Here’s an overview of the four stages of Medicare Part D prescription drug coverage and how prices can vary in the coverage gap. Note that this does not apply to prescription drug coverage offered through Medicare Advantage (Part C) plans.
Stage 1 — Deductible. Most Part D plans have an annual deductible that cannot exceed $445 in 2021. You pay the full negotiated price for your prescriptions until you meet the deductible.
Stage 2 — Coverage. After you meet the deductible, your plan covers part of the cost of your prescriptions. With the standard Medicare model, you would pay 25% of the cost and the plan would pay 75%. However, few plans follow the standard model. Most have varying copays or coinsurance for drugs at different “tiers” — for example, progressively higher copays for generics, preferred brand-name drugs, non-preferred brand-name drugs, and very high-cost drugs. This coverage continues until spending by you and your plan reaches the initial coverage limit ($4,130 in 2021, including the deductible).
Stage 3 — Coverage gap. When you exceed the initial coverage limit, you enter the coverage gap (donut hole). In this stage, you pay 25% of the negotiated retail price for all prescriptions. For generic drugs, your plan pays the other 75%; for brand-name drugs, the drug company pays 70% and your plan pays 5%.
If your plan follows the standard Medicare model in which you pay 25% of the cost of all prescriptions, you would see no difference in the coverage gap, so the donut hole would be effectively closed. However, because most plans have different copays or coinsurance for different types of drugs, the 25% of retail price that you pay in the coverage gap may be higher or lower than what you pay during the coverage stage. It could be substantially higher for very high-cost drugs. The good news is that you remain in the coverage gap only until you reach the out-of-pocket spending limit, which is $6,550 in 2021. This includes your out-of-pocket expenses (deductible, copays, and coinsurance) and the 70% paid on your behalf by drug companies; it does not include payments by your plan.
Stage 4 — Catastophic coverage. After you reach the out-of-pocket spending limit, you pay a relatively small amount per prescription for the rest of the year: the greater of 5% of the plan’s negotiated retail price or a flat fee ($3.70 for generics, $9.20 for all other drugs in 2021).
For additional information on Medicare Part D drug coverage, see medicare.gov/drug-coverage-part-d.