Prescription Drugs in Medicare


Until the 2006 introduction of Medicare Part D (Drug Coverage), Medicare covered very few prescriptions outside of hospital settings. Medicare Part B continues to cover a limited number of prescription drugs administered in a physician’s office or hospital outpatient department or associated with the use of durable medical equipment. Medicare Part B covers 80 percent of the cost. The beneficiary is responsible for the remaining 20 percent, some or all of which may be covered by some form of supplemental coverage. Beneficiaries who lack such coverage or use extremely costly drugs may face substantial cost-sharing for these medications. A recent Government Accountability Office report found that some particularly expensive Part B drugs have cost-sharing that exceeds $100,000 per year.

Medicare Part D is voluntary, outpatient prescription drug coverage. Approximately 70 percent of Medicare beneficiaries are enrolled in Part D either through stand-alone Part D plans (PDPs) or through Medicare Advantage plans that include prescription coverage, also known as MA-PDs. Some beneficiaries with low incomes and assets are eligible for extra help with their Part D costs through the Medicare Low-Income Subsidy program.

More than 46 million Medicare beneficiaries were enrolled in Part D plans in 2020: 20.2 million in stand-alone PDPs and 19.3 million in Medicare Advantage plans with prescription drug coverage (MA-PDs). An additional 7 million had drug coverage through employer-sponsored plans that received Medicare’s retiree drug subsidy for being the primary provider.

In 2020, enrollees could choose from an average of 28 PDPs and 24 MA-PDs. However, in 2020, more than half of Part D enrollees were in plans sponsored by four insurers.

The benefit has undergone several changes because of the Affordable Care Act (ACA). For example, Medicare Part D beneficiaries who do not receive payment help through the Low-Income Subsidy (LIS) program were traditionally responsible for all of their prescription drug costs while they were in the Part D coverage gap, or “doughnut hole.” In 2011, the hole began to close due to a series of escalating discounts provided by Medicare and brand-name drug companies.

The ACA was to close the coverage gap in 2020 so that non-LIS Part D beneficiaries would become responsible for just 25 percent of their prescription drug costs from the time they meet their deductible to the time they enter catastrophic coverage. However, the Bipartisan Budget Act of 2018 accelerated the timeline by closing the coverage gap in 2019 for brand-name prescription drugs only.

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, rose once again in 2020. From 2014 through 2019, it was slowed to limit enrollees’ per capita drug spending. In 2020, the out-of-pocket spending threshold increased from $5,100 to $6,350.

Another ACA provision that requires beneficiaries with higher incomes to pay higher Part D premiums was implemented in 2011. It had 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 the Centers for Medicare & Medicaid Services (CMS) data suggest that Part D premiums are growing slowly, the average enrollment-weighted monthly premium for PDPs has increased by roughly 60 percent since the benefit was first offered in 2006. It is now more than $40 per month.

Standard Medicare Part D coverage has a deductible. Once met, the policy then provides initial coverage. However, it is followed by a coverage gap before catastrophic coverage kicks in.

Enrollees enter catastrophic coverage after meeting a certain spending threshold. In 2021, it was more than $6,550 out of pocket. But even then, they are still responsible for 5 percent of their prescription drug spending. This benefit design can lead to exorbitant out-of-pocket costs for enrollees taking expensive prescription medications.

Cost-sharing under Part D is also growing. Most PDPs are shifting from flat-rate copayments to coinsurance. With coinsurance, beneficiaries pay a percentage of the drug’s price. When combined with rapidly escalating prescription drug prices, this trend will have beneficiaries paying considerably more at the pharmacy counter. Since 2006, median copayments for nonpreferred brand-name prescription drugs have increased by 45 percent. In addition, the proportion of PDPs using coinsurance instead of copayments has increased over recent years. In 2018, virtually all PDP enrollees were in plans that used coinsurance on two or more of their formulary tiers.

Another trend is the use of preferred pharmacy networks. In this case, PDPs offer lower cost-sharing for prescriptions filled at preferred pharmacies. In 2021, nearly all PDPs had a preferred pharmacy network.

Plans may also attempt to control costs and enhance quality by establishing drug formularies and preferred drug lists. A growing number of covered prescription drugs are subject to utilization management such as prior authorization, step therapy, or quantity limits. In 2018, PDPs and MA-PDs applied some form of utilization management to more than 45 percent of the prescription drugs on their plan formulary. These requirements can present administrative burdens on clinicians and barriers to coverage for beneficiaries.

One component of Part D designed to help people use their prescription drugs safely and to minimize risk is medication therapy management (MTM). PDPs must offer MTM services to those whose annual drug costs exceed a statutory amount. The amount is updated annually. It was $4,367 in 2021. Plans are generally free to set 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.

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.



Medicare negotiating authority

Congress should grant Medicare the statutory authority to use its purchasing power to obtain drug price discounts directly from pharmaceutical manufacturers. This is in addition to private Part D plans that currently negotiate with pharmacy benefit managers and pharmaceutical manufacturers.

Quality and safety

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 Medicare to minimize preventable medication-related problems and encourage appropriate prescribing, monitoring, and safe use of medications.


Access to the Low Income Subsidy (LIS)

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

Reforming the Part D benefit structure

Efforts to reform the Medicare Part D benefit structure should not lead to higher enrollee premiums or federal spending.

Adequate pharmacy benefits

With respect to their formularies and preferred drug lists, plans should:

  • publicly disclose the nature of formulary and preferred drug list restrictions and utilization management policies,
  • allow the use of nonformulary drugs or those not on the preferred drug list when they are medically necessary, and
  • ensure that plan members are aware of how alternatives can be obtained.

Plans should also:

  • ensure participation of plan physicians and clinical pharmacists in the development of formularies and preferred drug lists,
  • provide any prescription drugs that are exceptions to the health plan formulary and preferred drug list to enrollees who require such drugs, under the same terms and conditions (including cost-sharing requirements) as drugs in the formulary, and
  • subject disagreements between an enrollee and a plan about prescription drug coverage to the plan’s internal complaint process and external appeals process.

Prescription drugs

Pharmacies, prescription drug plans, and Medicare Advantage plans should be allowed to forgo copayments in cases where they would hinder the ability of a beneficiary with low income to obtain medically necessary prescription drugs.