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How Medicare Works

Medicare Prescription Drug Coverage (Part D)

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Prescription pills are mostly covered through Medicare Part D. Douglas Sacha/Getty Images

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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 2019, 45 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, copayments, coinsurance and other expenses as applicable, such as late enrollment penalties.

Originally, Medicare Part D had a coverage gap known as the donut hole. It worked like this. Part D enrollees paid the full cost for prescription drugs until they met their plan's deductible. After that, Part D began picking up some of the drug costs. When enrollees reached a certain out-of-pocket payment level – for most plans in 2020, it was $4,020 in total drug costs – you entered the dreaded donut hole. Here, enrollees had to pay a high percentage of their drug expenses until they reached the catastrophic coverage threshold, at which time Part D began paying the majority of the drug costs. The donut hole closed in 2020. Today, when enrollees reach the coverage gap, they only have to pay 25 percent of all drug costs. Once they hit a certain figure (in 2020 it was $6,350), Part D's catastrophic coverage kicks in and enrollees pay significantly less for the rest of the year [source: Medicare Interactive].

Medicare Part D plans have varying costs and formularies (the list of drugs covered under the plan). People who want to sign up for Part D should 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.

Enrollment in Medicare

Enrollment periods and procedures differ depending on the type of Medicare plan. Enrolling in Medicare occurs over a period of seven months: during the three months before the month of your 65th birthday, the month of your birthday and the three months after your birthday month. If you're born in June, for example, your Initial Enrollment Period (IEP) is March through September.

Anyone already receiving benefits from Social Security or the Railroad Retirement Board qualifies for Medicare Part A and Part B and is automatically enrolled at age 65.

Individuals who are 65 and still working and who receive group health coverage through an employer, union, or spouse may delay enrolling in Part B during the IEP without incurring penalties. They may enroll at any time while still covered by a group health plan or during the eight months after that group coverage ends.

Oct. 15 through Dec. 7 is Medicare's open enrollment period, during which beneficiaries may switch plans, or join or drop Medicare Part D. Coverage begins on Jan. 1, and the Medicare Advantage disenrollment period runs from Jan. 1 through Feb. 14. During this period, enrollees may leave Medicare Advantage and enroll in Original Medicare coverage. They can also enroll in a Medicare Prescription Drug plan (Part D), although a late enrollment penalty may apply if they're enrolling after they were initially eligible [source: Medicare.gov].

Anyone who is 65 and isn't receiving Social Security retirement benefits must apply for Medicare. You can enroll online or in person at a local Social Security office. Open enrollment happens on an annual basis, allowing new enrollees to sign up and current beneficiaries to change coverage as needed.

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