An Overview of the Medicare Part D Prescription Drug Benefit

Medicare Part D is a voluntary outpatient prescription drug benefit for people with Medicare, provided through private plans approved by the federal government. Beneficiaries can choose to enroll in either a stand-alone prescription drug plan (PDP) to supplement traditional Medicare or a Medicare Advantage prescription drug plan (MA-PD), mainly HMOs and PPOs, that cover all Medicare benefits including drugs. In 2019, 45 million of the more than 60 million people covered by Medicare are enrolled in Part D plans. Of this total, more than half (56%) are enrolled in stand-alone PDPs and more than 4 in 10 (44%) are enrolled in Medicare Advantage drug plans. This fact sheet provides an overview of the Medicare Part D program, plan availability, enrollment, and spending and financing, based on data from the Centers for Medicare & Medicaid Services (CMS), the Congressional Budget Office (CBO), and other sources.

Medicare Prescription Drug Plan Availability in 2020

In 2020, 948 PDPs will be offered across the 34 PDP regions nationwide (excluding the territories). This represents an increase of 47 PDPs from 2019 (a 5% increase) and the third year in a row with more stand-alone PDPs, after three years of plan reductions (Figure 1).

Figure 1: A Total of 948 Medicare Part D Stand-Alone Prescription Drug Plans Will Be Offered in 2020, a 5% Increase from 2019

The relatively large increase in the number of PDPs since 2018 is likely due to the elimination by CMS of the “meaningful difference” requirement for enhanced benefit PDPs offered by the same organization in the same region. Plans with enhanced benefits can offer a lower deductible, reduced cost sharing, and/or a higher initial coverage limit. Previously, PDP sponsors were required to demonstrate that their enhanced PDPs were meaningfully different in terms of enrollee out-of-pocket costs in order to ensure that plan offerings were more distinct. Between 2018 and 2020, the number of enhanced PDPs has increased from 421 to 566, largely due to this policy change.

Beneficiaries in each state will have a choice of multiple stand-alone PDPs in 2020, ranging from 24 PDPs in Alaska to 32 PDPs in California (see map). In addition, beneficiaries will be able to choose among multiple MA-PDs offered at the local level for coverage of their Medicare benefits.


Low-Income Subsidy Plan Availability in 2020

Beneficiaries with low incomes and modest assets are eligible for assistance with Part D plan premiums and cost sharing. Through the Part D Low-Income Subsidy (LIS) program, additional premium and cost-sharing assistance is available for Part D enrollees with low incomes (less than 150% of poverty, or $18,735 for individuals/$25,365 for married couples in 2019) and modest assets (less than $14,390 for individuals/$28,720 for couples in 2019).

In 2020, 244 plans will be available for enrollment of LIS beneficiaries for no premium, 29 more than in 2019 (a 13% increase), and the first year with a relatively substantial increase in the number of benchmark plans since 2017 (Figure 2). Just over one-fourth of PDPs in 2020 (26%) are benchmark plans.

All LIS enrollees can select any plan offered in their area, but if they are enrolled in a non-benchmark plan, they may be required to pay some portion of their plan’s monthly premium. Some enrollees have fewer benchmark plan options than others, since benchmark plan availability varies at the Part D region level. The number of premium-free PDPs in 2020 ranges from a low of 2 plans in Ohio to 12 plans in Arizona (see map).

Figure 2: In 2020, 244 Part D Stand-Alone Drug Plans Will Be Available Without a Premium to Enrollees Receiving the Low-Income Subsidy (“Benchmark” Plans)


Part D Plan Premiums and Benefits in 2020


The 2020 Part D base beneficiary premium—which is based on bids submitted by both PDPs and MA-PDs—is $32.74, a modest (1%) reduction from 2019. But actual premiums paid by Part D enrollees vary considerably from this amount. For 2020, PDP monthly premiums vary by plan across the country (and even within regions), ranging from a low of $12.18 for a PDP available in California to a high of $191.40 for a PDP in South Carolina. In addition to the monthly premium, Part D enrollees with higher incomes ($87,000/individual; $174,000/couple) pay an income-related premium surcharge, ranging from $12.20 to $76.40 per month in 2020 (depending on income).


