How Does Medicare Prescription Drug Coverage Work?

Published In Government Programs

Medicare Part D was signed into law in December 2003 by President George W. Bush, and retirees began to sign up for these Medicare-approved private prescription drug plans in 2006. Part D gave retirees the option to purchase prescription drug coverage through Medicare. Since then, 51 million people have enrolled in prescription drug plans.


Individuals on Medicare are eligible for prescription drug coverage under a Part D plan if they are signed up for benefits under Medicare Part A and/or Part B. Beneficiaries obtain the Part D drug benefit through two types of plans administered by private insurance companies: the beneficiaries can join a standalone Prescription Drug Plan (PDP) for drug coverage only or they can join a public Part C health plan that jointly covers all hospital and medical services covered by Medicare Part A and Part B. (Congressional Research Service, Medicare Overview Report)

Medicare beneficiaries, who do not enroll in a Part D when they are first eligible, but elect to enroll at a later date, pay a late-enrollment penalty, unless they have had creditable coverage through another source such as an employer or the U.S. Veterans Administration.

Beneficiary Cost Sharing

The standard benefit typically requires that the beneficiary pay an annual deductible ($545 in 2024;  $506 in 2023) and a coinsurance payment up to a certain amount. Most Medicare Prescription Drug Plans have a coverage gap (also called the “donut hole”). This means there’s a temporary limit on what the drug plan will cover for your drugs. The coverage limit is $5030 for 2024 and $4660 in 2023 . Once you’ve spent $8000 out-of-pocket in 2024 ($7400 for 2023), you’re out of the coverage gap. Once you get out of the coverage gap, you automatically get “catastrophic coverage.” Starting in 2024, this means you won’t have to pay a copayment or coinsurance for covered Part D drugs for the rest of the calendar year. Beginning in 2025, the maximum amount of out-of-pocket costs a Part D member will have to pay for prescription drugs is $2000 (the amount is annually indexed) and the coverage gap phrase is eliminated.

Maintaining Benefits

Each year, Medicare has an open enrollment period where beneficiaries can shop around to determine if they should change plans or remain with their existing provider. Seniors must compare prices and coverage among dozens of plans in their area and choose the one that best meets their needs. They can switch plans once a year during the open enrollment period from October 15 to December 7. There are a number of things to consider during this time.

  • Is the company that provides you with Part D benefits still available in your area?
  • Do they still provide the medications that you require?
  • Has the cost of benefits, deductibles, health care, doctors, household income changed?

Some Useful Resources

Kaiser Family Foundation
Medicare Website
Benefits Checkup

This article has been updated in October 2023 since it originally published in November, 2015.

Leave a Reply