Medicare Part D: Prescription Drug Coverage Explained

Prescription costs can be one of the biggest concerns when you are getting ready for Medicare. Even if you only take a few medications today, your needs can change over time.

That is where Medicare Part D comes in.

Part D is Medicare prescription drug coverage offered through Medicare-approved private plans. It can help cover many prescriptions you take at home, but every plan has its own formulary, pharmacy network, premium, and cost-sharing rules.

Understanding how the coverage works before choosing a plan can help you look beyond the monthly premium and focus on the things that affect your actual prescription costs.

AI Overview: How Does Medicare Part D Work?

Medicare Part D is optional prescription drug coverage available to people with Medicare. You can get Part D through a stand-alone Medicare drug plan if you have Original Medicare, or through most Medicare Advantage plans that include drug coverage.

Each plan has a formulary, or list of covered drugs. Plans also place medications into tiers, use pharmacy networks, and may have rules such as prior authorization, step therapy, or quantity limits.

For 2027, a Medicare drug plan can have a deductible of up to $700, and the annual out-of-pocket threshold for covered Part D drugs is $2,400. After reaching the applicable threshold, you generally pay $0 for covered Part D drugs for the remainder of the calendar year.

TL;DR: Medicare Part D at a Glance

What Is Medicare Part D?

Medicare Part D is the part of Medicare that provides prescription drug coverage through private plans approved by Medicare.

If you have Original Medicare, you can generally enroll in a stand-alone Part D plan.

If you have Medicare Advantage, most Medicare Advantage plans include Part D coverage. In most types of Medicare Advantage plans, you cannot add a separate stand-alone Part D plan.

Part D generally covers prescription drugs you obtain from a pharmacy or through another covered outpatient setting.

It is separate from Part B, which covers certain medications in medical settings, such as some drugs administered in a doctor's office or outpatient facility.

That distinction matters because not every prescription or medication falls under Part D.

Who Can Get Part D?

To join a Medicare drug plan, you generally need to have Medicare Part A or Part B and live in the plan's service area. You must also enroll during a valid election period.

Part D is available whether or not you currently take prescription medications.

Some people decide not to enroll because they take very few medications. But delaying Part D without other creditable prescription drug coverage can create a late enrollment penalty later.

That makes the decision about drug coverage more than a question of what you spend on prescriptions today.

What Does Part D Cover?

Part D plans must cover a wide range of medications used by people with Medicare.

Each plan has its own formulary, which is the list of drugs the plan covers. Formularies can include generic drugs, brand-name drugs, biological products, and biosimilars.

Plans must also cover most drugs in certain protected classes, including medications used to treat:

• Cancer
• HIV/AIDS
• Depression
• Psychotic disorders
• Seizure disorders
• Organ transplant conditions

However, one Part D plan may cover a particular medication differently from another.

That is why checking your actual prescriptions is one of the most important steps when reviewing drug coverage.

What Is a Part D Formulary?

A Part D formulary is the plan's list of covered prescription drugs.

It does more than tell you whether a medication is covered.

The formulary can also show how the drug is categorized into a tier and whether certain restrictions apply.

For example, plans may have:

The actual tiers vary by plan. A medication that is inexpensive under one plan could cost more under another.

That is why looking only at a plan's premium can give you an incomplete picture.

Can a Part D Plan Change Its Drug List?

Yes.

Medicare allows Part D plans to make certain formulary changes during the year under specific rules. For example, changes can happen when new drugs become available or when medical information changes.

Your plan must notify you about changes that affect the drugs you take.

This is another reason to review your plan materials rather than assuming your prescription coverage will remain exactly the same all year.

What Are Part D Tiers and Cost-Sharing?

A plan may use copayments, coinsurance, or both.

A copayment is a fixed amount. Coinsurance is a percentage of the cost.

The amount you pay can depend on the drug's tier, whether the pharmacy is preferred, whether you have met your deductible, and what stage of coverage you are in.

Two plans can cover the same medication but charge different amounts.

For example, your prescription might have:

The monthly premiums may also be different.

That is why the better question is not simply, “Which plan has the lowest premium?”

Instead, ask, “What will this plan cost me based on the prescriptions I actually take?”

How Much Does Part D Cost?

Part D premiums vary by plan and can change from year to year.

Some people may also pay a higher amount because of income.

For 2027, the standard Part D benefit parameters include a maximum deductible of $700. Some plans may have no deductible or a lower one.

The deductible is only one part of the cost. You should also review:

• Monthly premium
• Deductible
• Drug tiers
• Copayments
• Coinsurance
• Pharmacy network
• Preferred pharmacy pricing
• Annual out-of-pocket exposure

The actual amount you spend depends heavily on the medications you take and the plan you choose.