The Part D defined standard benefit has several phases where cost sharing for enrollees varies, including a deductible, an initial coverage phase, a coverage gap phase, and catastrophic coverage. The standard benefit amounts are indexed to change annually based on the rate of Part D per capita spending growth, and, with the exception of 2014, have increased each year since 2006 (Figure 3).

Figure 3: In 2020, Catastrophic Coverage Begins when a Part D Enrollees’ Out-of-Pocket Drug Costs Reach $6,350, or an Estimated $9,719 in Total Drug Costs

In 2020, Medicare Part D enrollees are facing a relatively large increase in out-of-pocket drug costs before they qualify for catastrophic coverage (Figure 4). This is due to the expiration of the ACA provision that constrained the growth in out-of-pocket costs for Part D enrollees by slowing the growth rate in the catastrophic threshold between 2014 and 2019. For 2020, the out-of-pocket spending threshold will increase by $1,250, from $5,100 to $6,350.

Figure 4: Medicare Part D Standard Benefit Parameters Will Increase in 2020

Part D enrollees will also face higher out-of-pocket costs in 2020 for the deductible and in the initial coverage phase, as they have in prior years. The standard deductible is increasing from $415 in 2019 to $435 in 2020, while the initial coverage limit is increasing from $3,820 in 2019 to $4,020 in 2020. For costs in the coverage gap phase, beneficiaries will pay 25% for both brand-name and generic drugs, with plans paying the remaining 75% of generic drug costs—which means that, effective in 2020, the Part D coverage gap will be fully phased out. For total drug costs above the catastrophic threshold, Medicare pays 80%, plans pay 15%, and enrollees pay either 5% of total drug costs or $3.60/$8.95 for each generic and brand-name drug, respectively.

Part D plans must offer either the defined standard benefit or an alternative equal in value (“actuarially equivalent”), and can also provide enhanced benefits. Both basic and enhanced benefit plans vary in terms of their specific benefit design, coverage, and costs, including deductibles, cost-sharing amounts, utilization management tools (i.e., prior authorization, quantity limits, and step therapy), and formularies (i.e., covered drugs). Plan formularies must include drug classes covering all disease states, and a minimum of two chemically distinct drugs in each class. Part D plans are required to cover all drugs in six so-called “protected” classes: immunosuppressants, antidepressants, antipsychotics, anticonvulsants, antiretrovirals, and antineoplastics.

Part D and Low-Income Subsidy Enrollment

Enrollment in Medicare Part D plans is voluntary, with the exception of beneficiaries who are eligible for both Medicare and Medicaid and certain other low-income beneficiaries who are automatically enrolled in a PDP if they do not choose a plan on their own. Unless beneficiaries have drug coverage from another source that is at least as good as standard Part D coverage (“creditable coverage”), they face a penalty equal to 1% of the national average premium for each month they delay enrollment.

In 2019, 45 million Medicare beneficiaries are enrolled in Medicare Part D plans, including employer-only group plans. Another 1.4 million beneficiaries are estimated to have drug coverage through employer-sponsored retiree plans where the employer receives subsidies equal to 28% of drug expenses between $435 and $8,950 per retiree (in 2020). Several million beneficiaries are estimated to have other sources of drug coverage, including employer plans for active workers, FEHBP, TRICARE, and Veterans Affairs (VA). Yet 12% of people with Medicare are estimated to lack creditable drug coverage.

An estimated 13 million Part D enrollees receive the Low-Income Subsidy in 2019. Beneficiaries who are dually eligible, QMBs, SLMBs, QIs, and SSI-onlys automatically qualify for the additional assistance, and Medicare automatically enrolls them into PDPs with premiums at or below the regional average (the Low-Income Subsidy benchmark) if they do not choose a plan on their own. Other beneficiaries are subject to both an income and asset test and need to apply for the Low-Income Subsidy through either the Social Security Administration or Medicaid.

Part D Spending and Financing

Part D Spending

The Congressional Budget Office (CBO) estimates that spending on Part D benefits will total $88 billion in 2020, representing 13% of net Medicare outlays (net of offsetting receipts from premiums and state transfers). Part D spending depends on several factors, including the number of Part D enrollees, their health status and drug use, the number of enrollees receiving the Low-Income Subsidy, and plans’ ability to negotiate discounts (rebates) with drug companies and preferred pricing arrangements with pharmacies, and manage use (e.g., promoting use of generic drugs, prior authorization, step therapy, quantity limits, and mail order). Federal law currently prohibits the Secretary of Health and Human Services from interfering in drug price negotiations between Part D plan sponsors and drug manufacturers.

