Understanding Medicare and its various parts can be a challenge. For example, Part D, which covers prescription drug coverage, might sound straightforward enough, but many beneficiaries don’t know how their premiums get allotted or what their premiums really cover. If you take part in Medicare Part D, then you might wonder where your money goes and how your benefits work when it comes to dollars and cents. The Affordable Care Act has made a few changes to the program over the past five years, and these changes affect your benefits and premiums. Here’s a breakdown of drug costs in a recent report by The Kaiser Family Foundation:
Where the Money Comes From
Medicare Part D accounts for 14 percent of the total spending of Medicare across all portions. In dollars, this equates to about $716 billion each year. This portion of Medicare draws funding from three primary sources: revenues from the program itself, premiums and contributions made by individual states. Your premium covers about 25.5 percent of standard drug coverage for Part D, and Medicare subsidizes the remaining 74.5 percent.
Income levels determine how much of your premium will pay for the system overall. If you earn above the threshold for high-income status, then your premiums account for more of the total percentage. You’ll also pay a surcharge based on your higher earning capacity. Right now, the income threshold is set to $85,000 for individuals and $170,000 for couples. That threshold will remain in effect through 2019. Likewise, those with lower incomes who also qualify for cost assistance will pay for less of the overall percentage.
Medicare subsidizes private plans and plans offered by employers. Private plans get about $548 per beneficiary per year at the standard rate while employers get $604 per retiree. Plans that enroll people with higher risks or lower incomes will receive a greater subsidy from Medicare. If the numbers seem overwhelming, just know that most of your premiums go toward funding the program as a whole and that percentages are adjusted based on ability to pay.
Premiums and Deductibles
Most insurers that offer Medicare Part D policies set “standard benefits.” They can opt for alternative plans with comparable coverage, but many of the major plans available include standard benefits that work as follows in 2015:
- The deductible for standard plans is $320.
- Beneficiaries pay 25 percent in coinsurance for prescriptions until they meet the coverage limit, which is $2,960.
- After you reach the coverage limit, you’ll be stuck in the coverage gap until you reach the out-of-pocket spending limit.
- Standard plans include an out-of-pocket spending cap of $4,700. Once you hit this amount, you’ll pay for prescriptions based on one of two rates: 5 percent for the total prescription costs, or $2.65 for generics and $6.60 for brand-name drugs.
Below, we’ll discuss more about the coverage gap and the ACA because the new law affects your out-of-pocket costs during this gap. Regarding premiums, Medicare Part D enrollees pay an average of about $33.13 per month for their coverage in 2015, which represents a 2 percent increase over last year’s average. Premiums vary widely. According to Kaiser, plans could cost anywhere from $12.60 to $171.90 per month depending on your region and plan type.
The Kaiser Foundation reports that 45 percent of plans will offer beneficiaries basic coverage in 2015 while the remaining 55 percent will offer “enhanced benefits.” Despite the above standards, your individual policy may vary significantly. Some insurers don’t even charge the 25 percent coinsurance rate. Instead, you might have to pay a tiered amount for certain drugs. On the other hand, not all plans require enrollees to meet the full $320 deductible.
It’s important to note that if you enroll in a Medicare Part D plan, you’ll need to review your coverage annually during the open enrollment period to make sure it still meets your needs. Many beneficiaries don’t take the time to review their coverage, and there may be cheaper and better options out there for you.
You may not know that Medicare offers cost assistance for people with low incomes. In 2014, the threshold to qualify for cost assistance was $17,505 for an individual, which represents 150 percent of the poverty limit. This year, low-income beneficiaries could choose from 283 plans that require zero-dollar premiums. The number of low-income policies has dropped by 24 percent since last year and now represents the lowest it’s been since Part D started in 2006. Medicare Trustees estimate that about 11 million beneficiaries take advantage of what’s called the Low-Income Subsidy. There may be millions more who qualify but don’t take part.
The Coverage Gap
One of the key changes brought about by the Affordable Care Act is the closing of the Part D coverage gap, also known as the “donut hole.” Since the program started in 2006, millions of beneficiaries have fallen into the “donut hole” created by the payout gap that happens when you reach the payout limit for your benefits but haven’t yet reached the out-of-pocket maximum. In other words, you still need to buy prescriptions but have reached the limit that your plan allows for coverage. Until you get to the other side of the gap, which happens when you meet the out-of-pocket spending cap established by Medicare, you’re stuck paying retail costs for your medicine.
The ACA seeks to close this gap, and the program appears to be working so far. ObamaCareFacts.com offers a summary of how much you’ll pay for prescriptions while you’re in the donut hole over the next five years. Over time, you’ll pay less and less for both generic drugs and brand-name medicine. In 2015, for example, Part D beneficiaries pay 45 percent for brand-name prescriptions and 65 percent for generics. The percentages for 2016 are 45 for brand-name medicine and 58 for generics. The trend continues until 2020 when you’ll pay 25 percent for either generics or brand-name drugs while you’re in the coverage gap.