Medicare Part D

How It Works

Medicare Part D was created by the Medicare Modernization Act of 2003 and launched in 2006. It is administered by private insurance companies that offer Part D plans, each with its own formulary and cost-sharing structure. Part D has a unique coverage structure with an initial deductible, an initial coverage phase, a coverage gap (the "donut hole," now largely closed), and catastrophic coverage. The Inflation Reduction Act capped out-of-pocket Part D spending at $2,000 per year starting in 2025 — a major change for patients on expensive medications.

Related Terms

• Formulary — A list of prescription drugs covered by an insurance plan, organized into tiers that determine how much the patient pays for each drug.
• Out-of-Pocket Cost — The amount a patient pays directly for a prescription drug — including copays, coinsurance, and deductible payments.
• Donut Hole (Coverage Gap) — A phase in Medicare Part D where patients historically paid a higher share of drug costs after exceeding initial coverage but before reaching catastrophic coverage.
• Inflation Reduction Act (IRA) — A 2022 federal law that, for the first time, allows Medicare to negotiate prices directly with drug manufacturers for select high-cost medications.