Medicare open enrollment: Prescription drug basics

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(MoneyWatch) Now's the time to review your Medicare prescription drug coverage, so you can be ready to make changes during Medicare's open enrollment period that runs from Oct. 15 to Dec. 7. Your goal? To minimize total out-of-pocket spending for prescription drugs, including the premiums you pay, plus your copayments and deductibles. This post provides some basic information about prescription drugs under Medicare, while my next post offers some ideas for managing your total out-of-pocket costs.

Medicare prescription drug basics

The cost of prescription drugs isn't covered by Medicare Parts A and B (which covers hospital and outpatient services) or by Medigap plans that supplement Medicare. In fact, there is no automatic coverage for prescription drugs under Medicare -- instead, you'll need to make a conscious choice about how to obtain prescription drug coverage. If you don't make any choice, there's a good chance you won't be covered for prescription drugs.

There are two ways to obtain prescription drug coverage under Medicare:

  • You can buy a stand-alone Medicare Prescription Drug Plan (PDP) under Medicare Part D. These plans add drug coverage to traditional Medicare and Medigap plans. If you choose to be covered under a traditional Medicare plan and purchase a Medigap plan to cover the costs that Medicare doesn't cover, you'll still have to buy a PDP to get prescription drug coverage. Monthly premiums in 2014 for PDPs are estimated to average $31.
  • You can enroll in a Medicare Advantage (MA) plan that also covers prescription drugs. (See my prior post for some background on MA plans.) MA plans cover some costs not covered by Medicare, but you usually have to use providers in the MA network. Not all MA plans cover prescription drugs, so you'll need to look closely at the terms of your MA plan to see if it does. If your MA plan doesn't cover the cost of prescription drugs, you'll need to buy a PDP as explained above.

There's actually a third way to be covered for prescription drugs, but it's not that common. If you're one of the lucky few who's covered by your former employer's retiree medical plan, these plans will often cover the cost of prescription drugs for no additional premium other than the premium you're already paying for medical coverage. In this case, you'd be throwing money down the drain if you bought a separate PDP or MA.

To determine your possible out-of-pocket costs, you should know about two concepts -- the standard Part D deductible and copayment schedule, and your plan's tier classification for reimbursing drug costs.

Learn about your plan's deductibles and copayments

Medicare has several requirements for a standard Part D prescription drug coverage; a PDP or MA plan may offer more generous terms than the standard plan, but any plan has to offer benefits at least as generous as the standard plan. For 2014, here are the deductible and copayment features for the standard plan:

  • The initial deductible is $310; you'll pay 100 percent of the costs of prescription drugs up to this amount.
  • Once your drug costs exceed $310, you'll pay 25 percent of the total cost of drugs that range from $310 to $2,970.
  • If the total cost of your drugs exceeds $2,970, you'll fall into the hated "donut hole," and under the standard plan, you'll pay 100 percent of any drug costs from $2,970 to $4,550.
  • Once your total drug costs exceed $4,550, you'll be eligible for catastrophic coverage, and you'll only pay for 5 percent of drug costs over this amount.

About one in four Medicare Part D enrollees falls into the donut hole each year. If you do fall into the hole, you may be eligible for discounts on generic drugs and certain brand name drugs. In some instances, subsidies for low-income beneficiaries may also reduce out-of-pocket expenses for prescription drugs.

Learn which exact drugs are covered

You'll also want to understand your plan's list of covered drugs, called a formulary. Many Medicare drugs plans place drugs into different tiers, and drugs in each tier may have a different cost. The lowest tiers typically cover generic drugs with the lowest co-payment, and the highest tiers typically cover specialty or brand name drugs with the highest co-payment. Insurance companies often change the tier classification for certain drugs and must disclose these changes during open enrollment; don't throw these notices away -- read them carefully to see how they impact you.

Two good places to learn more about prescription drugs and what's covered include Medicare's website and the website of 65 Incorporated, a Medicare educational and consulting firm that isn't affiliated with any insurance companies or the government.

Stay tuned for my next post that shares ideas for managing your total drug costs.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.