnut hole)
Here are some things that don’t:
  • Your Part D premium
  •  Pharmacy dispensing fee
  • Drugs not covered under your Part D plan
  • Payments by group health plans, insurers, government-funded health programs,

    and similar third party arrangements, except for LICS

It is important to note the difference. To reach the initial coverage limit, the calculation is based on what both you and your plan have spent. To get out of the doughnut hole it is calculated based on your TrOOP which is your total out of pocket. Once you reach the maximum TrOOP you enter what’s called catastrophic coverage in which case your cost sharing is significantly reduced. It is important to note, that the discount you receive on the drugs during your coverage gap are included towards your TrOOP.
 

Here’s an example:
You purchase a brand name drug while in the doughnut hole gap that has a negotiated retail cost of $100. Your cost sharing is 35%. There is a manufacturer discount payment of 50%. Your plan pays for the remaining 15% of the cost.

To calculate your cost sharing:
(Retail drug cost x coinsurance amount of 35%)

$100 x .35 (35%) = $35

To calculate the manufacture discount payment:
(Retail drug cost x manufacturer discount payment of 50%)

$100 x .50 (50%) = $50

To calculate the total amount applied to your TROOP:
(Your cost sharing + manufacturer discount payment)

$35+ $50 = $85

The total amount contributed to your TROOP is $85

Since the plan only paid 15%, the other 85% or $85 is what counts towards your TrOOP. Not just the $35 you paid out of pocket. If your plan includes coverage in the gap, this may vary. The calculation will also change as the doughnut hole starts to close. It’s always best to review your plan and your monthly “Explanation of Benefits” (EOB) that your plan provider sends to you for the most accurate information. This will keep you up to date on your cost-sharing expenses and allow you to keep track of your prescription drug claims and costs.
Now that you know how to calculate your TrOOP let’s talk about the cost sharing while in catastrophic coverage.

Catastrophic coverage cost sharing for 2018:

  • 5% of each brand-name drug, or $8.35, whichever is greater
  • 5% of each generic drug, or $3.35, whichever is greater

For 2019:

  • 5% of each brand-name drug, or $8.50, whichever is greater
  • 5% of each generic drug, or $3.40, whichever is greater

 

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Sean Senseman

Sean Senseman

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