What is Medicare Part D (and What Does it Cover?)

MedicareHealthcare

Feb 27

What is Medicare Part D (and What Does it Cover?)

As you may know, Medicare is comprised of four parts that each cover specific services. While Medicare Parts A and B (collectively “Original Medicare”) task the government with paying providers directly for patient services received—with almost all U.S. doctors and hospitals participating—Medicare Part C is a bundled alternative offered by approved private companies.

For the purposes of this post, however, we’ll zoom in on Medicare Part D. Unfortunately and as with so many other Medicare elements, this plan is complicated—but we’ll do our best to simplify critical learnings you should most certainly keep in mind.

What is Medicare Part D?

Medicare Part D (“Medicare drug coverage”) helps pay for brand-name and generic outpatient prescription drugs—medicines typically taken at home rather than at a doctor’s office—and is administered by Medicare-approved private insurance companies.

What does Medicare Part D cover?

Prescription drug coverage can vary significantly from one health plan to another, with each company's formulary outlining specific medications included in its coverage.

To help manage costs, most plans categorize their list of covered prescription drugs into tiers—typically ranging from one to five. Generally, drugs classified in lower tiers (Tiers 1 and 2) are less expensive than those in higher tiers, with brand-name drugs often found in Tiers 3 through 5.

Each plan’s formulary is required to include drug classes—groups of medications used to treat the same condition—that cover all disease states and ensure at least two chemically distinct drugs are available within each class. Individuals with various medical conditions can in turn access the medications they need.

All Part D plans are also required to cover all available drugs within six protected classes: immunosuppressants, antidepressants, antipsychotics, anticonvulsants, antiretrovirals, and antineoplastics. This requirement helps ensure patients have access to treatment for specific conditions such as cancer, mental illness, and epilepsy.

How much does Medicare Part D cost?

Unfortunately, Medicare Part D costs are less than straightforward: meaning the amount you’ll pay for stand-alone plans depends on various factors including the individual plan chosen, your income, and which (and how many) medicines you take.

You'll need to pay a monthly premium for starters, averaging around $46.50 but known to vary significantly for each enrollee per the Centers for Medicare and Medicaid Services (CMS). Individuals with higher incomes, meanwhile—specifically those who earn $106,000+ or couples filing jointly with earnings of $212,000+—are required to pay an additional income-related monthly adjusted amount (IRMAA) that ranges from $13.70 to $85.80 per month.

Three Medicare prescription drug stages also impact the amount you'll pay: your deductible and initial/catastrophic coverage stages.

While most Medicare plans have an annual deductible dictating you pay full retail price for your medications until you reach the same (no higher than $590, as of 2025), some plans cover specific drugs without requiring you to meet the deductible—or even allow you to waive it. Additionally, all plans that charge a deductible waive Tier 1 and Tier 2 costs. It’s thus important to discuss generic medications with your doctor so you get the most out of Medicare.

During the initial coverage stage, you’ll pay either a copay (a fixed dollar amount) or coinsurance (a percentage of the drug's cost) with your plan covering the remainder. You’ll then move into the catastrophic coverage stage after you and your plan have spent a total of $2,000—including your deductible—and thus won’t need to pay any additional out-of-pocket Medicare Part D-covered drug costs for the remainder of the plan year.

How to qualify for Medicare Part D

Anyone eligible for Original Medicare (Parts A and B) automatically qualifies for Medicare Part D but does need to enroll in Part A and/or Part B as a prerequisite for the latter.

When to sign up for Medicare Part D

You can obtain Part D via stand-alone coverage or a Medicare Advantage plan but must go through a private insurance company regulated by Medicare (check their star ratings) and sign up during a designated enrollment period either way. Your options here are the Initial Enrollment Period (typically a 7-month window beginning 3 months before turning 65 and ending 3 months thereafter), Annual Enrollment Period (October 15–December 7), or a Special Enrollment Period if you qualify (based on specific life events such as losing employer coverage).

Should you obtain Part D coverage through a Medicare Advantage plan, you can join during the fall open enrollment period that runs from October 15 through December 7 on an annual basis.

Why you should enroll in Medicare Part D

While Medicare Part D is technically optional, you must have “credible” prescription drug coverage (meaning coverage at least as good as what Medicare provides) at the time of enrollment—such as through an employer or individual health insurance.

Going without credible prescription drug coverage for more than 62 consecutive days after you’re first eligible will trigger a late enrollment penalty when you do in fact enroll. As this penalty is permanent—its scope depending on how long you lacked Part D or credible prescription coverage—you should enroll in Part D as soon as you’re eligible for Medicare if you don’t already have coverage.

