Medicare Part D: How Prescription Drug Coverage Works

Prescription drug costs are one of the biggest concerns for people approaching retirement, and for good reason. Without coverage, even common medications can cost hundreds of dollars a month. Medicare Part D is the program that covers outpatient prescription drugs, and while it can feel complicated, the basics are manageable once you understand the structure.

What Part D Is and How It Works

Part D is optional coverage you add to Original Medicare (or it is often built into Medicare Advantage plans). You enroll in a plan offered by a private insurance company that has been approved by Medicare. The plans vary by which drugs they cover, what you pay for each drug, and which pharmacies you can use.

Each Part D plan has a formulary -- a list of covered drugs organized into tiers, with different cost-sharing at each tier. Generic drugs typically land in lower tiers with lower copays. Brand-name drugs sit in higher tiers. Specialty drugs, which can cost thousands per month, are in the top tier.

The Standard Cost Structure in 2026

Part D plans have a few standard cost components, though they vary by plan.

Monthly premium: The average national premium is around $35 to $55 per month, though this varies considerably by plan and location. Higher-income enrollees pay an IRMAA surcharge on top of this.

Annual deductible: Most plans charge a deductible before coverage kicks in. The maximum allowable deductible in 2026 is $590. Some plans waive the deductible for certain drug tiers, particularly generics.

Copays and coinsurance: After the deductible, you pay a fixed copay or a percentage of the drug's cost depending on the tier.

The $2,000 Out-of-Pocket Cap (New in 2025)

This is a major change worth knowing about. Starting in 2025, Medicare Part D has a $2,000 annual out-of-pocket cap. This means once you have spent $2,000 out of pocket on covered drugs in a calendar year, your Part D plan covers 100% of additional costs for the rest of the year.

Before this change, there was a coverage gap (the "donut hole") that confused and frustrated many enrollees for years. The donut hole is now essentially eliminated. This is genuinely significant for people who take expensive medications.

How to Pick a Part D Plan

The most important step is making sure your specific medications are covered. Not all plans cover all drugs, and the same drug can cost very differently from plan to plan.

Step 1: Make a list of all your current prescriptions. Include the drug name, dosage, and how often you take it.

Step 2: Go to Medicare.gov and use the plan finder tool. Enter your drugs and it will show you every Part D plan available in your area, ranked by estimated annual cost including premiums, deductibles, and copays for your specific medications. This tool is free and genuinely excellent.

Step 3: Check your preferred pharmacy. Many plans have preferred pharmacy networks where your copays are lower. If you use CVS, Walgreens, or a local pharmacy, make sure the plan you choose works well with that pharmacy.

Step 4: Do not just choose the lowest premium. A plan with a $0 premium but high copays for your specific drugs might cost far more than a plan with a $45 premium. The total annual cost estimate from Medicare's plan finder is what matters.

Late Enrollment Penalty

If you do not sign up for Part D when you first become eligible and you go without creditable drug coverage for 63 days or more, you face a late enrollment penalty. The penalty is 1% of the national base beneficiary premium for each month you were without coverage, and it is added to your premium permanently.

If you have drug coverage through an employer or union plan that is considered creditable (meaning it is at least as good as Medicare's standard drug coverage), you can delay Part D enrollment without penalty. Your employer plan administrator should give you a letter each year stating whether your coverage is creditable -- keep this letter.

Extra Help: Low-Income Assistance

Medicare offers a program called Extra Help (also called the Low Income Subsidy) that significantly reduces Part D costs for people with limited income and resources. If you qualify, you pay little to nothing for your premiums, deductible, and copays. In 2026, individuals with income below about $23,000 and limited assets may qualify. Apply through the Social Security Administration at ssa.gov.