Medicare Part D Explained: How Prescription Drug Coverage Works

Prescription drugs are one of the largest and most variable healthcare costs for Medicare beneficiaries. Original Medicare (Parts A and B) does not cover most outpatient prescription drugs — that's where Medicare Part D comes in. Whether you enroll in a stand-alone Part D plan alongside Original Medicare, or get drug coverage as part of a Medicare Advantage plan, understanding how Part D works is essential to managing your costs.

What Is Medicare Part D?

Part D is Medicare's prescription drug benefit, available to anyone enrolled in Medicare Part A and/or Part B. It's offered through private insurance companies approved by the Centers for Medicare & Medicaid Services (CMS).

You can get Part D coverage in two ways:

• Stand-alone Part D plan (PDP) — used alongside Original Medicare and Medigap
• Medicare Advantage with prescription drug coverage (MAPD) — all-in-one plan that includes Part A, Part B, and Part D

The Part D Formulary: Your Plan's Drug List

Every Part D plan has a formulary— a list of covered prescription drugs. If your drug is not on the formulary, the plan won't cover it (you can request an exception, but this is not guaranteed).

Formularies are organized into tiers that determine how much you pay:

The same drug can be on Tier 1 in one plan and Tier 4 in another. This is why it's critical to run a formulary check with your specific medications before enrolling.

Part D Costs: What You Pay

Part D plans have several layers of potential costs:

• Premium — a monthly fee ranging from ~$0 to $100+ depending on the plan. Some Medicare Advantage plans include Part D with a $0 separate drug premium.
• Deductible — some plans have a drug deductible (up to the CMS maximum, which changes annually). Generics are sometimes exempt from the deductible.
• Copays or coinsurance — your share of each prescription based on tier
• The coverage gap (donut hole) — see below
• Catastrophic coverage — once your out-of-pocket drug costs reach a threshold, you pay only a small copay for the rest of the year

The Coverage Gap: What You Need to Know

The "donut hole" is a temporary phase in Part D coverage where historically your cost-sharing increased significantly. The Inflation Reduction Act (2022) and subsequent legislation have significantly changed this. Starting in 2025, there is a new $2,000 annual out-of-pocket cap for Part D prescription costs, eliminating the most financially burdensome aspects of the coverage gap.

Additionally, the Medicare Prescription Payment Plan allows beneficiaries to spread their out-of-pocket drug costs across monthly installments throughout the year, rather than paying large amounts upfront.

Extra Help (Low-Income Subsidy / LIS)

If you have limited income and resources, you may qualify for Extra Help — a federal program (also called the Low-Income Subsidy or LIS) that helps pay your Part D premiums, deductibles, and copays.

Extra Help can save beneficiaries over $5,000 per year in drug costs. For 2026, eligibility is generally for individuals with income below about $21,000/year and limited savings/assets. Married couples have higher thresholds.

• Apply through Social Security (ssa.gov) or your local Social Security office
• If you qualify for full Medicaid (like NJ FamilyCare), you automatically qualify for Extra Help
• If you receive Extra Help, you get a monthly SEP to change your Part D plan any time

The Late Enrollment Penalty

If you don't enroll in Part D when first eligible (when you turn 65 or first get Medicare) and don't have other creditable drug coverage, you may face a permanent late enrollment penalty. The penalty is 1% of the national base beneficiary premium for every month you went without creditable coverage. It applies for as long as you have Part D coverage.

Example: If you went 24 months without coverage, your penalty would be 24% of the base premium — added permanently to your monthly cost.

Creditable coverageincludes active employer drug coverage, TRICARE, VA benefits, and certain other programs. Always get documentation if you have creditable coverage — you'll need it to avoid the penalty when you do enroll.

How to Choose the Right Part D Plan

• List every prescription you take with dosage and frequency
• Use the Medicare Plan Finder tool to compare plans based on your specific drugs
• Look at total annual cost (premium + estimated drug costs), not just the monthly premium
• Check which pharmacy network the plan uses — some plans offer lower prices at preferred pharmacies
• Consider mail-order options for maintenance medications (usually cheaper for a 90-day supply)

Disclaimer: This article is for educational purposes only and does not constitute insurance or financial advice. Coverage details, costs, and eligibility vary by plan and individual situation. Always consult a licensed insurance professional and verify current information with the plan or CMS before making enrollment decisions.