Understanding Medicare Part D: Your Complete Prescription Drug Guide

Medicare Part D is the prescription drug benefit. It sounds straightforward, but choosing the right Part D plan is one of the most nuanced decisions in the entire Medicare process. The plan that costs the least for your neighbor may cost you hundreds more per year, because Part D costs are driven almost entirely by which specific medications you take.

This guide will walk you through how Part D works, what to watch for, and why an annual review of your drug plan is one of the smartest things you can do.

How Part D coverage works

Part D plans are offered by private insurance companies approved by Medicare. You can get Part D coverage in two ways:

• A stand-alone Prescription Drug Plan (PDP) that you add to Original Medicare (with or without a Medigap plan)
• A Medicare Advantage plan that includes drug coverage (MA-PD), which bundles Part D into your overall plan

Regardless of which path you choose, Part D plans cover both brand-name and generic drugs, though the specific drugs covered and the costs for each vary widely from plan to plan.

Understanding formularies

Every Part D plan has a formulary, which is the list of drugs the plan covers. Formularies organize drugs into tiers, and your cost for a medication depends on which tier it falls into:

1. Tier 1: Preferred generic drugs — lowest cost, often $0 to $10 per fill
2. Tier 2: Generic drugs — slightly higher cost
3. Tier 3: Preferred brand-name drugs — moderate cost
4. Tier 4: Non-preferred brand-name drugs — higher cost
5. Tier 5: Specialty drugs — highest cost, often for complex conditions

The same medication can be on different tiers in different plans. A drug that costs you $15 per month under one plan could cost $45 under another. This is why running a drug cost comparison is essential, and it is one of the most valuable things I do for my clients.

The four phases of Part D coverage

Part D coverage moves through four phases each calendar year:

Phase 1: Deductible. You pay the full cost of your drugs until you meet the annual deductible. In 2026, the maximum deductible is set by Medicare and varies by plan. Some plans have a $0 deductible for certain tiers.

Phase 2: Initial coverage. After meeting the deductible, you pay copays or coinsurance for your drugs. The plan pays the rest. This phase lasts until you and the plan together reach a combined spending threshold.

Phase 3: Coverage gap (the "donut hole"). Thanks to the Inflation Reduction Act, the Part D coverage gap has been eliminated for most beneficiaries starting in 2025. Previously, beneficiaries faced significantly higher costs in this phase. Under current rules, you should not pay more than a capped amount for your prescriptions during this phase.

Phase 4: Catastrophic coverage. After your total out-of-pocket spending reaches the annual cap, you pay $0 for the rest of the year. The $2,000 annual out-of-pocket cap introduced under the Inflation Reduction Act is a major improvement for people with high drug costs.

The Part D late enrollment penalty

If you do not enroll in a Part D plan when you are first eligible and you go 63 or more consecutive days without creditable prescription drug coverage, you will pay a late enrollment penalty. This penalty is calculated as 1% of the national base beneficiary premium for every month you were without coverage, and it is added to your Part D premium permanently.

Even if you do not currently take any prescriptions, enrolling in a low-cost Part D plan when you first become eligible protects you from this penalty down the road. Think of it as insurance against future prescription costs.

Why your Part D plan needs an annual review

Part D plans change every year. Formularies are updated, tier placements shift, and premiums are adjusted. A plan that was the best value this year may not be the best value next year. Additionally, your own medications may have changed.

During the Annual Enrollment Period (October 15 to December 7), I review each client's current medications against all available Part D plans in their area. In many cases, I find a plan that offers better coverage or lower costs for the coming year. This annual checkup is one of the most impactful things a dedicated agent does, and it takes me about 15 minutes to run the comparison.

What you can do right now

If you are approaching Medicare eligibility, start keeping an accurate list of your medications, including the name, dosage, and frequency. If you are already on Medicare, ask yourself: when was the last time someone reviewed my Part D plan? If the answer is more than a year ago, it may be time for a checkup.