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How Medicare Works


Medicare Prescription Drug Coverage (Part D)
President George W. Bush signing the Medicare Prescription Drug Improvement and Modernization Act of 2003.
President George W. Bush signing the Medicare Prescription Drug Improvement and Modernization Act of 2003.
© STEPHEN JAFFE/AFP/Getty Images

In December 2003, President George W. Bush signed the Medicare Modernization Act, expanding Medicare to offer optional subsidized prescription drug coverage; the result, Medicare Part D, was introduced on Jan. 1, 2006.

Any individual who is eligible for Medicare Part A, Part B or Part C is also eligible to enroll in Medicare Part D, which offers prescription drug coverage. There are two types of prescription drug benefit packages: a stand-alone prescription drug plan (PDP) and the Medicare Advantage prescription drug plan (MA-PD), which blends medical and drug coverage. In 2014 roughly 37 million people received Medicare Part D benefits as part of a PDP or MA-PD [source: KFF].

Medicare Part D is optional, and enrollees may be responsible for paying monthly premiums, annual deductibles, co-payments, co-insurance and other expenses as applicable, such as late enrollment penalties.

There is a coverage gap, also known as the donut hole, in Part D that works — very basically — like this: Part D enrollees pay monthly premiums and also pay a percent (in some cases up to 100 percent) of prescription drug costs until hitting the plan's yearly deductible. In 2010 that annual deductible was $310. Once they meet the deductible, enrollees are responsible for 25 percent of prescription drug costs — that is, until another limit is hit (in 2010 that limit was $2,800). And this is when beneficiaries fall into the donut hole; once the second limit has been reached, beneficiaries become responsible for 100 percent of all their prescription drug expenses. That is, until another spending limit is met — that annual limit was $4,550 in 2010. Once the third limit is met, enrollees become responsible for a small percentage of prescription drug costs.

It won't be until 2020 when the donut hole is closed and Medicare Part D no longer has these restrictions; Part D enrollees will then pay 25 percent of prescription expenses until reaching the plan's annual out-of-pocket maximum [source: Blum].

The plans have varying costs and formularies (the list of drugs covered under the plan). People who want to sign up for Medicare Part D are encouraged to compare the plans and find one that covers the drugs they need, or expect to need, in the future. Changes to plans may be made during the open enrollment period at the end of each calendar year.

As part of health care reform and the Patient Protection and Affordable Care Act (PPACA, also known as Obamacare) signed by President Barack Obama on March 23, 2010, annual wellness exams and certain types of preventive care — such as mammograms and other health screenings — became available to Medicare beneficiaries at no cost for Part D enrollees.