Medicare’s Four Stages of Drug Coverage*

With millions of enrollees on medications, how does Medicare prevent private insurance companies from charging whatever they want?

Each year, Medicare publishes a ‘standard benefit’ that insurance companies must meet to sell medications.  Insurance companies can do better than the standard, but they can’t do worse.

There are four stages or phases of drug coverage.

1. The Deductible Phase
2. The Initial Coverage Phase
3. The Coverage Gap Phase
4. The Catastrophic Phase

The stages stay the same from year to year.  Costs change annually.

1. Deductible: You pay the full price of the drug until you fulfill your deductible. The standard deductible is $545. If you have a Medicare Advantage plan, you may never see the deductible or pay a lower amount.

2. Initial Coverage: Once you fulfill your deductible, your plan helps pay for medications.  Your share of the cost is 25% or less.  Your plan pays the rest.  You stay in this stage until you and the plan together reach $5,053. If you take high cost medications, you may enter Phases 3 and 4.     

3. Coverage Gap: When you reach $5,053, you enter the Coverage Gap. The Coverage Gap places a temporary limit on what your plan will pay for medications. In this stage, you pay 25% for brand name and generic medications. You’re in this stage until your out-of-pocket costs reach $8,000. What counts toward your out-of-pocket costs? 1) Your annual deductible; 2) Copays and coinsurance during Initial Coverage; 3) What you pay for prescriptions in the Gap; 4) Manufacturer’s discount on brand name medications; 5) Contributions from state assistance programs, family members and friends, and charitable organizations.

4. Catastrophic: Once you reach $8,000, you’re in the Catastrophic Phase of drug coverage. Your cost is $0. On January 1, this four stage cycle repeats itself with different dollar amounts.

Does my premium count toward my out-of-pocket costs? 
No, it does not.

Why do my prescriptions cost more than they were last month?
You may be in the Coverage Gap, your plan has changed the cost of your drugs, or both.  Contact your insurance company to find out why.

What if I’m part of a federal program called Extra Help? 
If you have Extra Help, you will pay modest amounts for your medications. When you reach the Catastrophic Stage of drug coverage, your cost will be $0. You do not have to be on Medicaid to receive Extra Help. Eligibility is based on income and resource thresholds set by the federal government. To find out more about Extra Help go to: https://www.ssa.gov/medicare/part-d-extra-help.

What’s a formulary?
Under a healthcare plan, the list of covered prescription drugs is called a formulary. The formulary is usually divided into tiers or levels of coverage based on the type or usage of the medication. Each tier will have an out-of-pocket cost that you must pay before receiving the drug. For more information on tiers, please see my blog, ‘Medicare Advantage: Summary of Benefits.’

*This website is not affiliated with or endorsed by any government agency.

For more information about this blog, call 725-227-6795, email ken@deserthealthandlife.com, or use the contact form on this website. I am a licensed insurance broker.