Medicare Part D and the Coverage Phases

Medicare Part D is the prescription drug benefit that adds drug coverage to Medicare. It is available as a standalone Prescription Drug Plan (PDP) for people in Original Medicare, and is typically built into Medicare Advantage plans. Understanding how Part D coverage is structured — including deductibles, formulary tiers, and how costs change as you spend through the year — helps you budget and choose a plan that fits your medication needs. This page describes how the program works in general terms; plan-specific details vary, and rules change annually.

How to get Part D coverage

People in Original Medicare can add Part D by enrolling in a standalone Prescription Drug Plan sold by a private insurer approved by CMS. People in Medicare Advantage plans typically receive drug coverage automatically through their MA plan; they generally cannot enroll in a separate standalone PDP as well.

Enrollment windows for Part D follow the same schedule as other Medicare enrollment: your Initial Enrollment Period around your 65th birthday, Special Enrollment Periods triggered by qualifying events, and the Annual Enrollment Period (October 15 – December 7) for changes taking effect January 1.

The formulary: what your plan covers

Each Part D plan maintains a formulary — a list of covered drugs. CMS requires plans to cover drugs in certain therapeutic categories, but the specific drugs included and the tier assignments vary by plan. Most plans organize drugs into tiers:

1. Tier 1 — Preferred generics: lowest cost-sharing, often just a small copay
2. Tier 2 — Non-preferred generics: slightly higher cost-sharing
3. Tier 3 — Preferred brand-name drugs: moderate cost-sharing
4. Tier 4 — Non-preferred brand-name drugs: higher cost-sharing
5. Tier 5 — Specialty drugs: highest cost-sharing, typically percentage-based coinsurance

A drug that is on your current plan’s formulary may not be on another plan’s formulary — or it may be on a different tier with different cost-sharing. Comparing plans based on your specific medication list each year is one of the most effective ways to manage Part D costs.

The deductible phase

Many Part D plans charge a deductible at the start of each calendar year. CMS sets a maximum allowable deductible annually ($545 for 2024); some plans set a lower deductible or none at all. During the deductible phase you typically pay the full cost of covered drugs until you meet the deductible amount. Some plans waive the deductible for Tier 1 or Tier 2 drugs even while it applies to higher tiers.

The initial coverage phase

After you meet your deductible (or immediately, if your plan has no deductible), you enter the initial coverage phase. During this phase you pay your plan’s standard cost-sharing — a copay or coinsurance — for each covered drug, and your plan pays the rest. Your cost-sharing amount depends on the drug’s formulary tier.

The coverage gap (and how it changed under the Inflation Reduction Act)

Before 2025, Part D had a well-known coverage gap sometimes called the “donut hole.” A beneficiary entered the gap after their total drug spending (their payments plus the plan’s payments) reached a defined threshold, and cost-sharing increased during that middle phase until reaching a catastrophic threshold.

The Inflation Reduction Act substantially restructured Part D starting in 2025, including capping beneficiary out-of-pocket costs for covered drugs at a set annual maximum. The specific thresholds and cost-sharing rules applicable to the current year are published on Medicare.gov. If you are reviewing coverage for a plan year, consulting the Plan Finder and the plan’s Evidence of Coverage document will give you the most accurate current figures.

The catastrophic coverage phase

Once your out-of-pocket spending for covered drugs crosses the catastrophic threshold defined by CMS for that year, you enter catastrophic coverage. During this phase your cost-sharing drops significantly — under 2024 rules to a small coinsurance or copay per prescription for the rest of the year. For people who take high-cost specialty drugs or have significant prescription needs, reaching catastrophic coverage reduces out-of-pocket spending for the remainder of the year.

How the late enrollment penalty works

If you do not enroll in Part D when first eligible and go without creditable drug coverage for a period of time, you may face a permanent late enrollment penalty. The penalty calculation uses the national base beneficiary premium — a figure CMS sets each year (it was $34.70 in 2024).

The penalty equals 1 percent of the national base premium for each full month you were without creditable drug coverage after your Part D Initial Enrollment Period ended. For example, 18 months without creditable coverage would result in an 18 percent penalty on the national base premium, added to your monthly Part D plan premium. Because the national base premium changes annually, the dollar amount of your penalty also changes each year.

This penalty is waived for people who qualify for the Extra Help program. It is also not assessed for months when you had creditable coverage from another source, such as an employer plan or TRICARE. Keep documentation from your insurer confirming that your coverage was creditable.

Documents and terms you’ll see

As you navigate Part D, these terms appear on plan documents and CMS correspondence:

• Formulary — your plan’s drug list; drugs not on the formulary are generally not covered, though exception processes exist
• Coverage gap — the historical donut hole phase; restructured for 2025 and beyond under the Inflation Reduction Act
• Catastrophic coverage — the phase after you reach the out-of-pocket threshold where cost-sharing drops significantly
• Extra Help — the low-income subsidy program that reduces Part D costs for qualifying individuals; contact Social Security to apply

Formulary exceptions and prior authorization

If a drug you need is not on your plan’s formulary, or is on a higher tier than expected, you or your doctor can request a formulary exception. Plans are required to have a process for reviewing exception requests. A request is more likely to succeed if your doctor provides clinical documentation explaining why the requested drug is medically necessary and why formulary alternatives are not appropriate for your situation.

Plans may also require prior authorization before covering certain drugs — meaning the plan must approve coverage before you fill the prescription, rather than simply reimbursing after the fact. Some high-cost brand-name or specialty drugs also involve step therapy, which requires trying a lower-tier drug first before the plan will approve coverage of a more expensive alternative. These restrictions apply based on your specific plan’s formulary rules, not Medicare’s rules overall.

If an exception or prior authorization request is denied, you have the right to appeal through a structured process: redetermination by the plan, then reconsideration by a Qualified Independent Contractor, and further levels of review if needed. Time-limited appeals (for urgent medical situations) operate on an expedited schedule.

Comparing plans based on your drugs

The Medicare Plan Finder at Medicare.gov allows you to enter your specific medications and dosages to compare estimated annual costs across available plans in your area. This tool updates with new plan data each fall for the coming year. Comparing plans annually during the Annual Enrollment Period is worthwhile because formularies, tiers, and premiums change from year to year.

The Medicare Basics guide places Part D in context alongside the other parts of Medicare and explains how it interacts with Medigap and Medicare Advantage options.

Step-by-step: estimating what Part D will cost you this year

1. List every prescription you take, including the drug name, dosage, and how often you fill it.
2. Open the Medicare Plan Finder at Medicare.gov and enter your zip code and drug list.
3. Review the estimated annual cost for each plan, which accounts for deductibles, tier cost-sharing, and estimated phase transitions.
4. Check whether each plan includes your preferred pharmacy in its preferred network (preferred network pharmacies typically offer lower cost-sharing).
5. Review each plan’s Evidence of Coverage document for rules on formulary exceptions, prior authorization, and step therapy that may apply to your specific drugs.
6. Note the plan’s monthly premium and compare total annual costs — low-premium plans sometimes carry higher per-prescription costs that outweigh the premium savings.
7. Enroll by the end of the Annual Enrollment Period (December 7) for coverage starting January 1.