Prescription Drugs in Medicare

On this page: Medicare


Medicare Part B covers a limited number of prescription drugs that are administered in a physician’s office or hospital outpatient department. Medicare pays 80 percent of the cost and the beneficiary is responsible for the remaining 20 percent, which may be covered by some form of supplemental coverage. Enrollees who lack such coverage can face substantial cost-sharing. For example, a recent Government Accountability Office report found that some particularly expensive Part B drugs have cost-sharing that exceeds $100,000 per year.

Medicare’s outpatient prescription drug benefit, Part D, is a voluntary program that has been available since 2006. Approximately 70 percent of Medicare beneficiaries participate in it. More than 39 million Medicare beneficiaries were enrolled in Part D plans in 2015: 24.0 million in stand-alone plans (PDPs) and 15.3 million in MA plans with prescription drug coverage (MA-PDs). An additional 2.2 millionhad drug coverage through employer-sponsored plans that received Medicare’s retiree drug subsidy for being the primary provider.

In 2016, enrollees could choose from 886 PDPs and 1,682 MA-PDs, however, in 2015 more than three-quarters of Part D enrollees were in plans sponsored by the top nine insurers.

The standard Medicare Part D benefit consists of a deductible; an initial coverage period, in which beneficiaries are responsible for 25 percent of their prescription drug costs; a coverage gap, in which beneficiaries must pay for 100 percent of their prescription drug costs; and catastrophic coverage, in which beneficiaries must pay for 5 percent of their prescription drug costs (Figure 7-1). In 2017, beneficiaries fall into the coverage gap after their total prescription drug spending reaches $3,700 and enter catastrophic coverage after their total out-of-pocket spending reaches $4,950. Medicare Part D’s prescription drug coverage reduces out-of-pocket spending for many beneficiaries, particularly those who receive the low-income subsidy (LIS).

The benefit is currently undergoing several changes because of the ACA. For example, non-LIS Medicare Part D beneficiaries were traditionally responsible for all of their prescription drug costs while they were in the Part D coverage gap, or “doughnut hole.” Starting in 2011, the doughnut hole began to close due to a series of escalating discounts provided by Medicare and brand-name drug companies.

By 2020 non-LIS Part D beneficiaries will be responsible for just 25 percent of their prescription drug costs from the time they meet their deductible to the time they enter catastrophic coverage, effectively eliminating the coverage gap. In addition, the growth rate for the catastrophic spending threshold under Part D, which is the amount a beneficiary must spend out-of-pocket before a much lower coinsurance rate applies, is being artificially slowed from 2014 through 2019. In 2020, the growth rate will again rise along with enrollees’ per capita drug spending.

Another ACA provision that requires higher-income beneficiaries to pay higher Part D premiums was implemented in 2011, with the same income thresholds used for Part B premiums. The law also imposed a freeze on the income thresholds from 2011 through 2019, rather than allowing them to rise with inflation. This will increase the number and share of Medicare beneficiaries subject to income-related Part B and Part D premiums.

While CMS data suggest that Part D premiums are growing slowly, the average enrollment-weighted monthly premium for PDPs has increased by more than 60 percent since the benefit was first offered in 2006. It is now more than $43 per month.

Further, while Medicare Part D technically has an out-of-pocket limit ($4,950 in 2017), it is not a hard cap. Enrollees who reach catastrophic coverage are still responsible for 5 percent of their prescription drug spending. This benefit design can lead to out-of-pocket costs that exceed $10,000 for enrollees taking expensive prescription drugs.

Cost-sharing under Part D is also growing: Median copayments for many prescription drugs have increased by 50 percent or more since 2006. Furthermore the share of PDPs using coinsurance instead of copayments has increased over recent years. In 2016, 97 percent of PDP enrollees were in plans that used coinsurance on two or more of their formulary tiers. When combined with rapidly escalating prescription drug prices, this trend will have beneficiaries paying considerably more at the pharmacy counter.

Another trend is the use of preferred pharmacy networks, or when Part D plans offer lower cost-sharing for prescriptions filled at preferred pharmacies. In 2015, nearly 90 percent of stand-alone Part D plans had a preferred pharmacy network.

In addition, a growing number of covered prescription drugs are subject to utilization management such as prior authorization, step therapy, or quantity limits. In 2016, the average PDP enrollee faced some form of utilization management for more than 40 percent of the prescription drugs that were on their plan formulary.

                                                                              Figure 7-1

Medicare Doughnut Hole
Source: Centers for Medicare and Medicaid Services, Announcement of Calendar Year (CY) 2019 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies, April 2, 2018

While MTM services are reserved for eligible beneficiaries, all Part D participants can use CMS quality measures to determine how their respective drug plans ensure safe medication use. Plans are rated on about two dozen quality measures, grouped into four areas: drug plan customer service; member complaints, problems getting services, and choice to leave the plan; member experience with drug plan; and drug pricing and patient safety.One component of Part D designed to help people use their prescription drugs safely and to minimize risk is medication therapy management (MTM). MTM services must be offered by all Part D plans to those whose annual drug costs exceed a statutory amount, updated annually ($3,919 in 2017). Plans are generally free to set their own eligibility criteria related to the number of drugs being used and to the number and type of chronic conditions as long as they meet certain guidelines from CMS. Those who accept their drug plan’s invitation for free MTM services can receive a comprehensive review of all their medications, a detailed medication list, and recommended steps to resolve any drug-related problems.


Prescription Drugs in Medicare: Policy

Medicare negotiating authority

In this policy: Federal

Medicare should have statutory authority to use its purchasing power to obtain drug price discounts directly, in addition to private Part D plans that currently negotiate with pharmacy benefit managers and pharmaceutical manufacturers.

Quality and safety

In this policy: Federal

Medicare Part D quality measures that focus on clinical improvements should be emphasized in beneficiary communications including the Medicare Plan Finder.

Part D medication therapy management programs, especially pharmacist-led interventions, should be better incentivized across the Medicare program to minimize preventable medication-related problems and to encourage appropriate prescribing, monitoring, and safe use of medications.

Low-income subsidies (LIS)

In this policy: Federal

Congress should eliminate the asset test for LIS beneficiaries and ensure coordination of benefits for those who are dually eligible for Medicare and Medicaid.