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 2020, 46 million of the more than 60 million people covered by Medicare are enrolled in Part D 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 2021
In 2021, 996 PDPs will be offered across the 34 PDP regions nationwide (excluding the territories). This represents an increase of 48 PDPs from 2020 (a 5% increase) and an increase of 250 plans (a 34% increase) since 2017 (Figure 1).
The relatively large increase in the number of PDPs in recent years 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, 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 2021, the number of enhanced PDPs has increased by nearly 50%, from 421 to 618, largely due to this policy change.
Beneficiaries in each state will have a choice of multiple stand-alone PDPs in 2021, ranging from 25 PDPs in Alaska to 35 PDPs in Texas (see map). In addition, beneficiaries will be able to choose from among multiple MA-PDs offered at the local level for coverage of their Medicare benefits.
New for 2021, beneficiaries in each state will have the option to enroll in a Part D plan participating in the Trump Administration’s new Innovation Center model in which enhanced drug plans cover insulin products at a monthly copayment of $35 in the deductible, initial coverage, and coverage gap phases of the Part D benefit. Participating plans do not have to cover all insulin products at the $35 monthly copayment amount, just one of each dosage form (vial, pen) and insulin type (rapid-acting, short-acting, intermediate-acting, and long-acting). In 2021, a total of 1,635 Part D plans will participate in this model, which represents just over 30% of both PDPs (310 plans) and MA-PDs (1,325 plans) available in 2021, including plans in the territories. Between 8 and 10 PDPs in each region are participating in the model, in addition to multiple MA-PDs (see map).
Low-Income Subsidy Plan Availability in 2021
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 $19,140 for individuals/$25,860 for married couples in 2020) and modest assets (less than $14,610 for individuals/$29,160 for couples in 2020).
In 2021, 259 plans will be available for enrollment of LIS beneficiaries for no premium, 15 more than in 2020 (a 6% increase), and the second year with an increase in the number of benchmark plans since 2018 (Figure 2). Just over one-fourth of PDPs in 2021 (26%) are benchmark plans. 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 2021 ranges across states from 5 to 10 plans (see map). 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
Part D Plan Premiums and Benefits in 2021
The 2021 Part D base beneficiary premium – which is based on bids submitted by both PDPs and MA-PDs and is not weighted by enrollment – is $33.06, a modest (1%) increase from 2020. But actual premiums paid by Part D enrollees vary considerably. For 2021, PDP monthly premiums range from a low of $5.70 for a PDP in Hawaii to a high of $205.30 for a PDP in South Carolina (unweighted by plan enrollment). Even within a state, PDP premiums can vary; for example, in Florida, monthly premiums range from $7.30 to $172. 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 $12.32 to $77.14 per month in 2021 (depending on income).
The Part D defined standard benefit has several phases, including a deductible, an initial coverage phase, a coverage gap phase, and catastrophic coverage. Between 2020 and 2021, the parameters of the standard benefit are rising, which means Part D enrollees will face higher out-of-pocket costs for the deductible and in the initial coverage phase, as they have in prior years, and will have to pay more out-of-pocket before qualifying for catastrophic coverage (Figure 3).
- The standard deductible is increasing from $435 in 2020 to $445 in 2021
- The initial coverage limit is increasing from $4,020 to $4,130, and
- The out-of-pocket spending threshold is increasing from $6,350 to $6,550 (equivalent to $10,048 in total drug spending in 2021, up from $9,719 in 2020).
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.
For costs in the coverage gap phase, beneficiaries pay 25% for both brand-name and generic drugs, with manufacturers providing a 70% discount on brands and plans paying the remaining 5% of brand drug costs, and plans paying the remaining 75% of generic drug costs. For total drug costs above the catastrophic threshold, Medicare pays 80%, plans pay 15%, and enrollees pay either 5% of total drug costs or $3.70/$9.20 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 2020, 46.5 million Medicare beneficiaries are enrolled in Medicare Part D plans, including employer-only group plans; of the total, just over half (53%) are enrolled in stand-alone PDPs and nearly half (47%) are enrolled in Medicare Advantage drug plans (Figure 4). Another 1.3 million beneficiaries are estimated to have drug coverage through employer-sponsored retiree plans where the employer receives a subsidy from the federal government equal to 28% of drug expenses between $445 and $9,200 per retiree (in 2021). Several million beneficiaries are estimated to have other sources of drug coverage, including employer plans for active workers, FEHBP, TRICARE, and Veterans Affairs (VA). Another 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 2020. 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 $96 billion in 2021, representing 13% of net Medicare outlays (net of offsetting receipts from premiums and state transfers). Part D spending depends on several factors, including the total number of Part D enrollees, their health status and drug use, the number of high-cost enrollees (those with drug spending above the catastrophic threshold), 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.
Part D Financing
Financing for Part D comes from general revenues (71%), beneficiary premiums (16%), 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 2021, Medicare’s actuaries estimate that Part D plans will receive direct subsidy payments averaging $216 per enrollee overall, $2,639 for enrollees receiving the LIS, and $1,026 in reinsurance payments for very high-cost enrollees; employers are expected to receive, on average, $575 for retirees in employer-subsidy plans. Part D plans also receive additional risk-adjusted payments based on the health status of their enrollees, and plans’ potential total losses or gains are limited by risk-sharing arrangements with the federal government (“risk corridors”).
Under reinsurance, Medicare subsidizes 80% of total drug spending incurred by Part D enrollees with relatively high drug spending above the catastrophic coverage threshold. In the aggregate, Medicare’s reinsurance payments to Part D plans now account for close to half of total Part D spending (45%), up from 14% in 2006 (increasing from $6 billion in 2006 to $46 billion in 2019) (Figure 5). 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.
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 costs on the rise, more plans charging coinsurance rather than flat copayments for covered brand-name drugs, and annual increases in the out-of-pocket spending threshold, many Part D enrollees are likely to face higher out-of-pocket costs for their medications.
In light of ongoing attention to prescription drug spending and rising drug costs, policymakers 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, restructuring the Part D benefit to add a hard cap on out-of-pocket drug spending, 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., allowing for drug importation, and shifting more of the responsibility for catastrophic coverage costs to Part D plans and drug manufacturers.
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, examining formulary coverage and costs for new and existing medications, assessing the impact of the new insulin model, and keeping tabs on Medicare beneficiaries’ out-of-pocket drug spending.