Medicare Part D plans, also called Medicare Prescription Drug Plans or PDPs, allow you to add prescription drug coverage to your original Medicare package. Given how expensive prescriptions can be, it's wise to purchase a Part D policy if you don't have prescription drug coverage from another source. However, picking the wrong policy can be incredibly expensive, since Part D policies vary widely in how much they cost and which drugs are included in the plan.

How Part D plans work

If you choose to sign up for original Medicare (which includes Medicare Part A and Part B) rather than a Medicare Advantage plan, you can also sign up for a Part D plan to help cover the cost of any prescriptions you take. Every Medicare Part D plan has a formulary, a list of prescriptions that the plan covers (at least in part). If a prescription isn't on the plan's formulary, it's not covered and you'll have to pay the full cost yourself.

Medicine bottle on pharmacy counter

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How formularies work

Most Part D formularies are set up in "tiers," and each tier is associated with a different level of coverage. In the most common tier system, Tier 1 is preferred generics, meaning generic drugs that you can purchase at an extremely low cost.  Tier 2 is other generics, which are still usually pretty cheap but not as cheap as the preferred generics. Tier 3 includes preferred brand-name drugs, which are non-generics available at a discount through the plan. Tier 4 consists of nonpreferred drugs, which are brand-name and generic drugs that are covered by the plan, but typically at a high cost. Finally, Tier 5 includes specialty drugs, which includes prescriptions that are used for specific illnesses or conditions such as cancer.

In formularies using this tier system, the lower the tier, the cheaper the drug. Thus, if your prescription is in the formulary but is in Tier 4 or 5 it may still be so expensive that you'll have trouble affording it. The plan's Summary of Benefits will tell you how much you'll pay for prescriptions based on which tier they're in.

The dreaded "donut hole"

If your prescription costs are high, you may run afoul of the Part D coverage gap, also known as the donut hole. If you and your prescription drug plan together spend more than a certain amount on your prescriptions, the plan will limit how much it will pay for the rest of the year (unless you make it into the catastropic coverage phase before the year is up). In 2017, the coverage gap begins at $3,700.

Once you hit the coverage gap, you'll pay up to 40% of the cost of brand-name drugs and 51% of the cost of generic drugs. If your prescription out-of-pocket costs hit a certain level while in the donut hole (for 2017, it's $4,950), you'll enter the "catastrophic coverage" phase and your Part D plan will take over most of your prescription costs for the rest of the year.

What to look for in a Part D plan

First, you must decide if you need a Part D plan at all. If you have no ongoing prescriptions you may be able to get by without drug coverage, although this strategy can backfire if you suddenly develop a need for an expensive medication. Retirees with one or more ongoing prescriptions should definitely consider picking up drug coverage of some kind, and if you've got original Medicare (with or without a Medigap plan) then Part D is likely your best bet. The other option for Medicare enrollees is to sign up for a Medicare Advantage plan that includes drug coverage, which will take care of your prescription drug costs without the need for a separate plan.

Assuming that Part D is your preferred option, you'll need to take a careful look at the plan formularies to see which one will be the best fit. When you pull up the roster of plans in your area on the Medicare website, you can first choose to enter a list of your current prescriptions. If you do so, the website will take them into consideration when estimating your expenses for various Part D plans. However, don't take the computer's word for which plan is the best deal: make sure that you browse through the Summary of Benefits and formulary for each plan you're considering.

The Summary of Benefits for each Part D plan will tell you how much prescriptions in various tiers will cost you, but the plan with the best rates may not necessarily be the best deal for you. A Part D plan that puts your prescriptions in Tier 1 or 2 may very well be a better deal for you then one that puts your prescriptions in Tier 4, even if the latter plan has better rates overall.

If the cost of a Part D plan is out of your reach, you may be eligible for Medicare's Extra Help program. If you have up to $18,090 in annual income ($24,360 for married couples) and up to $13,820 in resources ($27,600 for married couples), Medicare may be able to help you with prescription drug costs such as Part D premiums, deductibles, and co-pays.

Once you've chosen a Part D plan, you'll still need to review your coverage options each year. That's because formularies can change, and a plan that worked out really well for you one year might be a disaster for you the next. And any changes to your prescriptions that have occurred during the past year may also make a different plan a better deal for you now. During open enrollment, be sure to review your Part D options thoroughly and compare them to your current plan. Prescription drugs may be ridiculously expensive, but if you do your homework and sign up for the right coverage, you can make them far more affordable.

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