This blog is part of our Medicare Overview series for employer-sponsored retiree plans.
What is Medicare Part D?
Medicare Part D is a voluntary prescription drug benefit for Medicare enrollees provided through private plans that contract with the federal government. Enrollees can choose either a standalone prescription drug plan (PDP) or a Medicare Advantage with Prescription Drug plan (MAPD) that includes drug coverage and all other Medicare-covered benefits. These private plans are both regulated and subsidized by Medicare.
A retiree does not have to enroll in Part D when they first become eligible, but it is encouraged unless the retiree has other prescription drug coverage that is creditable (or equivalent in value to the defined standard Part D benefit). If a retiree does not have creditable drug coverage and enrolls in Part D after they first became eligible, they may have to pay an extra amount—called a late enrollment penalty—in their monthly premium.[1]
When did the Part D program begin?
Medicare began to cover outpatient prescription drugs starting January 1, 2006 under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). Before 2006, Medicare only paid for some drugs administered during a hospital admission or a doctor’s office visit.
Where does funding for the Part D program come from?
Funding for Part D comes from the federal government (Centers for Medicare & Medicaid Services, or CMS) contributions (75%), enrollee premiums (13%), and state contributions (12%).[2] The largest portion of total Part D spending in 2026 will come from direct subsidy payments from CMS to Part D plan sponsors.
How much will the government pay per Part D enrollee in 2026?
In 2026, CMS actuaries estimate that the federal government will pay:[2]
- $1,710 on average per enrollee in direct subsidies
- $522 in reinsurance payments for very high-cost enrollees that enter the catastrophic phase
- $1,337 in subsidy payments for low-income enrollees receiving the LIS (Low Income Subsidy)
- $561 in subsidies for retirees in employer-subsidy Part D plans
Estimates of Federal Reimbursement Amounts per Enrollee for Part D Expenditures[3]
| Federal Direct Subsidy | Federal Reinsurance | Low-Income Subsidy (LIS) | Retiree Drug Subsidy (RDS) | |
| 2025 | $1,855 | $517 | $1,313 | $617 |
| 2026 | $1,710 | $522 | $1,337 | $561 |
| 2027 | $1,708 | $575 | $1,339 | $559 |
What are the costs for Part D enrollees?
Enrollee costs will depend on the plan and can include:[4]
- A fixed monthly premium
- If an enrollee has to pay a Part D late enrollment penalty, it will be added to the monthly premium
- An annual deductible: the amount an enrollee pays for covered drugs before the plan starts to pay for costs
- No Medicare drug plan may have a deductible that exceeds $615 in 2026
- Some plans have no deductible
- Copayment: a fixed amount enrollees pay for a covered drug
- Coinsurance: a percentage enrollees pay for a covered drug
Is there any financial assistance for low-income enrollees?
Enrollees with incomes up to 150% of the federal poverty level can receive financial help with their Part D costs through the Part D Low Income Subsidy (LIS or “Extra Help”) administered by the Social Security Administration.
Who is eligible for Part D?
To enroll in a PDP, the retiree must have Medicare Part A or Part B. To enroll in an MAPD, the retiree must have Part A and Part B. Retirees must have a permanent residence in the geographic region that is in their plan’s service area. Retirees who currently live outside the U.S. are not eligible to enroll. Incarcerated individuals currently in prison are also not eligible.
What are Part D plan requirements?
Part D plans must:
- Offer either the defined standard benefit or an alternative equal or greater in value, known as creditable coverage
- Cover all drugs in six “protected” classes: immunosuppressants, antidepressants, antipsychotics, anticonvulsants, antiretrovirals, and antineoplastics
- Have formularies (list of covered drugs) that include drug classes covering all disease states, and a minimum of two chemically distinct drugs in each class
- Cover all “selected” drugs in the Medicare Drug Price Negotiation Program, including all dosage forms and strengths
What are the basic Part D drug coverage requirements?
Part D drugs must be:
- Approved by the FDA for sale in the US
- Available only by prescription
- Medically necessary and for a “medically accepted indication.”
A drug that is for a “medically accepted indication” is one that is prescribed to treat a disease or condition (indication) approved by the FDA.
A drug prescribed for a condition that is not approved by the FDA is considered to be prescribed “off label.” Off label drugs may be covered only when support is found as safe and effective in an officially recognized drug compendia or, in the case of anti-cancer chemotherapeutic drugs, in peer reviewed journals. [5]
Are any drugs excluded from Part D coverage?
Yes, these are the drugs that are currently excluded from coverage:
- Over-the-counter drugs, even if they are prescribed by a physician
- Drugs for weight loss or gain; (drugs that treat wasting due to AIDS, cancer, or other diseases may be covered)
- Drugs that are only for the relief of cold or cough symptoms
- Fertility drugs
- Drugs used to treat erectile dysfunction
- Drugs used for cosmetic or hair growth purposes; (drugs that treat acne, psoriasis, rosacea and vitiligo are not considered cosmetic and may be covered)
- Drugs purchased in another country
- Vitamins and minerals, except niacin products, Vitamin D analogs (when used for a medically accepted indication), prenatal vitamins and fluoride preparations
- Drugs that may be covered under Medicare Part A or Part B
What are formularies?
