Medicare Part D Explained: A Quick Guide for Financial Advisors

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The top two key areas that people without financial advisors say they want guidance on are retirement income planning and Social Security/Medicare advice. Additionally, one study found that the majority of clients (68%) expect health insurance advice from their advisor, but only 4% receive it. It is clear your clients want your guidance when it comes to Medicare, but in order to do that, you need to know the basic parts of Medicare. You don’t need to become an expert; having a solid understanding of the core components of Medicare will take you far. Last week I talked about Medigap plans, so this week I’m going to share everything you need to know about Medicare Part D. Let’s begin!

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What is Medicare Part D?

Original Medicare is made of four parts:

• Medicare Part A (Hospital Insurance)
• Medicare Part B (Medical Insurance)
• Medicare Part D (Drug Coverage)
• Medicare Supplemental (“Medigap”)

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Medicare Part D is specifically for drug coverage. If your client enrolls in Original Medicare, they’ll want to select a stand-alone prescription drug plan even if they don’t currently take any prescription medications. Why? If your client doesn’t enroll in Part D during their Initial Enrollment Period and goes more than 63 days without creditable drug coverage, they’ll be charged a Late Enrollment Penalty (LEP) fee. The Part D LEP fee will be applied indefinitely, regardless of whether your client changes plans. The LEP fee adds an extra 1% of the “national base beneficiary premium” for each month your client does not have creditable drug coverage for as long as they do have Part D coverage. This national base beneficiary premium amount changes each year ($32.74 in 2023 and $34.70 in 2024), and the penalty fee will be rounded to the nearest $0.10 and added to your client’s monthly Part D premium. I’ve seen many clients not know this, and are unpleasantly surprised to learn that this penalty sticks with them for life.

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Are Part D plans offered through Medicare?

Although Medicare Parts A and B are offered by Medicare, Medicare Part D plans are provided by private insurance companies that contract with the federal government. If a beneficiary’s preferences align with Original Medicare over Medicare Advantage, it’s advisable to enroll in a private Medicare Part D plan to provide truly comprehensive coverage and avoid a Late Enrollment Penalty fee. Without a Medicare Part D plan, your clients will be paying entirely out-of-pocket for their medications.

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How much does Medicare Part D cost?

Each drug plan has its own formulary and separates drugs into different tiers, which affects overall drug costs. The pharmacy your client uses can also have an impact on their drug costs since not all pharmacies are considered in-network with all drug plans. Aside from actual drug costs, your client will also pay a monthly premium for their Part D drug plan. Again, the cost of this premium will depend on the individual plans. This year, there are some plans with a $0 monthly premium, however, it is advised that clients not automatically opt for those plans without checking the actual cost of their medications on those plans. 

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Additionally, your client’s income plays a part in how much they pay each month for Part D (and Part B) coverage. This income-related monthly adjustment amount (IRMAA) is based on your client’s tax filing status, the current year’s adjustment amount, and your client’s modified adjusted gross income from two years prior. For 2024, the standard base monthly premium for Part B is $174.70 and increases based on the income band that your client falls within. For Part D, your client will pay their chosen plan’s premium plus their associated income adjustment. Below is a table of expected total costs:

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The last component to consider when planning for Medicare Part D costs is something called the “Medicare Donut Hole.” 

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At the beginning of the year, the plan deductible (if it has one) starts over. This is the amount your client must pay out-of-pocket before their plan starts paying or cost-sharing. For 2024, the maximum deductible allowed by Medicare is $545. Once your client meets their deductible, they start paying for just the copay or coinsurance their plan issues. A copay is a fixed dollar amount enrollees pay every time they fill a prescription, and coinsurance is a percentage of the cost of a prescription. Some plans only have copays. Your client and their plan keep cost-sharing the plan’s cost for their drug(s) until they reach the initial coverage limit, which is $5,030 for 2024. Once your client and their plan have spent $5,030 on medications, their coverage falls into the “Donut Hole.” During this period, your client will pay no more than 25% of the total of their prescription costs. The time and amount it takes to leave the Donut Hole depends on whether your client takes brand-name or generic drugs, as well as the retail cost of the drug. If the drugs are brand-name, the manufacturer usually pays 75% of the cost and the enrollee pays 25%. The amount the manufacturer pays and the 25% out-of-pocket costs both count towards reaching the coverage gap limit. However, if your client takes generic drugs, only their contributions count towards reaching the limit. You can help clients by reviewing all the costs that count or do not count toward the coverage gap on Medicare’s website, or by using a software like HealthPlanner. For 2024, the coverage gap limit is $8,000. Once your client reaches this limit they exit the Donut Hole and begin catastrophic coverage. At the point where catastrophic coverage kicks in, your client will pay substantially less for their medication(s). They’ll pay the greater of 5% coinsurance or $4.15 for generic drugs and $10.35 for brand-name drugs.

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Are there any medications that Medicare Part D doesn’t cover?

All Medicare drug plans, generally, must cover at least two drugs per drug category, but plans can choose which drugs covered by Part D they will offer. All Part D plans must cover all drugs available in the categories below:

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• HIV/AIDS treatments
• Antidepressants
• Antipsychotic medications
• Anticonvulsive treatments for seizure disorders
• Immunosuppressant drugs
• Anticancer drugs (unless covered by Part B)

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Part D plans must also cover most vaccines, except for vaccines covered by Part B.

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Drugs not covered by Part D include:

• Over-the-counter drugs (even if they are prescribed by a physician).
• Drugs for weight loss or gain, even if used for non-cosmetic purposes, which is a hot topic currently with the rise of Ozempic.
• Cough and cold preparations, when prescribed for symptomatic relief only, without underlying medical indication.
• Fertility and erectile dysfunction drugs.
• Cosmetic and hair growth drugs.
• Drugs purchased in another country.
• Vitamins and minerals, except niacin products, Vitamin D analogs (when used for a medically accepted indication), prenatal vitamins, and fluoride preparations.
• Drugs that qualify to be covered under Part A or Part B, even if coverage is not actually available (e.g., because the individual has a Part A or B deductible, or does not yet have Part B.)

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Final Thoughts

If your client chooses to enroll in Original Medicare, they’ll need to also enroll in Medicare Part D and select a drug plan to ensure they have truly comprehensive health insurance and aren’t subject to a Late Enrollment Penalty fee. To help clients choose a Part D drug plan, a good starting place is to discuss their healthcare needs, the medications they take, and if they have any preferred pharmacies. Answering these questions will narrow down options for your client, and from there you can help them compare plan costs. Remember to look at the costs specifically for their medication list, not just the monthly premium. 

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We covered drug coverage for Original Medicare, but not Medicare Advantage. While that operates very similarly, that drug coverage is embedded within your chosen Medicare Advantage plan, which includes your medical coverage. More information about that and the information in this blog is available in Caribou’s Open Enrollment Resource Center and can help you confidently guide clients through the Medicare Open Enrollment process. But, if you really want to make healthcare planning a seamless experience for clients and yourself, schedule a call with me to learn how Caribou’s healthcare planning software supports financial goals and makes you the ultimate comprehensive financial planner.