Answers to ALL Your Medicare Questions

Part D Drug Coverage

Let’s do a quick review just in case there is a pop quiz. Medicare Part A covers hospital costs. Medicare Part B covers doctor visits, lab work, tests, medical equipment, and just about everything else you might need medically.

Part C is Medicare Advantage, which you may or may not choose to enroll in depending upon whether you go Medicare Advantage or stay with Original Medicare. So let’s just push Part C to the side for now, just like the guest that we may or may not invite to our party.

This brings us to Part D which is Prescription Drug coverage. In using the word “prescription” I will point out that not every drug which enters our body comes to us from a drug store in a little orange bottle that our mothers used to use, once empty, to store buttons. Some drugs are injected into our butts at the doctor’s office and don’t we enjoy that? Others are taken out- patient at a hospital through an IV drip. Those drugs are not considered Part D; they are in the Part B family.

Confusing, right? It is kind of like how a koala bear isn’t a bear at all but rather is a marsupial, making it kin to kangaroos and not to bears. Or how neither starfish or jellyfish are fish. But I digress. If you take any Part B drugs, or could, it will be important to your wallet to understand the difference between the usual Part D drugs and those drugs that are classified as Part B. So, in a moment we will clear it up.

Everyone Has to Have Part D Coverage

It doesn’t matter whether you take any prescription drugs, or you don’t take a pill and never have, you still have to have Part D prescription drug coverage. Medicare says so. Medicare (being the government) will punish you if you don’t. Medicare does not send you to your room or take television away from you for a week as punishment. It’s worse. You get punished with a permanent penalty of 1% of the average cost of a Prescription Drug Plan for each month that you don’t have drug coverage. It works out to around $4.00 a month for every year you are penalized for lack of drug coverage.

So, even going one year without Part D will result in a $4.00 monthly penalty for life. Two years without will result in an $8.00 monthly penalty for life, and so on. You can appeal this penalty, but unless you can prove that you had what Medicare views as credible drug coverage, you won’t win. Lecture over: Make sure you have prescription drug coverage.

There are three ways to get credible coverage and if you enroll in drug coverage from any of the three then you will not have to worry about any penalties.

1. Group Health or VA: Some people have credible coverage through another source Medicare considers credible.  Group Health Insurance is considered credible coverage and as long as you keep it you will not have any penalties to worry about. Likewise, if you get drug coverage through the VA you will not have any concerns about penalties from Medicare. In fact, some people will take out Medicare and keep their VA coverage for their prescription drugs. Tthis is perfectly acceptable. 

2. Medicare Advantage: If you do go on Medicare Advantage then most (around 95%) of Medicare Advantage plans include prescription drug coverage. There are a few without drug coverage designed for people who do not need it, usually veterans who already have VA drug coverage.

3. Stand-Alone Prescription Drug Plan: If you stick with Original Medicare and do not go onto a Medicare Advantage plan then you will get your drug coverage through a stand-alone Prescription Drug Plan. This is a plan that only has one purpose: providing you with drug coverage.

IMPORTANT TO NOTE: You will have one or the other. Medicare Advantage or a stand-alone Prescription Drug Plan. You cannot ever have both at the same time. In fact, if you start with a Medicare Advantage plan and then switch to a stand-alone Prescription Drug Plan during a period that you can do such as Open Enrollment Period each year, then CMS (Medicare) will automatically cancel your Medicare Advantage plan. Or, if you switch to a Medicare Advantage then CMS will automatically cancel your Prescription Drug Plan. It is always one or the other.

So, which is better? Getting your drug coverage through Medicare Advantage or through a Prescription Drug Plan?

With a Medicare Advantage plan, drug coverage is included and won’t cost you extra, whereas you will pay a monthly premium for a stand-alone Prescription Drug Plan. Another point in Medicare Advantage’s favor is that Medicare Advantage usually doesn’t charge a deductible before your coverage kicks in, whereas stand-alone Prescription Drug Plans usually do have a deductible.

The deductible is usually $445 which is the maximum amount they can charge in 2021. This maximum amount is set by Medicare each year. The good news is that this deductible is usually not charged for Tier 1 and Tier 2 drugs, which are the less expensive generic drugs we’re usually prescribed. The deductible is typically limited to Tier-3-and-above name-brand drugs. There are stand-alone Prescription Drug Plans that do not have any deductible at all but the tradeoff is a higher monthly premium cost.

Prescription Drug Plans: The Basics

It doesn’t matter whether you get your drug coverage through a Medicare Advantage plan or a stand-alone Prescription Drug Plan the mechanism of how it works is going to be the same because Medicare itself makes all the rules that every drug plan is required to follow. Drug coverage copay cost, which are the parts you pay out-of-pocket, work off of a Four-Phase system with the government setting the amount for each phase of coverage:

Phase One: Deductible, $445: Remember, if you get your coverage through Medicare Advantage there likely will not be any deductible. With a stand-alone Prescription Drug Plan there likely will be a deductible

Phase Two: Initial Coverage Phase, up to $4,130: This phase works on the drug Tier system.