How the 2027 Part D Coverage Phases Work

The Part D benefit has been redesigned compared with the older “donut hole” structure many people remember.

For 2027, the defined standard benefit has three main phases:

1. Deductible Phase

If your plan has a deductible, you generally pay the full cost of covered drugs until you reach the deductible.

For 2027, no Medicare drug plan can have a deductible higher than $700.

Some plans may charge less or have no deductible.

2. Initial Coverage Phase

After the deductible is met, you and the plan share the cost according to the plan's rules.

Under the defined standard benefit for 2027, the beneficiary cost-sharing level is 25% for covered drugs during this phase.

Actual plan designs can use copayments or other approved cost-sharing structures.

3. Catastrophic Coverage

For 2027, the annual out-of-pocket threshold for covered Part D drugs is $2,400. Once you reach the applicable threshold, you generally pay $0 for covered Part D drugs for the rest of the calendar year.

This change is important because it puts a clear annual ceiling on what you pay out of pocket for covered Part D drugs.

What About the Old Medicare “Donut Hole”?

You may still hear people talk about the Part D “donut hole.”

That term refers to an older coverage structure.

The Medicare Part D benefit was redesigned so that the coverage gap was eliminated beginning in 2025. For 2027, beneficiaries move through the deductible phase, initial coverage phase, and then catastrophic coverage after reaching the applicable out-of-pocket threshold.

So if you have heard older explanations about reaching a coverage gap and then paying a higher percentage, make sure the information is current.

What Is the Medicare Prescription Payment Plan?

People with high prescription costs may be interested in the Medicare Prescription Payment Plan.

This option allows you to spread your covered Part D out-of-pocket prescription costs across the calendar year instead of paying the full amount at the pharmacy when you pick up the prescription.

There are a few important points. The payment plan does not reduce the total amount you owe; it only changes when you pay it.

Your monthly payment can change throughout the year as new prescription costs are added and the remaining balance is spread over the months left in the calendar year.

This can be useful for managing cash flow, particularly for someone who has large prescription expenses early in the year.

What Pharmacies Can You Use With Part D?

Part D plans have pharmacy networks.

A pharmacy inside your plan's network has an agreement with the plan to provide covered medications under the plan's terms. Some plans also have preferred in-network pharmacies, which may offer lower out-of-pocket costs than other participating pharmacies.

Mail-order pharmacies may also be available for certain medications.

An out-of-network pharmacy may cost more, and in some cases you may have to pay the full cost and ask the plan whether any reimbursement is available.

If you have a pharmacy you have used for years, check whether it participates in the plan you are considering.

What Rules Can Part D Plans Use?

Prescription coverage is not always as simple as “covered” or “not covered.”

Plans may use rules designed to manage cost and ensure appropriate medication use. These may include:

Prior Authorization

Your doctor or other prescriber may need to obtain plan approval before the plan covers a medication.

Step Therapy

The plan may require you to try another covered medication first.

Quantity Limits

The plan may limit how much of a drug you can receive over a certain period.

These rules vary by plan and drug. If your doctor believes a covered alternative is not appropriate, you or your prescriber may be able to request an exception under the plan's rules.

What About Vaccines Under Part D?

Part D includes coverage for many vaccines.

Medicare Part D plans must cover recommended adult vaccines that are not covered under Part B, including vaccines such as shingles, RSV, and Tdap when medically necessary under the applicable rules. You generally pay nothing for ACIP-recommended adult vaccines covered by Part D.

Part B covers certain vaccines, including flu, COVID-19, hepatitis B for eligible people, and pneumococcal vaccines.

Knowing which part of Medicare covers a vaccine can help avoid confusion at the pharmacy or doctor's office.

Do You Need Part D If You Don't Take Prescriptions?

You may still want to consider it.

Someone who takes very few medications today may assume prescription drug coverage is unnecessary.

But Medicare's late enrollment rules can matter later.

Creditable coverage can include certain employer or union coverage, TRICARE, Veterans Affairs coverage, Indian Health Service coverage, and other qualifying prescription drug coverage.

Keep documentation from your current drug coverage showing whether it is creditable.

How Is the Part D Late Enrollment Penalty Calculated?

The late enrollment penalty is added to your monthly Part D premium and generally continues for as long as you have Medicare prescription drug coverage.

The penalty is generally calculated using 1% of the national base beneficiary premium for each full month you went without Part D or other creditable prescription drug coverage after your applicable enrollment period.

For 2027, the national base beneficiary premium used in the calculation is $41.33. Actual Part D plan premiums are different and can vary widely by plan.

For example, 12 full uncovered months would produce a preliminary calculation of:

The amount is rounded to the nearest $0.10 and added to the monthly premium.

The longer someone goes without creditable prescription drug coverage, the greater the potential penalty.

People who qualify for Extra Help do not pay the Part D late enrollment penalty.