The average annual growth rate in per beneficiary costs for Part D is projected to be higher in the coming decade (4.4%) than it was between 2010 and 2018 (2.3%) (Figure 5). This is due in part to higher Part D program costs associated with an increase in the use and availability of expensive specialty drugs, which is expected to be reflected in higher reinsurance payments from Medicare to plans (described below). Part D benefits spending is projected to increase modestly from 13% of total (net) Medicare spending in 2020 to 15% in 2029, based on CBO projections.

Figure 5: After a Period of Relatively Slow Growth, Average Part D Enrollee Costs Are Projected to Increase at a Faster Rate in the Coming Decade

Part D Financing

Financing for Part D comes from general revenues (71%), beneficiary premiums (17%), and state contributions (12%). The monthly premium paid by enrollees is set to cover 25.5% of the cost of standard drug coverage. Medicare subsidizes the remaining 74.5%, based on bids submitted by plans for their expected benefit payments. Higher-income Part D enrollees pay a larger share of standard Part D costs, ranging from 35% to 85%, depending on income.

Payments to Plans

For 2020, Medicare’s actuaries estimate that Part D plans will receive direct subsidy payments averaging $259 per enrollee overall and $2,531 for enrollees receiving the LIS; employers are expected to receive, on average, $592 for retirees in employer-subsidy plans. Part D plans’ potential total losses or gains are limited by risk-sharing arrangements with the federal government (“risk corridors”). Plans also receive additional risk-adjusted payments based on the health status of their enrollees and reinsurance payments for very high-cost enrollees.

Under reinsurance, Medicare subsidizes 80% of total drug spending incurred by Part D enrollees above the catastrophic coverage threshold. For 2020, average reinsurance payments per enrollee are estimated to be $955. In the aggregate, Medicare’s reinsurance payments to plans have grown from $6 billion in 2006 to an estimated $43 billion in 2019, accounting for a larger share of total Part D spending over time, from 14% in 2006 to 42% in 2018 (Figure 6). Higher benefit spending above the catastrophic threshold is a result of several factors, including an increase in the number of high-cost drugs, prescription drug price increases, and a change made by the ACA to count the manufacturer discount on the price of brand-name drugs in the coverage gap towards the out-of-pocket threshold for catastrophic coverage; this change has led to more Part D enrollees with spending above the catastrophic threshold over time.

Figure 6: Spending for Catastrophic Coverage (“Reinsurance”) Has Increased as a Share of Total Medicare Part D Spending, from 14% in 2006 to 42% In 2018

Issues for the Future

The Medicare drug benefit has helped to reduce out-of-pocket drug spending for enrollees, which is especially important to those with modest incomes or very high drug costs. But with drug prices on the rise, more plans charging coinsurance rather than flat copayments for covered brand-name drugs, and an increase in the annual out-of-pocket threshold for 2020, Part D enrollees can expect to face higher out-of-pocket costs for their medications.

In light of ongoing attention to prescription drug spending and higher drug prices, the Trump Administration and members of Congress have issued several proposals to control drug spending by Medicare and beneficiaries. Several of these proposals address concerns about the lack of a hard cap on out-of-pocket spending for Part D enrollees, the significant increase in Medicare spending for enrollees with high drug costs, and the relatively weak financial incentives faced by Part D plan sponsors to control high drug costs. Such proposals include allowing Medicare to negotiate the price of drugs, requiring manufacturers to pay a rebate to the federal government if their drug prices increase faster than inflation, using drug prices in other countries in determining pricing for drugs in the U.S., and shifting more of the responsibility for catastrophic coverage costs to Part D plans and drug manufacturers.

Whether or not any of these proposed changes are adopted, understanding how well Part D continues to meet the needs of people on Medicare will be informed by ongoing monitoring of the Part D plan marketplace, formulary coverage and costs for new and existing medications, and Medicare beneficiaries’ out-of-pocket drug spending.

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