What is the Standard Part D Benefit?

The standard Part D benefit refers to the basic structure and parameters of coverage that Medicare prescription drug plans must offer. When Medicare’s voluntary outpatient drug benefit, known as Part D, launched in 2006 it established this standard benefit design.

While plans have flexibility to modify the standard benefit, it serves as a consistent benchmark for comparing coverage across the multitude of stand-alone Part D plans and Medicare Advantage drug plans. Understanding the phases, costs, and how the standard benefit works provides helpful context on this key Medicare program.

Overview of the Standard Part D Benefit

The standard Medicare Part D benefit has defined phases and cost sharing that reset each year as enrollees progress through their drug coverage. Here is a high-level overview:

• Deductible – Enrollees pay 100% of drug costs until reaching the deductible amount.

• Initial Coverage – Enrollees pay 25% coinsurance on covered drugs until reaching the initial coverage limit.

• Coverage Gap – Enrollees pay 25% coinsurance on generics and brand drugs with discounts.

• Catastrophic Coverage – Enrollees pay a small coinsurance or copay once out-of-pocket costs exceed the catastrophic threshold.

The standard benefit amounts change each year, with parameters updated by Medicare based on Part D spending growth trends. The figures for 2023 are:

• Deductible: $505
• Initial Coverage Limit: $4,660
• Coverage Gap Threshold: $7,400
• Catastrophic Limit: $7,400

So in the standard benefit, enrollees pay the full discounted drug costs until meeting their $505 deductible. Then they pay 25% of costs until reaching $4,660 in total drug spending. Next comes the coverage gap where enrollees pay 25% coinsurance until True Out-of-Pocket (TrOOP) costs reach $7,400. At that point catastrophic coverage kicks in with reduced copays.

However, specific costs and coverage details can vary significantly across the numerous Part D plans available to Medicare beneficiaries. It’s important to review an individual plan’s benefit structure when evaluating options.

The Deductible Phase

The deductible is the amount a Part D enrollee must pay out-of-pocket before their drug plan begins covering costs.

In 2023, the standard Part D deductible is $505. This means the enrollee pays 100% of their covered drug expenses until they reach $505. At that point, the plan assumes responsibility for 75% of costs in the initial coverage stage.

The deductible applies to all tiers of covered medications. Some plans choose to waive the deductible for certain tiers, like generics. But in the standard benefit, the enrollee is responsible for the full discounted cost of drugs until hitting their $505 deductible.

Just like other standard benefit parameters, the deductible may increase slightly each year. For 2022 it was $480, so it rose to $505 for 2023. The deductible has steadily increased most years since Part D began.

Some key notes on the Part D deductible phase:

• Not all plans impose a deductible. Many use an actuarially equivalent structure without this phase.

• For those with Extra Help/Low Income Subsidy, the deductible may be reduced or waived based on income and asset criteria.

• The deductible applies across all drug tiers and categories. Only the enrollee’s out-of-pocket spending counts toward meeting it.

• After reaching the deductible, the plan covers 75% of costs in the initial coverage stage up to the next spending limit.

The Initial Coverage Phase

Once a Part D enrollee has paid the full deductible amount out-of-pocket, they enter the initial coverage phase. This is the stage after the deductible and before the coverage gap.

In standard Part D benefit plans, enrollees pay 25% coinsurance on covered medications during the initial coverage period. The plan covers the remaining 75% of costs.

This 25/75 split lasts until the enrollee and plan combined have spent enough to reach the initial coverage limit. For 2023, this limit is $4,660.

Essentially, the enrollee pays:

• 100% of costs during the deductible phase
• Then 25% of costs during initial coverage phase
• Until total drug spending hits $4,660

After reaching the initial coverage limit, the enrollee enters the coverage gap stage. Some key notes on initial coverage:

• Catastrophic coverage begins once out-of-pocket costs exceed $7,400, not when drug spending hits the initial coverage limit.

• Many plans use tiered copays rather than 25% coinsurance during this phase. But overall beneficiary costs are designed to be actuarially equivalent.

• Only the enrollee’s payments count toward the $7,400 needed to qualify for catastrophic coverage, not the plan’s 75% share.

The Coverage Gap Stage

The coverage gap, sometimes still referred to as the “donut hole”, begins when combined drug spending exceeds the initial coverage limit. For 2023, a Part D enrollee enters the coverage gap once total drug spend surpasses $4,660.

In the gap, the enrollee continues paying cost sharing until True Out-of-Pocket (TrOOP) costs reach the catastrophic threshold. For standard plans in 2023, that TrOOP threshold is $7,400.

During this stage, enrollees pay:

• 25% coinsurance on brand-name drugs
• 25% coinsurance on generic drugs

The Medicare Coverage Gap Discount Program provides manufacturer discounts on brand medications. This helps reduce the enrollee’s cost sharing burden.

Colloquially called the “donut hole”, this stage still requires significant cost sharing. But the gap has essentially closed in recent years due to discounts and catastrophic coverage beginning once TrOOP spending exceeds $7,400.

The Catastrophic Coverage Phase

Once a Part D enrollee’s TrOOP costs surpass $7,400 for 2023, they enter the catastrophic coverage phase. This stage heavily subsidizes drug costs to protect against excessive annual spending.

In 2023 under the standard benefit, catastrophic coverage has the enrollee pay:

• $4.15 copay for generic drugs or drugs treated like generics
• $10.35 copay for brand-name and non-preferred medications
• 5% coinsurance on costs, whichever is greater

However, due to a change that began in 2024, there are no copays or coinsurance required once reaching the catastrophic spending threshold.

The Part D plan assumes greater responsibility for costs in the catastrophic phase. This coverage protection helps limit excessive annual out-of-pocket drug spending.

Some key aspects:

• Catastrophic coverage is based on TrOOP spending exceeding $7,400, not total drug costs.

• The 5% coinsurance formerly required was eliminated as of 2024, so just small copays apply now.

• By law, there is no coverage gap once catastrophic spending threshold is met.

True Out-of-Pocket (TrOOP) Costs

A spending concept called True Out-of-Pocket (TrOOP) costs determines when a Part D enrollee qualifies for catastrophic coverage.

TrOOP spending includes the enrollee’s deductible, coinsurance, and copays throughout the initial and gap coverage. However, it does not include:

• Monthly premiums
• Drugs not covered by the plan
• Payments made by other insurance
• The 75% of costs paid by the plan (only enrollee’s share counts)

Only the enrollee’s own direct payments for in-network formulary medications apply toward the $7,400 TrOOP threshold for catastrophic coverage.

TrOOP was instituted so that plans share greater responsibility for very high-cost enrollees. Monitoring TrOOP is key to knowing when catastrophic coverage with reduced costs begins.

How Costs Are Updated Each Year

The standard Part D benefit features defined spending limits and coverage phases renewed annually. By law, the parameters are updated each year based on growth in Part D drug spending nationwide.

Specifically, the deductible, initial coverage limit, and catastrophic threshold are increased by the rate of Part D per capita spending growth. This growth metric is calculated by Medicare’s actuaries.

For example, 2021 vs. 2022 per capita spending rose by 6.1%. So the standard benefit amounts for 2023 were increased by 6.1% accordingly.

The law also institutes additional limits on how much the maximum deductible can rise year-to-year. For 2023, the deductible could increase by no more than $10 over 2022 levels.

Alternative Benefit Designs

While described above, the defined standard benefit is not the only permissible Part D design. Plans can offer actuarially equivalent alternatives with adjusted cost sharing as long as parameters meet certain rules.

Two key alternative structures include:

• No deductible plans – Many plans waive