Phase Three: Coverage Gap, $4,130 to $6,550: This phase is often referred to as the doughnut hole phase. Calling it this was someone’s way to put our minds onto thoughts of warm, out-of-the-oven Krispy Kreme doughnuts. Most of us find doughnuts nicer to think about than copays.

Phase Four: Catastrophic Coverage: Starts at $6,550. This phase caps copays at 5%.

The amounts for each phase are set by Medicare itself, and every plan must follow the phases exactly as Medicare designed them. So if you look at 30 different plans in your pursuit of the perfect plan, you will always see these same numbers over and over again.

The exception is the Phase One deductible of $445. That number is an “outer limit” number. Plans cannot go over $445 as a deductible, but they can charge any number under that amount. Most stand-alone Prescription Drug Plans charge the full $445, but a few charge less. Most Medicare Advantage plans don’t charge any deductible, but a few do. $195 is a common deductible for Medicare Advantage plans that choose to have a deductible.

It is important to note that, like all things with Medicare, every plan uses a calendar year. So if you join a Medicare plan in December, if that’s when you turn 65, then 2021 will still be your first calendar year with 2022 quickly following as a new one. As a result, you could have to pay a $445 annual drug deductible two months in a row. Is that fair? No. But nobody said that Medicare was always fair.

How Each of the Four Phases Works

1.The Deductible Phase ($445): The deductible usually applies to Tier 3 and above drugs. For many people who just take basic generic Tier 1 and Tier 2 drugs, even if their plan has a deductible they will not have to pay it. If you do however have prescriptions that are Tier 3 or higher then you will generally pay the first $445 of the cost out of your pocket until your deductible is met.  

2.The Initial Coverage Phase (Up to $4,130):  This $4,130 amount is not the amount you pay out of pocket, which is a common area of confusion, but rather it is the combined total of what you pay out of pocket together with what your Drug Plan pays. So for instance, if a drug costs $400 and your copay is $45 and your plan picks up the balance of $355 then it will count $400 each month towards the $4,130 Initial Coverage Phase limit.

The Initial coverage phase works off a Tier system with most Medicare Advantage and stand-alone Prescription Drug Plan plans having 5 Tiers.

Tier 1 drugs are the basic (preferred) generics. These are drugs that have been around seemingly forever. Lisinopril is a perfect example. Lisinopril has been around so long that George Washington probably popped Lisinopril for his blood pressure from the stress of crossing the Delaware. Or Atorvastatin, which Michelangelo took to keep his cholesterol levels down after all that pasta he ate. After all, painting the ceiling in the Sistine Chapel can work up quite an appetite. In other words, these are the drugs that your plan would ideally like you to take for anything at all that ails you. Because they are tried and true and dirt cheap!

Copay ranges for Tier 1 drugs are from $0 on some plans to $5 on others.

Tier 2 drugs are slightly more expensive generics drugs. There is often a less expensive Tier 1 drug that your plan would prefer that you take instead.

Copay ranges for Tier 2 drugs are from $0 for a few plans to as much as $19 for others.

Note: Not all plans think alike. Some drug plans have Drug Y as Tier 1 and Drug Z as Tier 2. Other Drug Plans do the opposite and have Drug Z being their preferred Tier 1 and Drug Y being their less preferred Tier 2. Just as people have different preferences, Medicare drug plans have different preferences too, for what you put in your mouth.

Tier 3 drugs are preferred brand name (not generic) drugs. By the way, the word “preferred” does not refer to them being preferred by doctors or by you as a patient because they work better. Preferred means that your plan prefers them to some other name-brand drug that does the same thing because you guessed it, they cost less than the less preferred drug used to treat the same condition. Once again though, different plans have different opinions as to which Tier 3 drug alternative costs that plan less.

Your copay amounts for Tier 3 drugs are almost always in the $40 to $50 range. It is not uncommon for a Tier 3 drug to cost less than the copay which we will discuss in detail in the section on formularies.

Tier 4 drugs are non-preferred drugs. Let me quiz you at this point to test your knowledge of how drug plans think. They are rated non-preferred Tier 4 by Drug Plans because:

A) They cause more side effects
B) They are harder to take
C) They don’t work as well
D) They cost more than Tier 3 drugs do

If you answered D then you are correct.

Copay ranges for Tier 4 drugs are almost always in the $90 to $100 range. Note that drug plans sometimes use a percentage copay, such as 25%, instead of a specific amount such as $20.

Tier 5 drugs are what are called the Specialty Tier. The plan does not mean specialty in the sense that a Rolls Royce is a Special automobile or a Five Star hotel is a Special hotel. But just like the Rolls Royce or a 5 Star hotel, it means Tier 5 drugs are “Specialty” Expensive.

Being Specialty expensive the drug plans want to see to it that you pay what they consider to be your fair share. Copays are almost always 33% for Tier 5 drugs. Tier 5 drugs typically cost $1,000 to as much as $5,000 each month, to where 33% of their cost can be a real gasper. With the cost of Tier 5 drugs being so high most people who take them will quickly reach the Coverage Gap phase and from there they’ll most often get to the Catastrophic Coverage phase as well. 