If you’re currently under a group plan that includes prescription drug coverage and are Medicare-eligible, meanwhile, your provider is required to communicate annually—in writing—whether or not your plan meets credible coverage criteria.

How to research Medicare Plan D options

The good news in all of this is that plan options abound; in New Jersey alone, 14 stand-alone prescription drug plans are available. Click here to kick off your Medicare Part D research, making sure to look beyond costs when making your final selection. More specifically, refer to Medicare’s Star Rating system (a one-to-five scale, with five as the best) measuring how well Part D plans perform per a variety of factors including quality of care and customer service. Medicare also assigns plans one overarching star rating to summarize performance as a whole.

When comparing plans, check to make sure your pharmacy (or an equally convenient one) is in the plan’s network and compare mail order prices as well—as most Medicare Part D plans negotiate with a network of pharmacies to lower costs.

How to change your Medicare Part D plan

If you enroll and aren’t satisfied with your plan later on, you can in fact switch plans and do so during the open enrollment period for Medicare regardless of whether you have a stand-alone or Medicare Advantage plan. Even if you're happy with your current plan, evaluating others during open enrollment is often recommended as options do routinely change.

More on Medicare Part D surcharges

The IRMAA surcharge we highlighted earlier is calculated based on tax returns reported from two years prior: meaning your 2025 income determines your IRMAA in 2027, your 2026 income determines your IRMAA in 2028, and so on.

For those unfamiliar with IRMAA, this two-year lag can lead to unpleasant surprises when you first enroll in Medicare—especially if your income declines substantially post-retirement. IRMAA can also creep up later in life when you begin taking RMDs (required minimum distributions), as the additional amount is reevaluated annually based on the previous two years of income. It’s therefore important to plan ahead for Medicare a few years before you enroll.

That said, one approach to mitigating (or even avoiding!) Medicare surcharges (for Part B or D) is to file an appeal—especially in light of a life-changing event that may qualify for IRMAA reconsideration such as:

· The death of a spouse

· Marriage

· A divorce or annulment

· A reduction in hours worked (or complete cessation)

· A reduction in or loss of pension income (due to a default, scheduled cessation, etc.)

· The loss of income-producing property beyond beneficiary control (such as a disaster, theft, or similar circumstance)

· An employer settlement payment wherein you or your spouse receives a settlement from an employer (or former employer) due to company bankruptcy or reorganization

The quickest and easiest way to file an appeal is via online filing form SSA-44 through the Social Security website, but you can also do so over the phone (800-772-1213) or by contacting your local Social Security office. Note that you should appeal only after receiving notice that your Medicare premiums for Part D include IRMAA.

More on formularies

In relation to what we discussed earlier, plans that meet specific requirements can adjust their formularies (lists of covered medications) such as replacing brand-name drugs with new generic alternatives or altering the cost and coverage rules for brand-name drugs when adding new generics: providing you with written notice of any changes at least 30 days before the changes take effect, per related requirements.

Alternatively, you may be informed of the changes in writing upon requesting a refill and provided at least one month's supply of your medication under existing plan rules before the changes take effect. Your doctor can also request a plan exception to help you secure a lower coinsurance payment or copayment for higher-tier medications.

In sum: what you need to know about Medicare Part D

While Medicare Part D can help cover prescription costs, you can indeed wind up paying much more than you need to if you don’t do your research and plan accordingly. This is precisely why we recommend enlisting the help of a Medicare expert or financial planner to help in this regard.

Still have questions about Medicare? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.

FAQs

No; but if you don’t have credible coverage (such as through an employer or individual health insurance) you must sign up for a Part D plan within a specific amount of time after enrolling in Medicare Part A or B to avoid a permanent late enrollment penalty.
Yes, even if you aren’t on any medication. As with any other insurance, you buy Medicare Part D to cover the cost of prescriptions you may need in the future—signing up for a Part D plan within a specific timeframe after enrolling in Part A or B to avoid a permanent late enrollment penalty. That said, a low-premium Part D plan is perhaps best suited for those not on any medication.
You can seek out either stand-alone coverage or a Medicare Advantage plan with prescription drug coverage. According to KFF—an independent source for health policy research—you may have access to as many as 24 stand-alone Part D plans and 43 Medicare Advantage plans (depending on the state where you live), so speak with a Medicare expert to help identify the best option(s) for you.