Medicare Part D Prescription Drug Coverage Guide: Plans, Costs, and the $2,000 Cap

Prescription drugs are one of the largest and most unpredictable healthcare expenses for people on Medicare. A single brand-name medication can cost hundreds or even thousands of dollars per month without insurance. Medicare Part D exists to bring those costs under control, and recent legislation has made the program more affordable than ever before.

This guide explains how Part D works — what it covers, how drug formularies and tiers determine your costs, how to navigate the four coverage stages, what the Inflation Reduction Act's $2,000 out-of-pocket cap means for you, and how to choose the best plan for your medications and budget.

What Is Medicare Part D?

Medicare Part D is the federal prescription drug benefit program. Established by the Medicare Modernization Act of 2003, it became available in 2006. Unlike Part A and Part B, Part D is delivered through private insurance companies approved by Medicare rather than administered directly by the government.

There are two ways to get Part D coverage. The first is through a standalone Prescription Drug Plan (PDP), which adds drug coverage on top of Original Medicare and is the right choice if you have a Medigap supplement policy. The second is through a Medicare Advantage plan that includes drug coverage, known as an MA-PD plan.

Part D is optional, but choosing not to enroll can have lasting consequences. If you go without creditable drug coverage for more than 63 days after you are first eligible, you face a permanent late enrollment penalty. For most people, enrolling when first eligible — even without current prescriptions — is the financially sound decision.

How Part D Works: Formularies, Tiers, and Pharmacy Networks

Part D plans are not all the same. Each plan designs its own drug list, pricing structure, and pharmacy network. Understanding these three elements is essential to choosing a plan that covers what you need at a price you can afford.

The Formulary (Drug List)

Every Part D plan maintains a formulary — a list of prescription drugs the plan covers, reviewed and updated regularly. Medicare requires every plan to cover at least two drugs in each therapeutic category and all or substantially all drugs in six protected classes: anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals, and immunosuppressants. If a drug is not on a plan's formulary, the plan is not required to cover it unless you successfully request an exception.

Drug Tiers

Drugs on a formulary are organized into tiers, and the tier determines how much you pay. A typical five-tier system works as follows:

• Tier 1 — Preferred generics: Lowest cost, typically $0 to $15
• Tier 2 — Non-preferred generics: Low cost, typically $10 to $25
• Tier 3 — Preferred brand-name drugs: Moderate cost, typically $30 to $50
• Tier 4 — Non-preferred brand-name drugs: Higher cost, often 30% to 40% coinsurance
• Tier 5 — Specialty drugs: Highest cost, often 25% to 33% coinsurance for drugs costing thousands per month

The same drug can sit on different tiers across different plans. This is why comparing plans based on your specific medications is essential.

Pharmacy Networks

Part D plans contract with specific pharmacies. Most plans have preferred and standard pharmacy tiers — you pay less at a preferred pharmacy. Many plans also offer mail-order pharmacies for 90-day supplies of maintenance drugs, saving money and the inconvenience of monthly trips. Before enrolling, confirm your regular pharmacy is in the plan's network.

The Four Coverage Stages of Part D

Part D does not work like a simple insurance policy with a flat copay. Your costs change as you move through four stages during the calendar year.

Stage 1: The Deductible

Before your plan starts sharing costs, you pay the full price of your drugs up to the annual deductible. For 2026, the maximum Part D deductible is $590. Some plans charge less or waive the deductible for certain tiers such as generics. Once you meet the deductible, you advance to the next stage.

Stage 2: Initial Coverage

After meeting the deductible, you pay a copay or coinsurance for each prescription while your plan pays the rest. The amount depends on the drug's tier. This stage continues until total drug costs — what you and your plan have paid combined — reach $5,030 in 2026. Most enrollees with moderate prescription needs spend the entire year in this stage.

Stage 3: The Coverage Gap

The coverage gap — historically called the donut hole — was once the most expensive stage for beneficiaries. Thanks to the Inflation Reduction Act, the gap has been effectively eliminated. You now continue paying the same copays and coinsurance as during initial coverage. The plan and drug manufacturers absorb the additional costs, so you may not even notice the transition.

Stage 4: Catastrophic Coverage

Once your true out-of-pocket spending reaches $2,000 in a calendar year, you enter catastrophic coverage and pay nothing for covered Part D drugs for the rest of the year. Before the Inflation Reduction Act, beneficiaries in this stage still owed 5% coinsurance on every prescription — meaning people on expensive specialty drugs could face thousands more in costs. That 5% coinsurance has been eliminated entirely starting in 2025.

The $2,000 Out-of-Pocket Cap: What the Inflation Reduction Act Changed

The Inflation Reduction Act, signed in August 2022, is the most significant change to Part D since the program's creation. Its centerpiece for beneficiaries is the $2,000 annual out-of-pocket cap that took effect January 1, 2025. Here is what changed:

• $2,000 annual out-of-pocket cap: Once your out-of-pocket drug spending hits $2,000, you owe nothing more for the rest of the year. This replaces the old structure where there was no hard cap.
• Medicare Prescription Payment Plan: You can spread your out-of-pocket drug costs into predictable monthly installments with no interest and no credit check, preventing sticker shock at the pharmacy counter early in the year.
• Insulin capped at $35 per month: All Part D plans must cap insulin copays at $35 for a one-month supply, regardless of the coverage stage. This applies to both pens and vials.
• Free recommended adult vaccines: Part D plans must cover all ACIP-recommended vaccines at no cost, including the shingles vaccine that previously cost over $200 out of pocket.
• Medicare drug price negotiation: For the first time, Medicare can directly negotiate prices with manufacturers for certain high-cost drugs. The first negotiated prices took effect in 2026 for ten selected drugs, with the list expanding in future years.

