Time to review your Medicare Rx coverage

With Medicare's open-enrollment period approaching -- Oct. 15 to Dec. 7 -- you should be getting ready to review your Medicare prescription drug coverage. Your goal is to minimize your total out-of-pocket spending for prescription drugs, including your premiums, co-payments and deductibles.

Let's first look at some basic information about prescription drug coverage under Medicare.

How to get drug coverage

The cost of prescription drugs isn't covered by Medicare Parts A and B (which cover hospital and outpatient services) nor by "Medigap" plans that supplement Medicare. To cover drug costs, you'll need to make a conscious choice about how to obtain prescription coverage. If you don't make any choice, you'll most likely be paying the full cost out-of-pocket.

You can obtain prescription drug coverage in one of three ways 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. The monthly premiums in 2018 for PDPs are estimated to average in the low $30s.
  • You can enroll in a Medicare Advantage (MA) plan that also covers prescription drugs. MA plans cover some costs not covered by Medicare, but you usually must use providers in the MA network. Not all MA plans cover prescription drugs, so you'll need to look closely at the terms of yours to see if it does. If it doesn't, you'll need to buy a PDP.
  • 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 one you're already paying. In this case, you'd be throwing money down the drain if you bought a separate PDP or MA.

When shopping for prescription drug coverage, you'll want to estimate your possible out-of-pocket costs. For this task, you should know about two concepts: the standard Part D deductible and co-payment schedule, and your plan's tier classification for reimbursing drug costs.

Deductible and co-payment basics

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 must offer benefits at least as generous as the standard plan. For 2018, here are the deductible and co-payment features for the standard plan:

  • The initial deductible is $405. You'll pay 100 percent of the costs of prescription drugs up to this amount.
  • Once your drug costs exceed $405, you'll pay 25 percent of the total cost of drugs that range from $405 to $3,858.75.
  • If the total cost of your drugs exceeds $3,858.75, you'll fall into the "donut hole." Under the standard plan, you'll pay 100 percent of any drug costs from $3,858.75 to $5,000. 
  • Once your total drug costs exceed $5,000, you'll be eligible for catastrophic coverage, and you'll pay for only 5 percent of drug costs over this amount. 

About one in four Medicare Part D enrollees falls into the donut hole each year. In that case, 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.

Tier classifications for prescription drugs

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 each year, and they must disclose these changes during open enrollment. Don't throw these notices away -- read them carefully to see how they affect 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.

According to Diane Omdahl, founder of 65 Incorporated, insurance companies that offer PDP plans continually change their formularies in an effort to manage their costs. She recently shared the story of one woman with cancer whose specific drugs were moved to a much higher-cost tier from one calendar year to the next. If she hadn't changed plans after the change occurred, she would have been spent thousands of dollars in the next year on prescription drugs. 

Said Omdahl: "The vast majority of our clients change drug plans each year, and generally experience an average savings of $1,200 in out-of-pocket expenses for prescription drugs."

You can change drug plans each year during open enrollment, and you won't be subject to medical underwriting. This is unlike the situation with Medigap plans that supplement original Medicare. They often require medical underwriting if you want to switch Medigap plans after your initial enrollment.

The bottom line: Shopping for a prescription drug plan is a very good use of your time if you take many prescription drugs that are crucial for your health or if you expect to increase your use of prescription drugs in 2018. This is just one of many critical tasks required to age successfully -- they're all part of your "retirement job." 

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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.