D Is for Dilemma

Kathy Wilhelm

IF MEDICARE’S A MAZE, its Part D drug plan is a maze within a maze, with no one good path and plenty of so-so choices, along with a couple of potential “gotchas.”

Until 2006, Medicare offered no coverage for outpatient drugs, so today’s situation—however imperfect—is certainly an improvement. It’ll improve even more for people with high drug costs in 2024 and 2025, as I’ll explain at the end of this article.

What if you have Medicare Advantage, rather than traditional Medicare? Some Advantage plans include drug coverage. That coverage is typically modeled on Part D and conforms to its rules. Meanwhile, drugs administered in hospitals and doctors’ offices are usually covered under Medicare Part A and Part B.

Most Part D plans have five drug tiers and four coverage phases. Premiums, deductibles and co-pays vary. You buy coverage from an insurance company, not Medicare, and each plan sets its own prices and creates its own “formulary.” The formulary lists the drugs that the plan covers. Some drugs, such as those for HIV and cancer, must be covered, and each plan needs to have at least two drugs in the most commonly prescribed categories and classes. Still, no plan covers all drugs. The plans available to you will vary depending on where you live.

In my zip code and county, there are 24 plans, with premiums ranging from a low of $4.20 a month to a high of $132.50. The maximum deductible is set by Medicare and is $505 this year, but some plans charge no deductible. Four of the most expensive plans available to me have a zero deductible, partly offsetting their high premium cost, while the cheapest plan charges the full $505. Medicare has a good tool for comparing plans, which you should use before you choose a plan for the year ahead.

Insurance companies can set their own drug tiers. In general, those tiers are preferred generic, generic, preferred brand, non-preferred drug and a specialty tier. The latter is also known as Tier 5. The tiers—combined with the so-called coverage phases, which I’ll get to in a moment—determine your co-pay. If your plan has a deductible, you pay the full cost of your drugs until the deductible is met.

In the initial coverage phase, which you enter after you’ve met the deductible, your co-pay depends on the drug tier and your plan’s requirements. You might pay just $1 per prescription for a preferred generic, while another plan could charge $5. There may be restrictions on Tier 5 drugs, such as a requirement for prior approval or a quantity limitation. I stayed with the same drug plan for years because I’d already been approved for my Tier 5 drug.

Once you and your plan spend $4,660 on covered drugs in 2023, you reach the coverage gap, otherwise known as the “donut hole.” If you take a brand name drug, you pay 25% of retail, your plan pays 5% of retail and the manufacturer discounts the rest. There’s also a small dispensing fee. If you take a generic, you pay 25% of retail and Medicare pays the rest.

Note that “retail” refers to the price negotiated by the insurer for your specific drug at your specific pharmacy. The charge might be different at another pharmacy. The total amount you pay for your drugs, plus the manufacturer’s discount, if any, needs to add up to $7,400 this year for you to reach the catastrophic coverage phase. Once in catastrophic coverage, you’ll most likely pay 5% of retail.

Want to see what the gory details look like? This is the coverage chart for the mid-range plan I used last year. The premium for the plan is $34.60 a month and the deductible is $505 a year. If you have difficulty paying, there’s a program called Extra Help, though I doubt many HumbleDollar readers would qualify. Manufacturers often have programs to help people with the most expensive drugs, but these programs aren’t available to people on Medicare.

You can also save if the drug you need can be given in a doctor’s office. The first drug I tried for my rheumatoid arthritis was given by injection in my doctor’s office and was covered under Medicare Part B. At that time, I had original Medicare plus Medigap Plan F, and there was no charge to me.

What are the “gotchas”? The first has to do with the formulary. Each year, you sign up for a drug plan during open enrollment, which is Oct. 15 through Dec. 7 this year. The coverage goes into effect on Jan. 1 of the next year. You can’t change plans again until the next open enrollment period.

This wouldn’t matter if the insurance companies were under the same constraint, but they aren’t. They can choose to add and drop drugs from their formularies at any time. If your drug is dropped, you can have your doctor file for an exception, but it may not be granted. And, of course, you have no way of knowing when you apply to a plan in November what new drug you might need next August.

Today, there’s no out-of-pocket annual maximum for Part D. If you spend enough to make it to catastrophic coverage, you might be charged as little as $10.35 per brand-name prescription. That’s also what’s charged by the private group Medicare Advantage plan that I’m on this year. But drug costs aren’t necessarily that low. All of the Part D plans available to me charge 5% of retail once you reach the catastrophic coverage phase.

The drug I’ve taken for the past five years for rheumatoid arthritis currently retails for more than $6,000 a month—and 5% of $6,000 is a significant amount. The good news: Last year’s Inflation Reduction Act made three key changes to improve Part D’s affordability.

First, in 2024, if you make it to catastrophic coverage, co-pays will be eliminated. Second, in 2025, there will be a $2,000 annual out-of-pocket maximum for Medicare drug coverage—assuming these changes survive Washington’s budget negotiations. Finally, starting in 2026, Medicare will be able to negotiate directly with manufacturers on the price of some expensive brand-name Part B and Part D drugs that don’t have competition.

Kathy Wilhelm, who comments on HumbleDollar as mytimetotravel, is a former software engineer. She took early retirement so she could travel extensively. Some of Kathy’s trips are chronicled on her blog. Born and educated in England, she has lived in North Carolina since 1975. Check out Kathy’s previous articles.

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