3.The Coverage Gap Phase (From $4,130 to $6,550): This phase lasts for a $2,420 period. During this phase the tier system, and what tier your drugs happen to be on, no longer matters. Just like a caterpillar turns into a butterfly, during the Coverage Gap Phase all drugs turn into butterflies and you flat out pay a 25% copay on all of your drugs. With most drugs, this 25% copay will cost you more than you paid out of pocket during the Initial Coverage Phase. With Tier 5 drugs having a 33% copay during the tier phase, the 25% copay during the Coverage Gap phase actually works out to your benefit.

If you make it through the Coverage Gap Phase to the Catastrophic Coverage Phase it means you will have paid exactly $605 in copays which is 25% of the $2,420 Gap Phase. 

4.The Catastrophic Coverage Phase (After $6,550): Call this the bad news/ good news phase. The bad news is that you are taking drugs that cost over $6,550 which is enough money to buy a hot tub or a motorcycle or rent spending a day with movie star/comedian Gilbert Gottfried. Yes, if you want to, you actually can. And who wouldn’t rather have at least one of the first two?

The good news is that once the combined amount of your copays plus what the plan has spent on your behalf reaches $6,550, you only need to pay 5% of the remaining cost for the rest of the year. This was designed to keep people from going completely broke from ongoing humongous copays for expensive drugs.

The System in Action

A perfect way to look at the system in action is to examine one drug that some people take and see what the copays would be in each of the four phases.

For the example plan, we will use Humira. Most people (other than those who don’t own TV sets) have heard of Humira. They have probably seen as many commercials for this particular drug as they have seen spots for Budweiser. With Humira being the most advertised drug on TV one would think that Humira might show up on Super Bowl broadcasts with a herd of Clydesdales pulling a giant pill bottle.

There is a rule of thumb about drugs that has no exceptions. The rule is this: If a drug is advertised on TV then it is expensive. Humira is expensive. It costs at a minimum around $1,100 a month. Most plans have Humira as a Tier 5 drug, so at $1,100 a month with a 33% copay, someone taking Humira the copay is $363 a month. If a Humira user could find a plan that had Humira as a Tier 4 drug, rather than Tier 5, this would drop the out-of-pocket cost significantly, from $363 to $100.

Let’s now begin our copay journey with Humira. The first thing you would need to do is pay the deductible if the plan had one, and then in Month One, you’d enter the Initial Coverage Phase.

With Humira costing $1,100 per month, you’d reach $4,130, the limit of the Initial Converge Phase, within four months. If you took other drugs as well then their costs would be added to the cost of Humira and you could reach the $4,130 phase border much quicker.

At $4,130 you would be welcomed to the Coverage Gap Phase. Here you would pay 25% of the cost of all of your drugs including Humira. If you were paying for Humira as a Tier 5 your copay would drop from 33% you had been paying down to 25%, saving you money.

By the sixth month of the year, just based on the $1,100 cost of Humira alone, you would come to a sign in the road that said NOW LEAVING THE GAP PHASE and then another sign saying NOW ENTERING CATASTROPHIC COVERAGE much as you would see LEAVING MONTANA and ENTERING IDAHO signs while driving in your Winnebago.

Signs or not, at the Catastrophic Coverage point you would start paying 5% a month or only $55 in copay for your $1,100 Humira.


It has been said that you need a Ph.D. in Medicare to understand all of the different rules and nuances that Medicare has. What is a Part B drug and not a Part D drug is a perfect example of Medicare’s complexities that lead to yes, more confusion.

Let’s clear the confusion up. If it comes from a pharmacy and you can swallow it, drop it into your ears or eyes, or inject it on your own then it’s a Part D drug. If you need the help of a doctor, hospital, or some equipment to take it on your own, it’s a Part B Drug. Part B drugs are:

1. Drugs injected in a doctor’s office. Whether it’s in the arm or somewhere to the south doesn’t matter.

2. Drugs taken outpatient in a hospital, with chemo drugs being the classic example.

3. Drugs that are used in conjunction with equipment such as an insulin pump or a COPD machine.

Drugs in these three categories are usually Part B. When a drug is categorized as being Part B then instead of a copayment you have coinsurance which is 20%.

There are situations where Plan B drugs can save you money. For instance, your doctor can sometimes give you an injection that could take the place of a more expensive Tier 5 drug. When it comes to saving money it never hurts to ask.

In some instances though, most especially with expensive chemo drugs, or if you have an expensive doctor-injected drug you get regularly, your 20% coinsurance could add up to big dollars out-of-pocket. If you are new to Medicare, Guaranteed Issue allows you the choice of going to Original Medicare with a Medigap Supplement such as Plan G. When you need Part B this can sometimes be the most cost-effective direction to go.

With a Medicare Advantage plan, you will keep paying 20% coinsurance for Part B drugs which, if they are expensive enough, could sometimes take you to your maximum-out-of- pocket cost limit. On the other hand, with a Plan G Medigap Supplement, the Part B coinsurance would be picked up 100% after your annual $203 deductible is met.

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