What is Medicare Part D?

Key points

• Medicare Part D provides prescription drug coverage for Medicare beneficiaries.
• The out-of-pocket costs with a Medicare Part D plan include your premiums, deductibles and coinsurance.
• Medicare Part D is offered by private insurers, but regulated by the federal government, and you can sign up for a plan on the Medicare website.
• You should enroll in a Medicare Part D plan when you sign up for Medicare during your initial enrollment period, unless you have other drug coverage.
• As an alternative to a standalone Medicare Part D plan, you can get prescription drug coverage with a Medicare Advantage plan.

When Medicare was created in 1965 to provide health insurance for Americans aged 65 and older, the program included just two parts: hospital coverage (Part A) and medical insurance (Part B). Since then, this federal government safety net for retirees has grown to cover more health care expenses, including prescription drugs, thanks to the addition of Medicare Part D.

What is Medicare Part D?

One of the newest additions to the federal health insurance program, Part D was created by the Medicare Prescription Drug Improvement and Modernization Act of 2003 to provide an optional prescription drug benefit for Medicare recipients. Part D prescription drug coverage became available in 2006.

Unlike Medicare Part A and Part B, Medicare Part D isn’t administered by the federal government. Instead, you can buy a plan from a private insurer that is government-approved.

You generally sign up for Medicare Part D during the seven-month window surrounding your 65th birthday, what’s known as your initial enrollment period. If you fail to do so, you could be subject to a penalty in the form of higher premiums when you eventually do sign up. 

However, if you have prescription drug coverage from another plan, such as an employer-sponsored insurance plan, you can sign up once that coverage ends without facing a penalty, as long as you do so within 63 days of your creditable drug coverage ending.

What does Medicare Part D cover?

Every Medicare Part D plan provides coverage for both generic and brand-name prescription drugs, following standards set by Medicare. Each individual Medicare Part D plan has its own formulary, which is a list of the drugs the plan covers and what tiers they fall into based on price. You’ll pay a higher coinsurance amount for a drug in a high tier and lower coinsurance for a medication in a lower tier.

Medicare requires that each formulary include at least two drugs in the most common categories and classes of prescriptions to ensure that everyone with a medical condition has access to the medications they need. That way, even if the exact drug your doctor prescribes isn’t covered by your plan, a similar alternative should be.

Tip: If you need a drug that either isn’t covered or is in a high tier, your physician can ask your plan provider for an exception to help you pay less.

Medicare Part D costs

Unlike some other parts of Medicare, Part D isn’t free. Your out-of-pocket costs break down as follows.

Monthly premiums

You’ll pay a monthly premium for Part D coverage and the amount will vary depending on the plan you choose. According to the Kaiser Family Foundation, most Medicare recipients have 709 stand-alone prescription drug plan options to choose from in 2024, and the base premium is $34.70 a month.

While it might be tempting to pick the most affordable Part D plan, it’s also important to ensure that the plan you choose offers the coverage you need. Buying a plan that doesn’t cover your regular medications could result in higher costs over the long run.

Also, while your premium is based on your Part D plan, you could face an additional cost due to your income. In 2024, if your income is above $103,000 for a single filer or $206,000 for joint filers, you will pay an extra premium, which increases as your income rises. Your normal premium goes to your plan, while the extra amount goes directly to Medicare.

Deductibles, copayments and coinsurance

Your premium isn’t the only cost associated with Medicare Part D. You’ll also have to meet a deductible, which is the amount you must pay out of pocket each year before insurance covers its share. In 2024, the maximum deductible any plan can have is $525, though some plans have no deductible at all.

You may also be responsible for a copayment or coinsurance for the drugs you’re prescribed. Coinsurance is the percentage of the cost of the prescription that you pay out of pocket and it’s determined by the plan tier the drug falls into. The higher the tier in the plan’s formulary, the bigger your out-of-pocket share.

Coverage gap

The next cost you should expect is what’s known as the Medicare Part D coverage gap or the “donut hole.” In 2024, this gap begins once you and your insurer have spent $5,030 on covered drugs. At that point, you’ll pay 25% of the cost of brand-name drugs. Of the remainder, 70% is discounted by the manufacturer, while the other 5% is covered by the plan.

With generic drugs, you pay 25% of the cost while you’re in the donut hole, and your plan picks up the other 75%. You’ll remain in the coverage gap until you reach $8,000 in total out-of-pocket spending for the year. Once there, you’ll get catastrophic coverage automatically, which means you’ll only have to pay a small copay or coinsurance percentage for the rest of the plan year.

Late enrollment penalty

The final cost you may be on the hook for is a late enrollment penalty, which is added to your premium if you don’t sign up for Medicare Part D during your initial enrollment period and don’t have adequate prescription drug coverage from another plan (what’s called “creditable coverage”). The penalty will remain as long as you have Medicare drug coverage.

The penalty is calculated by multiplying 1% of the national base beneficiary premium, which is $34.70 in 2024, by the number of full months you didn’t have prescription drug coverage, and rounding it to the nearest 10 cents. That penalty can change each year based on changes to the national base beneficiary premium.

How to sign up for Medicare Part D

You can sign up for a Medicare Part D plan either during your initial enrollment period, which is the seven months surrounding your 65th birthday, or during open enrollment, which runs from Oct. 15 through Dec. 7 each year.

These plans are offered by private companies, not the federal government. To sign up, you can view the list of approved plans on the Medicare website. Once you choose a plan, you can enroll on the plan’s website, by sending a paper enrollment form or by calling the plan directly. You can also sign up on the Medicare website using the Medicare Plan Finder.

Before you choose a plan, compare premiums, deductibles and coinsurance, plus check the plan’s formulary to see if your medications are covered.

Medigap and Medicare Advantage plans and Medicare Part D

Before Medicare Part D went into effect in 2006, seniors had limited options for prescription drug coverage. Many secured coverage with Medigap policies, which are offered by private companies to supplement Medicare and fill in some of the coverage gaps.

Once Medicare Part D was created, most seniors switched their drug coverage to Medicare Part D, largely because many Medigap prescription drug coverage plans aren’t considered “creditable” (meaning it does not provide as much prescription drug coverage as Medicare Part D). But if you have Original Medicare, you still may want a Medigap policy to supplement other coverage gaps, though you will still need to buy a separate Part D plan for prescription drug coverage.

You can also get prescription drug coverage with a Medicare Advantage plan, often referred to as Medicare Part C. A Medicare Advantage plan is a health insurance policy that replaces all the other parts of Medicare — Part A, Part B and Part D. These private plans may also offer coverage for things that Medicare doesn’t cover, including vision, hearing and dental services.

Most Medicare Advantage plans include prescription drug coverage, allowing you to skip Medicare Part D. However, if you sign up for a Medicare Advantage plan that doesn’t include prescription drug coverage, you can (and should) still sign up for Medicare Part D.