Broker Check

Want to be Smarter With Your Money?

Join our mailing list and get news and info to support your financial goals.

Thank you! Oops!
Understanding Medicare Part D and The Coverage Gap

Understanding Medicare Part D and The Coverage Gap

| September 22, 2022

What is it?   

Medicare Part D is optional coverage offered to everyone that is Medicare eligible. It helps cover the cost of outpatient prescription drugs. There are two ways to get Medicare drug coverage. 

I. You can enroll in a standalone Medicare Prescription Drug Plan (PDP). Doing so will add coverage to your Original Medicare (Parts A & B). It can be added to one of the following: 

  • A Medicare Savings Account (MSA) plan 
  • A Medicare Private Fee-for-Service (PFFS) plan, if the PFFS does not offer PDP coverage. 
  • A Medicare Cost Plan, if the Cost plan does offer PDP coverage but the beneficiary did not elect the drug coverage.

        Who is eligible?   For Part D, the beneficiary must have Medicare Part A and/or Medicare Part B 

II. Join a Medicare Advantage plan that includes PDP. These are called Medicare Advantage Prescription Drug (MAPD) plans.  

  • Examples of MAPD plans are Health Maintenance Organization (HMO), Preferred Provider Organization (PPO), Private Fee-for-Service (PFFS) Plan or Special Needs Plan (SNP) 

        Who is eligible? To be eligible for a MAPD you must be enrolled in Medicare Part A & Medicare Part B. 

When can I sign up?   

You have an Initial Enrollment Period (IEP), which is a seven-month window around the month you turn 65, to first sign up for Medicare. This seven-month period consists of the three months before your birth month, your birthday month and three months following your birth month. I discussed this in depth in a previous post about enrollment.   

In 2022, your effective date or coverage start date is the month you turn 65, if you sign up one to three months before you turn 65.  

If you elect to sign up the month you turn 65, then your effective date is the following month. The same holds true for all three months that follow. Your coverage would begin the month after signing up.   


Should I sign up for it?   

If you choose not to sign up for Medicare Part D when you are first eligible, and you do not have credible prescription drug coverage or get extra help (from the government), you will likely be assessed a late enrollment penalty (LEP) if you decide to join a plan later. The LEP is an amount that is permanently added to your Part D premium. The penalty amount is calculated by multiplying 1% of the “national base beneficiary premium” ($33.77 in 2022) times the number of full uncovered months where you were not enrolled in credible prescription drug coverage. This amount may change each year as the national base can change from year-to-year. If you don’t agree with the LEP, you may ask for a reconsideration. 

What is the monthly premium?   

Medicare Part D has a monthly premium that is paid directly to the insurance company you chose. If you were a higher earner, you may be required to pay an extra premium. The premium amount typically changes annually and is based on your modified adjusted gross income as reported on your tax return from two years prior, also referred to as a 2-year lookback. Every year they process a 2-year lookback to calculate your current premium. For 2022, they will use your 2020 tax returns as the basis. Depending on your level of income, an income-related monthly adjustment amount (IRMAA) may be imposed. See the chart below to see what your Part D premiums will be.  

If your yearly income in 2020 was:  

File Individual Return  

File Joint tax return  

File married & separate tax return  

You pay (in 2022)  

$91,000 or less  

$182,000 or less  

$91,000 or less  

Your plan premium  

>$91,000 - $114,000  


Not applicable   

$12.40 + your plan premium  

>$114,000- $142,000  


Not applicable  

$32.10 + your plan premium 

>$142,000 - $170,000  


Not applicable  

$51.70 + your plan premium  

>$170,000- $499,999  


>$91,000 and <$409,000  

$71.30 + your plan premium 




$77.90 + your plan premium 


What is The Coverage Gap? 

Some refer to this as the “Donut hole”. When you enter this phase, there’s a temporary limit on what your drug plan will cover. During this phase the beneficiaries cost typically rises.   


How did I get into the coverage gap? 

The coverage gap begins after you and your drug plan have spent a certain amount for covered drugs. Once you and your plan have spent $4,430 on covered drugs in 2022, you're in the coverage gap. 

While in the donut hole, you will pay no more than 25% of the cost of your plan’s covered brand-name drug prescription drug. Fortunately, 95% of that total cost will count towards the coverage gap (25% you & 70% drug manufacturer). 

For generic drugs, Medicare will pay 75% of the price for generic drugs during the coverage gap. You'll pay the remaining 25% of the price. The coverage for generic drugs works differently from the discount for brand-name drugs. For generic drugs, only the amount you pay will count toward getting you out of the coverage gap. 

What counts towards the coverage gap? 

  • Your deductible, coinsurance & copayments 
  • The discount you received on brand-name drugs while in the coverage gap 

What does NOT count towards the coverage gap? 

  • Your plan’s premium 
  • Any pharmacy dispensing fee 
  • What you pay for drugs that are not covered 

Not everyone enters the donut hole. If you are having issues paying for your prescriptions, Medicare, and your state both offer programs to assist those that need help to pay for their prescriptions. 

Will I ever get out of the donut hole? 


Once you’ve spent $7,050 out-of-pocket in 2022 you will leave the coverage gap and enter the Catastrophic Coverage. This amount is calculated by adding what you paid, and costs paid by others (insurance plan, manufacturer, etc.) 

What is catastrophic coverage? 

When in this final phase, you will pay significantly lower copays or coinsurance for your covered drugs until years end.  During catastrophic coverage, you will pay 5% of the cost for each of your drugs, or $3.95 for generics and $9.85 for brand-name drugs (whichever is greater). 

To Simplify Things in Summary 

In 2022, once you and your drug plan have spent $4,430 you enter the coverage gap. While in here your cost share will increase and will generally be about 25% for generic and brand-name drugs. You will remain in there until you, the plan and the drug manufacturer have paid spent a total of $7,050. Once that level is reached you enter the catastrophic coverage phase where your cost share goes way down.