What Medicare Part D Does and How It Pays for Drugs

Medicare Part D is the prescription drug coverage piece of Medicare. It pays a share of what you spend on medications at the pharmacy — how much depends on which plan you pick, what drug you need, and where you are in the coverage year. Part D is run by private insurance companies, not Medicare directly, so you choose a plan and pay a monthly premium to that company.

Part D does not cover all drugs. Each plan has a formulary — a list of medications the plan will pay for. Some drugs are on the formulary but require you to try a cheaper option first, or need approval from the insurance company before the pharmacy will fill it. Other drugs are not covered at all, and you pay the full pharmacy price yourself.

The way Part D pays changes as you spend money through the year. You start in the deductible phase, where you pay the full cost of drugs until you hit your plan's deductible (usually $545 to $565, though this amount changes each year). After that, you enter the initial coverage phase, where the plan pays its share and you pay yours — typically 25 percent of the drug cost. Once your total out-of-pocket spending reaches a certain amount (around $5,850 in 2024), you enter the catastrophic phase, where the plan pays most of the cost and you pay a small copay.

Key Takeaways

  • Part D is sold by private insurance companies, not Medicare, so you must pick a plan during your enrollment window or lose the chance to join without a penalty.
  • Each plan has its own formulary, deductible, copays, and list of covered pharmacies, so two plans can cost very different amounts for the same medications.
  • Your costs change throughout the year as you move from the deductible phase through initial coverage and into catastrophic coverage.
  • If you do not join Part D when you first become may be able to access and do not have other drug coverage, you will pay a permanent penalty on top of your premium if you join later.
  • You can change Part D plans once a year during the annual enrollment period, usually October 15 to December 7.

The Four Phases of Part D Coverage in a Single Year

Understanding how much you will pay requires knowing where you are in the coverage year. The year runs from January 1 to December 31, and your costs reset each January.

Deductible phase: You pay the full cost of every drug until your total spending reaches your plan's deductible. Not all plans have a deductible — some start you in initial coverage right away — but most do. Once you hit the deductible, the plan begins to pay.

Initial coverage phase: The plan and you split the cost. Your share is usually 25 percent of the drug price, though some plans charge a flat copay ($5, $10, $15, or more) instead. This phase lasts until your combined spending — what you paid plus what the plan paid — reaches about $5,850. This is called your true out-of-pocket cost, and it counts only what you actually paid, not what the plan paid.

Coverage gap (the "donut hole"): Once you hit $5,850 in true out-of-pocket spending, you enter the coverage gap. Here, you pay 25 percent of the cost of brand-name drugs and 25 percent of generic drugs. The plan does not help. This gap used to be much worse — you used to pay nearly full price — but it has shrunk over time. You stay in the gap until your true out-of-pocket spending reaches about $8,550.

Catastrophic phase: Once you hit the catastrophic threshold (around $8,550 in true out-of-pocket spending), the plan pays most of the cost. You pay either 5 percent of the drug price or a small copay ($3.95 to $10.20 for most drugs in 2024), whichever is higher. You stay in catastrophic coverage for the rest of the year.

How to Find and Compare Part D Plans

Because Part D is sold by private companies, each plan is different. Two plans sold in the same state can have different deductibles, copays, formularies, and pharmacy networks. The only way to know which plan costs the least for your specific drugs is to compare them.

Medicare provides a free tool called the Medicare Plan Finder at Medicare.gov. You enter the medications you take, the dosages, and the pharmacies near you, and the tool shows you every Part D plan available in your area, ranked by estimated cost. This is the most accurate way to compare because it uses your actual drug list, not a generic example.

You can also call 1-800-MEDICARE to speak with someone who can walk you through the plans, or visit your local State Health Insurance information Program (SHIP), which offers free counseling. Many SHIPs will do the comparison for you over the phone.

When you compare, look at the total estimated cost for the year, not just the premium. A plan with a low monthly premium might have high copays that cost you more overall. Also check whether your preferred pharmacy is in the plan's network — some plans have limited pharmacy choices.

When You Can Join or Switch Part D Plans

Part D has strict enrollment windows. If you miss them, you cannot join a plan until the next window opens, and you may owe a permanent penalty.

Initial enrollment period: You have seven months to join Part D, starting three months before the month you turn 65 (or become may be able to access for Medicare). If you turn 65 in June, your window opens in March and closes in September. If you miss this window and do not have other drug coverage, you will owe a penalty for every month you were not enrolled.

