Medicare Part D

Medicare Part D: How Medicare Prescription Drug Coverage Works

Medicare Part D is the part of Medicare that helps pay for prescription drugs you pick up at a pharmacy.

Part D is different from Medicare Parts A and B.

With Parts A and B, the federal government runs the insurance program and pays doctors, hospitals, and other medical providers through Medicare.

Part D was built differently.

Congress decided to have private insurance companies provide the prescription drug benefit. Medicare helps pay those insurance companies, and the companies then run the drug plans. (Centers for Medicare & Medicaid Services)

Understanding that difference makes Part D much easier to understand.

When Did Medicare Part D Begin?

For many years, Original Medicare did not provide broad coverage for the prescription drugs people bought at a pharmacy.

That became a bigger problem as prescription drugs became a larger part of healthcare.

In 2003, Congress passed a law called the:

Medicare Prescription Drug, Improvement, and Modernization Act

This law created Medicare Part D.

People with Medicare were able to start using Part D prescription drug coverage in 2006. (Centers for Medicare & Medicaid Services)

So an easy way to remember it is:

2003 = Congress created Part D

2006 = Part D coverage began

Part D Was Built Differently From Parts A and B

This is one of the most important things to understand about Part D.

With Original Medicare Parts A and B, Medicare is the main insurance program.

A hospital or doctor provides a Medicare-covered service and sends a claim to Medicare. Medicare then pays the provider according to Medicare’s rules.

Part D does not work the same way.

When Congress created Part D, it set up a system where private insurance companies contract with Medicare to provide prescription drug coverage. (Centers for Medicare & Medicaid Services)

So think about it like this:

Parts A and B

Government Medicare program → Doctor or hospital

Part D

Government Medicare program → Private Part D insurance plan → Prescription drug benefit

That does not mean the federal government is out of the picture.

The federal government still helps pay for Part D and sets many of the rules.

But the private insurance company runs the drug plan.

What Does the Insurance Company Do?

The Part D insurance company has several important jobs.

It decides which covered drugs will be on its drug list, also called a formulary, while following Medicare’s rules.

The company also works with pharmacies.

It sets up different levels, or tiers, for drugs.

It may require things like prior approval for certain medicines.

And it processes your prescription drug claims when you go to the pharmacy.

That is why two Part D plans can be very different.

One plan may cover your medicine at a low cost.

Another plan may put the same medicine on a more expensive tier.

A certain pharmacy may be cheaper with one plan than another.

So with Part D, it is important to look at more than just the monthly premium.

You also need to look at:

Your drugs + your pharmacy + the plan’s rules + the total cost

How Does the Government Help Pay for Part D?

Even though private insurance companies run Part D plans, the federal government helps pay for the program.

Part D plans submit bids to Medicare.

People with Medicare pay part of the cost through their premiums, and the federal government pays part of the cost to the insurance companies.

Medicare also makes other payments to plans, including extra help for certain people with low incomes and payments connected to people with very high drug costs. (Centers for Medicare & Medicaid Services)

So it would be wrong to say:

“Part D is completely private insurance.”

It is better to say:

“Part D is a Medicare program that uses private insurance companies to provide the prescription drug benefit.”

The government provides funding and rules.

The insurance company runs the plan.

Then Came the Inflation Reduction Act

Medicare Part D has changed many times since it began.

One of the biggest changes came from a federal law called the Inflation Reduction Act, which was signed in 2022.

The law made several major changes to Medicare prescription drug coverage.

Some changes started in 2023.

Others started later.

Major changes to the way Part D works took effect in 2025, and additional changes took effect in 2026. (Centers for Medicare & Medicaid Services)

The Biggest Change: A Limit on What You Pay

Before these changes, someone taking very expensive medicine could spend thousands of dollars out of their own pocket during the year.

The Inflation Reduction Act changed that.

In 2025, the new Part D out-of-pocket limit started at $2,000 for covered Part D drugs. (Centers for Medicare & Medicaid Services)

That amount is allowed to increase in later years.

For 2026, the limit is:

$2,100

Once a person reaches the 2026 out-of-pocket limit for covered Part D drugs, they pay $0 out of pocket for covered Part D drugs for the rest of that calendar year. (Centers for Medicare & Medicaid Services)

This is a very important change.

Think about someone who takes an expensive cancer drug.

Before the new law, that person could continue having prescription costs during the year even after spending a large amount of money.

Now there is a yearly stopping point for covered Part D drug costs.

For 2026:

Once you reach the $2,100 out-of-pocket limit, you pay $0 for covered Part D drugs for the rest of the year.

Who Pays After You Reach the Limit?

The medicine does not suddenly become free.

Someone still has to pay for it.

The new rules changed who is responsible for those costs.

After the person reaches the Part D out-of-pocket limit, the insurance company pays a much larger share of the cost.

Drug manufacturers also help pay for certain drugs through the Manufacturer Discount Program.

The federal government continues to help pay part of the cost through Medicare. (Centers for Medicare & Medicaid Services)

So after the member reaches the limit, the cost is being shared mainly among:

The insurance company

The drug manufacturer, when the discount rules apply

The federal government

The person with Medicare pays $0 for covered Part D drugs for the rest of that year. (Centers for Medicare & Medicaid Services)

Insurance Companies Now Carry More of the Risk

This is another important part of the Inflation Reduction Act.

The law did not just lower what people with Medicare have to pay.