Can Employer Coverage Delay Part D Enrollment?

Possibly.

If you are still working after becoming eligible for Medicare and have creditable prescription drug coverage through an employer or another qualifying source, you may be able to delay enrolling in Part D without the late enrollment penalty.

Medicare recommends asking your current plan whether the drug coverage is considered creditable and keeping the annual notices you receive.

This is different from simply having any health insurance. The important question is whether the prescription coverage itself is creditable.

When Can You Enroll in Part D?

There are several enrollment opportunities.

For people newly eligible for Medicare, Part D enrollment can generally happen during the Initial Enrollment Period.

Medicare Open Enrollment runs from October 15 through December 7 each year. During this period, people with Original Medicare can join, drop, or switch Medicare drug plans for coverage beginning January 1 of the following year.

Special Enrollment Periods may also apply after certain qualifying events.

For people already enrolled in Medicare Advantage with drug coverage, the Medicare Advantage Open Enrollment Period from January 1 through March 31 can allow certain changes, depending on the individual's situation.

The enrollment window you have depends on your circumstances.

What Should You Review Before Choosing a Part D Plan?

A good drug-plan review starts with your real prescription list.

1. List Every Medication

Write down the name, dose, and frequency of each prescription.

2. Check the Formulary

Confirm that each medication is covered.

3. Check the Tier

Find out whether each prescription is placed on a lower-cost or higher-cost tier.

4. Look for Restrictions

Check whether the plan requires prior authorization, step therapy, or quantity limits.

5. Check Your Pharmacy

Make sure your preferred pharmacy is in the network and see whether it is a preferred pharmacy.

6. Review the Total Cost

Look at the premium, deductible, copayments, coinsurance, and expected yearly prescription spending.

7. Check Your Enrollment Timing

Know when your current coverage ends and when the new plan would begin.

A plan that looks inexpensive at first glance may not be the least expensive choice once your specific prescriptions are entered.

A Part D Review Example

Imagine Linda takes five medications.

Her current plan has a relatively low monthly premium, but two of her prescriptions have moved to higher tiers.

A different plan has a slightly higher premium but covers four of her five medications at lower tiers and uses a preferred pharmacy near her home.

Looking only at premiums would make the first plan appear cheaper. Looking at the full prescription picture could lead to a very different result.

This is why plan selection should begin with the medications themselves.

What Happens During Medicare Open Enrollment?

Medicare Open Enrollment runs from October 15 through December 7 every year.

This is one of the most important periods for reviewing Part D because plan formularies, premiums, pharmacy arrangements, deductibles, and cost-sharing can change from one year to the next.

Before deciding to keep your current plan, review the Annual Notice of Change and other plan materials for the upcoming year.

For 2027 coverage, beneficiaries can review their options during the October 15 through December 7, 2026, enrollment period. CMS has confirmed that the 2027 Part D benefit will use a $700 maximum deductible and $2,400 annual out-of-pocket threshold.

For a broader review, see Clarity65's guide to What to Review During Medicare Annual Enrollment.

How Clarity65 Can Help You Review Prescription Drug Coverage

Part D can be easier to understand when the review starts with the prescriptions you actually take.

Clarity65 works with independent licensed agents who can explain available Medicare coverage options and review factors such as prescriptions, pharmacies, costs, and plan availability. Clarity65 represents multiple Medicare carriers and states that its service is free to consumers.

A licensed agent can help you understand the plan information you are reviewing, but the final enrollment decision remains yours.

You can also use Medicare.gov to review available plans and costs or contact 1-800-MEDICARE for Medicare assistance.

For people who are new to Medicare, the Clarity65 New to Medicare guide is a useful starting point. You can also explore the Clarity65 Medicare Advantage guide to understand how Part D works when prescription coverage is included in a Medicare Advantage plan.

Final Thoughts

Understanding Medicare Part D means looking at more than whether a plan has a low monthly premium.

Your prescriptions, formulary, drug tiers, pharmacy network, plan rules, deductible, cost-sharing, and enrollment timing can all affect what you pay.

For 2027, the Part D deductible can be as high as $700, while the annual out-of-pocket threshold for covered Part D drugs is $2,400. Once you reach that threshold, you generally pay $0 for covered Part D drugs for the rest of the year.

The best time to review prescription drug coverage is before you need to change it.

Make a current medication list, check the formulary, look at your pharmacy options, review the full cost structure, and confirm which enrollment period applies to you.

That approach can help you understand your coverage today and make a more informed decision when your plan or prescription needs change.

Raul Gonzalez

Licensed Agent

Independent licensed Medicare advisor dedicated to plain-English guidance and personalized plan comparisons across leading national carriers.

Clarity65 is not connected with or endorsed by the U.S. government or the federal Medicare program.