Prescription Drugs in Medicare

On this page: 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 (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 43 million Medicare beneficiaries were enrolled in Part D plans in 2018: 20.6 million in stand-alone plans (PDPs) and 16 million in Medicare Advantage plans with prescription drug coverage (MA-PDs). An additional 6.8 million had drug coverage through employer-sponsored plans that received Medicare’s retiree drug subsidy for being the primary provider.

In 2018, enrollees could choose from an average of 23 PDPs and 17 MA-PDs, however, in 2018 more than half of Part D enrollees were in plans sponsored by the top three insurers.

The benefit is currently undergoing 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.

Once the coverage gap closes in 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. This timeline remains unchanged for generic prescription drugs. However, the Bipartisan Budget Act of 2019 closes the coverage gap in 2019 for brand-name prescription drugs.

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. This change is expected to increase the out-of-pocket spending threshold from $5,100 in 2019 to $6,350 in 2020.

Another ACA provision that requires beneficiaries with higher incomes 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 roughly 60 percent since the benefit was first offered in 2006. It is now more than $40 per month.

Standard Medicare Part D coverage consists of a deductible, then initial coverage, followed by a coverage gap, and finally catastrophic coverage. The benefit parameters change annually based on Medicare Part D per capita drug spending (Figure 7-1). In 2019, beneficiaries fall into the coverage gap after their total drug spending reaches $3,820 and enter catastrophic coverage after their total out-of-pocket spending reaches $5,100.

Even when enrollees enter catastrophic coverage (i.e., after spending more than $5,100 out-of-pocket in 2019), they 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 medications.

Cost-sharing under Part D is also growing. Most Part D plans are shifting from flat rate copayments to coinsurance (where 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 non-preferred 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.


                                                                                                   Figure 7-1

                                                                           The Medicare Part D “Doughnut Hole”

doughnut holeSource: U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, Announcement of Calendar Year (CY) 2019 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies, April 2, 2018 

Another trend is the use of preferred pharmacy networks. In this case, 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.

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). MTM services must be offered by all Part D plans to those whose annual drug costs exceed a statutory amount, updated annually. It was $3,967 in 2018. 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

In this policy: Federal

Congress should grant Medicare the statutory authority to use its purchasing power to obtain drug price discounts directly from pharmaceutical manufacturers 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 Medicare to minimize preventable medication-related problems and to encourage appropriate prescribing, monitoring, and safe use of medications.


Access to the Low Income Subsidy (LIS)

In this policy: Federal

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

Adequate pharmacy benefits

In this policy: Federal

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; and
  • 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 such 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

In this policy: Federal

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