Introduction

When the Medicare program was first implemented in 1965 to provide subsidized health coverage for the elderly and disabled, it encompassed inpatient hospital stays and outpatient physician office visits via Medicare’s Part A and Part B, respectively. However, the program didn’t cover self-administered retail prescription drugs, which have long consisted of the largest share of prescription drug use. The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003, signed into law in 2003 and effectuating in 2006, created an optional outpatient prescription drug benefit program called Medicare Part D or Medicare Rx to help pay for drugs at retail, mail order, home infusion, and long-term care pharmacies. By 2021, 48 million out of the over 62 million Medicare beneficiaries are enrolled in Part D plans.

In 2018, Part D’s program expenditures reached $95.4 billion, or nearly 13% of total Medicare spending. Part D constitutes more than one-third of retail prescription drug spending in the US. It’s financed primarily by general revenues (71%), beneficiary premiums (17%), and state payments for beneficiaries eligible for both Medicare and Medicaid (12%). 

Types of Medicare Part D Plans

Differing from Parts A and B, which are publicly administered by Medicare, Part D is provided by authorized Medicare-contracted private insurers. These companies are subject to Medicare regulations and subsidization, pursuant to one-year, annually renewed terms. There are two main types of plans beneficiaries can enroll in for Part D benefits. 

1. Prescription Drug Plan (PDP): a standalone plan that covers solely prescription drugs. 
2. Medicare Advantage Prescription Drug Plan (MA-PD): combines a beneficiary’s doctor, hospital, and prescription drug coverages under one policy. Additionally, employers and unions can extend the Part D coverage from their own MA-PD plans to Medicare-eligible employees and retirees in what’s known as Employer or Union Sponsored Part D Retiree Plans.

Generally, an individual must have either Part A OR Part B coverage to enroll in a PDP, while he/she would need both Part A AND Part B to enroll in an MA-PD. PDPs tend to be nationwide plans, while MA-PDs have more restricted regions, whether by state or by counties within states. Therefore, MA-PDs aren’t recommended for those who travel extensively or reside in various areas of the country throughout the year. 

PDP plans also differ from MA-PDs because with PDP plans, beneficiaries’ costs are directly related to the anticipated prescription drug spending of the population. Additionally, PDPs are dictated by costs within the retail drug sector, therefore fluctuations in healthcare costs in other respects such as hospitalization don’t impact PDPs. 

Costs of Medicare Part D

Part D operates on an insurance model where enrollees are charged costs typically associated with standard insurance plans, such as monthly premiums, annual deductibles, and copays. In 2022, Medicare Part D coverage costs on average $33 per month, while Medicare Advantage plans will cost $19 per month. 

Covered Drugs

Part D plans aren’t required to cover all Part D drugs. Instead they establish their own formularies, with varying tiers associated with accordingly set copay amounts across the categories of drugs. Lower tiers tend to have lower copays. A formulary must follow the model formulary in the US Pharmacopeia, include at least 2 drugs in each of the 148 drug categories, and covers all or “substantially all” drugs under the categories of anti-cancer; antipsychotic; anti-convulsant, antidepressants, immuno-suppressant, and antiretroviral drugs.

The Standard Benefit

The law mandates companies to offer a “standard benefit” package at the minimum, including an annual deductible and a coverage gap, known as the “Donut Hole”. While some plans may deviate from the standard benefit in terms of structure, they must be actuarially equivalent. Occasionally, “enhanced” plans may provide more benefits than the baseline set by the “standard benefit”, including more coverage during the Donut Hole period. The section below outlines the Part D standard benefit phases for 2022.

