Medicare Part D: How Prescription Drug Coverage Works

Original Medicare (Part A and Part B) covers very few of the prescriptions you fill at a pharmacy. That job belongs to Part D, Medicare's prescription drug coverage. Part D is optional, it's sold by private companies, and the details vary a lot from plan to plan.

This guide explains how Part D is set up, how plans decide which drugs they cover, how the yearly cost stages work, and why many people sign up even if they take few medications today.

This is general information, not insurance, financial or medical advice, and this independent site isn't connected with Medicare, CMS or any plan. It doesn't recommend specific plans. For free help comparing options, contact your State Health Insurance Assistance Program (SHIP) or call 1-800-MEDICARE (1-800-633-4227). Talk with your doctor or pharmacist about the medications themselves.

What Part D is and how you get it

Medicare.gov describes Part D as coverage that helps pay for brand-name and generic drugs. It's optional and offered to everyone with Medicare through insurance companies and other private companies approved by Medicare. Plans must follow Medicare's rules, but each can vary in cost and in the specific drugs it covers.

There are two ways to get it, according to the Medicare & You 2027 handbook:

• A separate Medicare drug plan. These plans add drug coverage to Original Medicare and to certain other plan types. You need Part A and/or Part B to join one.
• A Medicare Advantage Plan (or other Medicare health plan) that includes drug coverage. Most Medicare Advantage Plans include Part D.

Watch for one trap. The handbook says that if you join a Medicare Advantage HMO or PPO that doesn't include drug coverage, you can't add a separate Medicare drug plan. To join any drug plan, you must live in its service area and meet Medicare's citizenship or lawful-presence requirements.

How plans decide which drugs they cover

Each plan has its own list of covered drugs, called a formulary. The Medicare & You 2027 handbook says all plans must cover a wide range of drugs that people with Medicare take, including most drugs in certain "protected classes" used to treat cancer, HIV/AIDS, depression, psychosis and seizures, or to prevent organ transplant rejection. Beyond that, formularies differ, so always check that your drugs are on a plan's list before you join.

Plans usually sort drugs into tiers, and lower tiers generally cost you less. Plans can also set coverage rules, which the handbook describes this way:

• Prior authorization: you or your prescriber must get the plan's approval before it covers the drug.
• Quantity limits: limits on how much of a drug you can get at a time.
• Step therapy: you may need to try a similar, lower-cost drug first.

If your prescriber thinks you need a drug that's restricted or on a higher tier, you or your prescriber can ask the plan for an exception. Plans can change their formularies during the year under Medicare's guidelines, and the handbook says your plan must notify you of changes that affect drugs you take.

Your pharmacy choice matters too. The handbook notes that costs can be lower at a plan's preferred pharmacies than at standard, out-of-network or mail-order pharmacies.

What you pay: premium, deductible and the yearly cap

Part D costs come in several layers, and all of them vary by plan:

• Premium: Most plans charge a monthly premium. Medicare.gov says people with higher incomes pay an extra amount on top of the plan premium.
• Deductible: Some plans have none. Medicare.gov's drug cost page says no Medicare drug plan may have a deductible higher than $615 in 2026 or $700 in 2027.
• Copayments or coinsurance: your share of each covered prescription after any deductible.

The most important protection is the out-of-pocket cap. Medicare.gov's drug cost page says that once your out-of-pocket spending on covered Part D drugs reaches $2,100 in 2026 ($2,400 in 2027), you move into "catastrophic coverage." From then on, you pay nothing for covered Part D drugs for the rest of the calendar year. Medicare.gov says certain payments made on your behalf, such as through the Extra Help program, count toward that cap.

A few other rules are worth knowing. The Medicare & You 2027 handbook says plans can't charge more than $35 for a one-month supply of each covered insulin, and there's no deductible for insulin. The 2027 handbook also says Part D generally covers recommended adult vaccines, such as shingles and RSV, at no cost to you.

If big costs early in the year are a problem, the 2027 handbook describes the Medicare Prescription Payment Plan. This option, offered by all Part D plans, lets you spread your out-of-pocket drug costs across the year. It doesn't lower what you owe, and the handbook says it may not be the best choice if you qualify for Extra Help.

The handbook also notes that Medicare has been negotiating prices for certain high-cost brand-name drugs, with the first negotiated Part D prices taking effect January 1, 2026, and more on January 1, 2027. Ask your plan how those prices affect you.

The late enrollment penalty and "creditable" coverage

Many people with few prescriptions sign up anyway because of the late enrollment penalty. The Medicare & You 2027 handbook says you may owe it if, after your Initial Enrollment Period, you go 63 or more days in a row without Medicare drug coverage or other "creditable" drug coverage. Medicare.gov describes creditable drug coverage as coverage that's similar in value to Part D. The penalty is added to your premium, and you generally pay it for as long as you have Medicare drug coverage. People who get Extra Help don't pay it.

Creditable coverage can come from a current or former employer or union, TRICARE, the Indian Health Service or the VA, among others. The handbook says your plan must tell you each year whether your drug coverage is creditable. Keep those notices, because a new plan may ask for proof later. Our Costs & Help Paying section explains how the penalty is calculated.

If you have other coverage, check first

Adding Part D isn't always harmless. The handbook warns that if you have employer or union coverage and join a Medicare drug plan, you could lose that employer or union coverage for yourself and your dependents, and you may not be able to get it back. Call your benefits administrator before you make a change.

Older Medigap policies that include drug coverage can be kept, but Medigap policies can no longer be sold with drug coverage. The handbook notes that most Medigap drug coverage isn't creditable.

Review your plan every fall

Plans change their premiums, formularies and pharmacy networks each year. The 2027 handbook says your plan sends an "Annual Notice of Change" and an "Evidence of Coverage" each fall. Read them, then use Medicare.gov's plan finder to compare during Open Enrollment, which runs October 15 to December 7 each year according to the 2027 handbook. Each month you fill a prescription, your plan also sends an Explanation of Benefits. If you see drugs you didn't get, the 2027 handbook lists the Investigations Medicare Drug Integrity Contractor at 1-877-7SAFERX (1-877-772-3379) for reporting suspected fraud.

Key takeaways

• Part D is optional drug coverage sold by Medicare-approved private companies, either as a separate plan or inside a Medicare Advantage Plan.
• Formularies, tiers, pharmacy networks and coverage rules differ by plan, so check your own drugs before choosing.
• Medicare.gov lists a yearly out-of-pocket cap on covered Part D drugs of $2,100 in 2026 and $2,400 in 2027, and you pay $0 after reaching it.
• Going 63 or more days without Part D or creditable coverage after you're first eligible can mean a lasting late enrollment penalty.
• If you have employer or union coverage, talk to your benefits administrator before adding Part D.

Sources

• Medicare.gov, What's Medicare drug coverage (Part D)?
• Medicare.gov, Drug coverage basics
• Medicare.gov, How much does Medicare drug coverage cost?
• Centers for Medicare & Medicaid Services, Medicare & You 2027 (official U.S. government Medicare handbook)
• Medicare.gov, Costs (2026 amounts)