Annual enrollment period: Every year from October 15 to December 7, you can switch to a different Part D plan or join one for the first time. Changes take effect January 1. This is the main time most people make changes.

Special enrollment periods: If you lose drug coverage (for example, your employer coverage ends), you may have a special window to join Part D outside the normal periods. You usually have 63 days from the date you lose coverage.

The Late Enrollment Penalty and How to Avoid It

If you do not join Part D when you first become may be able to access and you do not have other drug coverage that is at least as good as Part D, Medicare charges you a late enrollment penalty. This penalty is added to your Part D premium for as long as you have Part D coverage — it does not go away.

The penalty is calculated as 1 percent of the national average Part D premium for each full month you were not enrolled. In 2024, the national average premium is around $164, so the penalty is roughly $1.64 per month for each month you were late. If you waited two years to join, your penalty would be about $39 per month, added to whatever your plan's premium is.

You can avoid the penalty if you have creditable coverage — drug coverage from an employer, a union, the Veterans Administration, or another source that is at least as good as Part D. If you have creditable coverage, you can wait to join Part D without penalty. When you do join, you must show proof that you had creditable coverage during the time you were not enrolled in Part D.

What Part D Does Not Cover

Part D has limits. It does not cover all medications, and some drugs require special approval before the pharmacy will fill them.

Part D generally does not cover drugs used for weight loss, fertility, hair loss, or erectile dysfunction. It does not cover over-the-counter medications (though some plans offer a small benefit for certain OTC drugs). It does not cover drugs used only in a hospital or doctor's office — those are covered under Part B instead.

Each plan's formulary determines which specific drugs are covered. If your doctor prescribes a drug that is not on your plan's formulary, you have options: you can pay out of pocket, ask your doctor to prescribe a different drug that is covered, or ask the plan for an exception. Some plans will cover a non-formulary drug if your doctor writes a letter explaining why you need that specific medication.

Certain drugs require prior authorization — the plan must approve them before the pharmacy will fill them. Others require you to try a cheaper drug first (called step therapy). These requirements slow down the process but do not prevent you from getting the drug.

How to Handle Changes in Your Situation

Your Part D plan might stop working well for you if your medications change, your pharmacy closes, or a drug you take gets moved to a higher cost tier. You do not have to wait until October to make a change if your situation changes.

If your plan drops a drug from its formulary or moves it to a higher cost tier, you can switch plans outside the annual enrollment period. If your pharmacy leaves the network, you can switch. If you move to a different state, you can switch. These are called may have access to life events, and they give you a special enrollment window, usually 60 days.

Contact your Part D plan directly to ask whether your situation qualifies for a special enrollment period. If it does, the plan will tell you how to switch. If you are not sure, call 1-800-MEDICARE and ask.

Frequently Asked Questions

Do I have to take Part D when I turn 65?

No, but if you do not have other drug coverage and you do not join, you will owe a late enrollment penalty if you join later. The penalty is permanent and is added to your premium every month. If you have creditable coverage from an employer or other source, you can wait without penalty.

What happens if my drug is not on my plan's formulary?

You can ask your doctor to prescribe a different drug that is covered, pay the full cost yourself, or ask the plan for an exception. Many plans will cover a non-formulary drug if your doctor explains in writing why you need that specific medication. The process usually takes a few days.

Can I change Part D plans if I realize I picked the wrong one?

Yes, but only during the annual enrollment period (October 15 to December 7) or if you have a may have access to life event like a move or job loss. If you made a mistake during the initial enrollment period, you may be able to disenroll and re-enroll during the next annual period, though rules vary.

How much will my Part D premium be?

Premiums vary by plan and by state. They range from around $7 to $100 per month, though most plans fall between $20 and $50. The Medicare Plan Finder tool shows the exact premium for each plan in your area. If your income is below certain limits, you may be able to get help paying the premium through the Low-Income Subsidy program.

What if I cannot afford my copays?

If your income is low, you may may have access to for the Low-Income Subsidy (LIS), which reduces your copays and deductible. You can also ask your pharmacy or drug manufacturer about patient information programs, which sometimes provide drugs for free or at a reduced cost. Contact your plan or call 1-800-MEDICARE to learn more.