Breaking Down Medicare Part D

A Closer Look at the Stages of Part D


Updated on: June 29, 2018

Originally posted on: September 21, 2016
Express Scripts Medicare Advisor
Ms. Kyong specializes in personal finance issues for Medicare recipients. Topics include managing healthcare costs in retirement.

All Medicare Part D plans are designed with four stages of coverage. You move from the first stage to the next based on what you and your plan spend for your prescription drugs. Medicare sets the limits for each stage every year. It’s important to understand how the stages work and what you will pay out-of-pocket each year.

Here is a quick video that explains the process.

Stage One: Annual Deductible

The annual deductible is the first stage of coverage. If your plan has a deductible, you are responsible for paying the full cost of your prescription drugs until you meet the amount set by your plan. The deductible amount depends on the type of plan you choose and changes from year to year. Most “basic” plans have a deductible set by Medicare which is the most you will pay with any plan. Some plans have a $0 or low deductible which means your coverage will begin right away and you’ll have a copayment or coinsurance for your prescriptions and the plan pays the rest. While plans with a $0 or low deductible may seem like a good way to save money, they sometimes have higher copayments or coinsurance, fewer drugs on their formulary or the drugs are covered on a higher tier. This can sometimes cost you more than a plan with a deductible depending on the type and number of medications you take, as well as the tier they are on.

Stage Two: Initial Coverage

Once you meet your deductible amount, you enter the initial coverage stage which is when the plan begins to pay its share of the cost. During this stage, you pay a copayment or coinsurance for each of your prescription drugs and your plan pays the rest. The amount you pay will vary depending on your plan and the “drug tier” your medication falls under. Most plans have between four and five drug tiers. The higher the tier, the more your copayment or coinsurance will be. You will stay in this stage until the total amount you and your plan have spent on covered drugs, including your deductible, reaches an amount set by Medicare. Once you exceed that amount, you enter the next stage of coverage, called the Coverage Gap.

Stage Three: Coverage Gap

Depending on the number of medications you take and what tier they are on you may never reach the Coverage Gap (also known as the donut hole). If you do reach this stage, your out-of-pocket costs will be higher. Your deductible, coinsurance and copayments in the initial coverage stage, the manufacturer discount and what you pay for covered drugs all count toward your out-of-pocket costs to get you out of this stage. Your monthly premium and any copayments for drugs that are not covered by the plan do not count toward out-of-pocket costs. One way to avoid the Coverage Gap is to use generic drugs from day one or by switching to a generic during the initial coverage stage. This way, if you do reach this stage your costs will be less.   This is because, although the percentage you pay for generics is higher in this stage than for brand drugs, the cost for generic drugs is much lower which means you pay less overall.

Stage Four: Catastrophic Coverage

If your out-of-pocket costs exceed the Coverage Gap limit you will automatically enter the catastrophic coverage stage. At this point you only pay a small copay or coinsurance for your prescription drugs for the remainder of the year.

Don’t let the threshold changes confuse you. At the beginning of each new year, note the changes and always be sure you know which stage of coverage you are in.