1. Deductible Phase: Enrollees pay for the full cost of his/her prescription drug until he/she reaches the initial Annual Deductible of $480.
2. Initial Coverage: The beneficiary would go on to pay 25% of a covered Part D prescription drug, either a copayment (a set amount) or coinsurance (a percentage of the drug’s cost). This amount will depend on the drug’s designated tier. This stage ends when a beneficiary and his/her insurer reach the initial coverage limit of $4,430, or when the beneficiary has paid $1107.50.
3. Coverage Gap: Prior to 2019, upon the plan and enrollee collectively reaching the initial coverage limit, the enrollee enters the “Donut Hole” phase, where the enrollee would be required to pay a higher percentage of the drug’s full cost than the 25% of the previous phase. The Health Care and Education Reconciliation Act of 2010 (HCERA) established a gradual phase-out of the coverage gap by 2020. With the Bipartisan Budget Act of 2018 (BBA), the Donut Hole for brand-name drugs closed one year ahead. In 2022, enrollees on the standard drug plan will pay 25% coinsurance for both brand name and generic drugs until their true out-of-pocket cost (TrOOP) reaches the catastrophic coverage minimum. The 75% discount on brand-name drugs is 70% paid by the drug manufacturer and 5% by the Part D plan. The TrOOP is calculated by adding together the yearly deductible, coinsurance, and copayments from the entire plan year, and beneficiary contributions during the coverage gap including the 70% Donut Hole manufacturer discount.
4. Catastrophic Coverage: Once a beneficiary’s TrOOP amounts to $7,050, he/she will pay the greater amount between either 5% of drug costs or $3.70 for generics and $9.20 for brand names. For the remaining costs, roughly 95% of the total, 80% will be covered by Medicare and 15% by the plan. The enrollee will remain in this phase until the end of the plan year before it resets in the new year. 

Pros of Medicare Part D

By design, different coverage costs for according “tiers” of drugs are meant to protect consumers from high-cost prescription drugs. At low premiums and a plethora of options, consumers have a wide range of choices depending on their needs and how Part D works alongside their other concurrent coverage plans. 

Studies have observed the percentage of Medicare beneficiaries forgoing medications due to cost dropped from 15.2% in 2004 to 11.5% in 2006 post-enactment of Part D. A 2020 study also found that Part D led to a sharp reduction in the number of full-time workers older than 65.

Cons of Medicare Part D

Medicare enables Part D coverage enrollment around the time of a person’s 65th birthday. However, if a Medicare enrollee goes without Part D or other creditable prescription drug coverage for any continuous interlude of 63 days or more after the end of their Part D Initial Enrollment Period, they are subjected to a late enrollment penalty. The penalty is typically added to the person’s monthly premium amount and its amount increases with how long he/she has gone uninsured. For each full, uncovered month that the enrollee didn’t have Medicare drug coverage or other creditable coverage, 1% of the “national base beneficiary premium” (or the base beneficiary premium) will be added to his/her monthly premium. 

Given Part D’s formulary structure, a potential enrollee would need to anticipate his/her drug needs for the upcoming plan year and have to shop between various plans on the market. Further, due to plans differing from insurer to insurer other than a Medicare-mandated minimum amount of coverage, this gives enrollees another reason to ensure a particular plan satisfies all drug needs.

Another key criticism regarding Part D is the “Noninterference Clause”, which prevents Medicare from negotiating Part D prices with drug companies in hopes that private insurers are incentivized to negotiate the lowest possible drug prices. However, since not even the largest insurers have enough enrollee base as leverage, Part D drug prices are largely not negotiated, leading to spending $50 billion a year in the “most conservative high-cost scenario” that otherwise could have been saved between 2006 and 2013. 

Medicare Part D in the News

At a time when reining in drug prices has overwhelming public support in the US, the current Senate’s Democratic majority recently reached a deal allowing Medicare to negotiate and place caps on drug price inflation. The crux of the legislation is the negotiation provisions. If passed, Medicare could start the Drug Price Negotiation Program (DPNP) in 2023, with the secretary of the Department of Health and Human Services selecting up to 10 drugs to negotiate prices on, with the negotiated prices effectuating in 2026. In 2029, the number of drugs subjected to bargaining will increase to 20. Furthermore, the legislation will create a $2,000 out-of-pocket spending cap for Part D beneficiaries, prohibiting brand-name manufacturers from hindering competition from generic-drug producing counterparts and requiring companies to pay a rebate for hiking drug prices beyond the rate of inflation. Over the next decade, this plan is projected to save $288 billion.