A plan’s list of covered drugs is called a formulary. It can include brand-name drugs and generic drugs, as well as original biological products and biosimilars. Plan sponsors are not required to cover all drugs that are eligible for Part D coverage, but they must follow requirements established by law.
Formularies must:
- Include drug classes covering all disease states, and a minimum of two chemically distinct drugs in each class
- Cover all drugs in six “protected” classes: immunosuppressants, antidepressants, antipsychotics, anticonvulsants, antiretrovirals, and antineoplastics
- Cover all drugs that have been selected for Medicare drug price negotiation, including all dosage forms and strengths
CMS monitors the sufficiency of plan formularies, including the placement of drugs in tiers and the application of utilization management restrictions in relation to industry best practices.[5]
Is an enrollee’s drug coverage limited to their plan’s formulary?
Yes, an enrollee’s drug coverage limited to their plan’s formulary. However, the enrollee may request an exception to have a non-formulary drug covered. Non-formulary drugs are eligible for Part D coverage, but are not on a particular plan’s formulary. If a plan approves a non-formulary drug through the exceptions or appeal process, it has the flexibility to choose which cost-sharing tier to place the drug in.
Excluded drugs are not coverable under Part D; enrollees may not request an exception. However, excluded drugs may be offered as a supplemental benefit.
Can plans change their formularies during the year?
Yes, plans can change their formularies during the year under guidelines set by CMS.
Plans can change their formulary when:[6]
- A manufacturer removes a drug from the market, or the FDA rules it unsafe
- Plans that meet certain requirements can replace a brand-name drug with a
generic drug, or change the cost or coverage rules for brand-name drugs when adding new generic drugs
What is the standard Part D benefit in 2026?
The Part D defined standard benefit is used as a baseline. By law, Part D plan sponsors must offer either this minimum benefit package or an alternative equal or greater in value (“actuarially equivalent”).
The defined standard benefit is defined by the financial structure of the cost-sharing. In the 2026 plan year, the benefit will have three phases.
What are the cost-sharing phases of the Part D benefit in 2026?
Phase 1: Deductible
Enrollees contribute 100% of costs until the annual deductible is met. The annual deductible is $615 in 2026.
Once an enrollee meets their deductible, they enter the initial coverage phase.
Phase 2: Initial Coverage
In initial coverage in 2026, enrollees will contribute 25% of drug costs until their annual Out-of-Pocket (OOP) cost of $2,100 is met. The Part D plan sponsor will contribute 75% of costs for generics in this phase. The plan sponsor will contribute 65% of costs for brand-name drugs after a 10% manufacturer discount. For “selected” drugs, the Part D sponsor will contribute 65% of costs after receiving a government subsidy equal to 10% of the drug’s negotiated price.
Once an enrollee meets their $2,100 MOOP, they enter the catastrophic phase.
Phase 3: Catastrophic
In 2026, there is no cost-sharing for the enrollee in the catastrophic phase. They contribute 0% of costs after meeting their annual OOP. For generic and selected drugs, Part D sponsors contribute 60% of drug costs and CMS contributes 40% through Federal Reinsurance. For brand-name drugs, Part D sponsors also contribute 60% of drug costs after a 20% manufacturer discount and CMS contributes 20% through Federal Reinsurance.
How will these cost-sharing phases change in 2027?
In 2027, CMS has proposed increasing the standard deductible to $700 (up from $615 in 2026) and the standard OOP spending cap to $2,400 (from $2,100 in 2026). However, changes won’t be finalized until CMS releases the 2027 Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies by April 6, 2026.[7]
[1] Medicare.gov, “Avoid late enrollment penalties”
https://www.medicare.gov/basics/costs/medicare-costs/avoid-penalties
[2] KFF, “A Current Snapshot of the Medicare Part D Prescription Drug Benefit” by Juliette Cubanski, Oct 7, 2025.
https://www.kff.org/medicare/a-current-snapshot-of-the-medicare-part-d-prescription-drug-benefit/
[3] 2025 Annual Report, The Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds
https://www.cms.gov/oact/tr/2025
[4] Medicare.gov, “How much does Medicare drug coverage cost?”
https://www.medicare.gov/health-drug-plans/part-d/basics/costs
[5] Center for Medicare Advocacy, “Part D / Prescription Drug Benefits”
https://medicareadvocacy.org/medicare-info/medicare-part-d/
[6] Medicare.gov, How do drug plans work?
https://www.medicare.gov/health-drug-plans/part-d/what-drug-plans-cover/how-drug-plans-work
[7] CMS.gov, Fact Sheet: 2027 Medicare Advantage and Part D Advance Notice
https://www.cms.gov/newsroom/fact-sheets/2027-medicare-advantage-part-d-advance-notice