It also changed who pays the bills behind the scenes.

Part D insurance companies are now responsible for a larger share of very high prescription drug costs than they were under the old system. (Centers for Medicare & Medicaid Services)

That gives insurance companies a strong reason to manage prescription drug costs.

It also helps explain why Part D plans pay close attention to:

• Which drugs they cover
• Which tier a drug is placed on
• Which pharmacies they work with
• Prior authorization
• Generic drugs
• Lower-cost drug choices

The insurance company is not simply passing every drug bill to the federal government.

The insurance company has real money at risk.

The “Donut Hole” Is Gone

People who have had Medicare for a long time may remember something called the:

Donut Hole

or

Coverage Gap

The old Part D benefit had several stages. People could enter the coverage gap and see their prescription costs change.

Starting in 2025, the old coverage-gap stage was removed.

Part D now has a simpler structure with three main stages:

Deductible → Initial Coverage → Catastrophic Coverage

Once you reach the yearly out-of-pocket limit, you enter the catastrophic stage and pay $0 for covered Part D drugs for the rest of the year. (Centers for Medicare & Medicaid Services)

Insulin Became More Affordable

The Inflation Reduction Act also placed an important limit on what people with Medicare pay for covered insulin.

Since 2023, people with Medicare generally pay no more than $35 for a month’s supply of each covered insulin product, under the Medicare rules that apply. (Centers for Medicare & Medicaid Services)

For someone who uses insulin every month, this can make a big difference.

Many Vaccines Became $0

The law also changed the cost of certain vaccines.

Part D-covered adult vaccines recommended by the Advisory Committee on Immunization Practices can be provided with $0 cost sharing.

That includes important vaccines that many older adults need. (Centers for Medicare & Medicaid Services)

You Can Spread Your Drug Costs Over the Year

Another change started in 2025.

It is called the:

Medicare Prescription Payment Plan

This program allows people to spread their out-of-pocket Part D drug costs over the year instead of having to pay a large amount all at once at the pharmacy. (Centers for Medicare & Medicaid Services)

For example, imagine you have a very expensive prescription early in the year.

Instead of having to pay the full amount at the pharmacy that day, this program can allow you to spread your Part D out-of-pocket costs into monthly payments.

It does not lower the total amount you owe.

It simply gives you another way to pay it over time.

Medicare Can Now Negotiate Prices for Certain Drugs

The Inflation Reduction Act also gave Medicare the power to negotiate prices with drug companies for certain high-cost prescription drugs.

The first negotiated prices take effect in 2026. (Centers for Medicare & Medicaid Services)

This is another major change to the Medicare drug program.

The government still does not run your Part D insurance plan.

Your private Part D company still provides your drug coverage.

But the federal government now has a larger role in helping control the prices of certain expensive medicines.

Part A, Part B, and Part D Made Simple

Here is an easy way to see the difference:

Medicare	What It Mainly Covers	Who Runs the Coverage?
Part A	Hospital care	Federal Medicare program
Part B	Doctors and outpatient medical care	Federal Medicare program
Part D	Prescription drugs	Private insurance companies under Medicare rules

That last part is important.

Part D is still Medicare.

But Congress chose to have private insurance companies administer the drug benefit instead of having Medicare directly run one nationwide prescription drug plan. (Centers for Medicare & Medicaid Services)

An Easy Example

Let’s say Mary has Medicare.

Mary has:

Part A for hospital care

Part B for doctor and medical care

Part D for prescription drugs

Mary goes to her doctor.

The doctor treats Mary and sends the Medicare claim through Medicare Part B.

Later, Mary’s doctor writes her a prescription.

Mary takes that prescription to the pharmacy.

Now her private Part D insurance plan comes into play.

The pharmacy checks Mary’s Part D plan.

The plan determines things like:

Is the drug covered?

What tier is it on?

What does Mary have to pay?

The Part D insurance company processes that drug claim under Medicare’s rules.

That is the big difference.

The Most Important Thing to Remember

Medicare Part D was created by Congress in 2003 and started providing prescription drug coverage in 2006.

But Congress built Part D differently from Original Medicare Parts A and B.

Instead of having the federal government directly run one drug plan and pay pharmacies in the same basic way Original Medicare pays medical providers, Congress created a system where:

Private insurance companies provide the Part D benefit.

The federal government helps pay for it.

Medicare sets many of the rules.

The insurance company manages the drug plan. (Centers for Medicare & Medicaid Services)

Then the Inflation Reduction Act made some of the biggest changes to Part D since the program began.

Today, the easiest things to remember are:

There is a yearly limit on your out-of-pocket costs for covered Part D drugs.

The 2026 limit is $2,100.

After reaching that limit, you pay $0 for covered Part D drugs for the rest of the year.

Covered insulin has special cost protections.

Many recommended adult vaccines have $0 cost sharing.

You can choose to spread your Part D out-of-pocket costs over the year.

Insurance companies now carry more responsibility for high drug costs.

And beginning in 2026, Medicare-negotiated prices for the first group of selected drugs take effect. (Centers for Medicare & Medicaid Services)

The simplest way to say it is:

Parts A and B are government-run Medicare health coverage.

Part D is a government Medicare benefit delivered through private insurance companies.

The government makes the rules and helps provide the money.

The private insurance company runs your prescription drug plan.

Higher-income beneficiaries may pay more for Part D through IRMAA, while people with limited income may qualify for help paying for Medicare in Alabama.