The $2,000 cap is particularly transformative for people taking specialty medications for conditions like cancer, multiple sclerosis, or rheumatoid arthritis. Before this cap, some beneficiaries faced $10,000 or more per year in out-of-pocket drug costs. Now, no Part D enrollee will pay more than $2,000 annually for covered drugs.

How to Choose a Part D Plan

Choosing the right Part D plan can save you hundreds or thousands of dollars per year. Follow these steps to find the best fit.

Step 1: List Your Current Medications

Write down every prescription you take, including the drug name, dosage, and frequency. Include medications you take occasionally or seasonally. This list is the foundation of your plan comparison.

Step 2: Use the Medicare Plan Finder Tool

Go to Medicare.gov and use the Plan Finder. Enter your zip code, medications, and preferred pharmacy. The tool ranks every Part D plan in your area by estimated total annual cost — including premiums, deductibles, and cost-sharing for your specific drugs. This total cost estimate is far more useful than comparing premiums alone.

Step 3: Check the Formulary for All Your Drugs

Verify that every medication on your list is covered. Pay attention to restrictions such as prior authorization, step therapy — where you must try a cheaper drug first — or quantity limits. A low-premium plan is not a good deal if it places your drugs on a high-cost tier or does not cover them at all.

Step 4: Confirm Your Pharmacy Is in the Network

Check whether your preferred pharmacy is in the plan's network and whether it qualifies as a preferred pharmacy for lower costs. If you use mail-order prescriptions, verify that the plan offers a mail-order option and check the pricing for 90-day supplies.

Step 5: Compare Total Annual Cost, Not Just the Premium

The cheapest plan by premium is almost never the cheapest overall. A $0-premium plan could have a high deductible, limited formulary, or expensive tier placement for your drugs. Always compare by total estimated annual cost, and review your coverage every year during the Annual Enrollment Period — formularies, costs, and plan availability change annually.

Part D Costs: Premiums, Deductibles, and Copays

Part D costs have several components:

• Monthly premium: Varies by plan. The national average for 2026 is approximately $46 per month, though many plans cost less and some offer $0 premiums.
• Annual deductible: Up to $590 for 2026. Many plans set it lower or waive it for generics.
• Copays and coinsurance: After the deductible, you pay a fixed copay or percentage at each fill. Generics typically have low flat copays; brand-name and specialty drugs often require percentage-based coinsurance.
• Out-of-pocket maximum: $2,000 per year. Once reached, you pay nothing more for covered drugs that year.

Higher-income beneficiaries also pay an Income-Related Monthly Adjustment Amount (IRMAA). If your modified adjusted gross income from two years ago exceeded $106,000 individually or $212,000 for a married couple filing jointly, you pay a surcharge of approximately $13 to $81 per month on top of your Part D premium. Your 2026 IRMAA is based on your 2024 tax return. If your income has dropped due to a life-changing event like retirement, you can request a reconsideration from the Social Security Administration.

The Part D Late Enrollment Penalty

If you go 63 or more consecutive days without creditable prescription drug coverage after your Initial Enrollment Period ends, Medicare imposes a late enrollment penalty. This penalty is permanent — it is added to your Part D premium for as long as you have drug coverage.

The penalty equals 1% of the national base beneficiary premium (approximately $36.78 in 2026) multiplied by the number of full months without creditable coverage. Going without coverage for 24 months would add roughly $8.83 per month permanently. Over a decade, that exceeds $1,000 in penalties alone.

Creditable coverage means drug coverage expected to pay, on average, at least as much as a standard Part D plan. Employer plans, TRICARE, Federal Employee Health Benefits, and VA drug coverage are typically creditable. Your plan must notify you annually whether your coverage qualifies. Keep these notices — you may need them to avoid the penalty.

Extra Help: The Low Income Subsidy (LIS)

Medicare's Extra Help program, also called the Low Income Subsidy, helps people with limited income and resources pay for Part D. If you qualify, Extra Help can cover most or all of your premium, deductible, and copayments. It is one of the most valuable and underutilized Medicare benefits.

To qualify in 2026, your annual income must be below approximately $22,590 individually or $30,660 for a couple, and your resources must be below $17,220 individually or $34,360 for a couple. Your home, car, personal belongings, burial plots, up to $1,500 in burial funds, and life insurance are excluded from the resource calculation.

With full Extra Help, you pay no premium for plans at or below the regional benchmark, no deductible, and only small copays — typically $0 to $4.50 for generics and $0 to $11.20 for brand-name drugs. You can apply at ssa.gov, by calling 1-800-772-1213, or through your state Medicaid office. People with full Medicaid, Supplemental Security Income, or Medicare Savings Program benefits are enrolled automatically.

When to Enroll in Part D and When You Can Switch Plans

There are specific windows during which you can enroll in or change your Part D plan. Missing them can leave you without coverage or stuck with the wrong plan.

Initial Enrollment Period (IEP)

Your IEP is a seven-month window: three months before your 65th birthday month, your birthday month, and three months after. If you qualify through disability, it begins three months before your 25th month of receiving Social Security disability benefits. This is your first and best chance to enroll without a penalty.

Annual Enrollment Period (AEP)

The AEP runs from October 15 through December 7 each year. You can join a Part D plan for the first time, switch plans, or drop coverage. Changes take effect January 1. Use this window every fall to review your plan — formularies, cost-sharing, and pharmacy networks change annually, so the best plan last year may not be the best this year.

Special Enrollment Periods (SEPs)

SEPs allow changes outside regular enrollment windows when qualifying events occur — such as moving out of your plan's service area, losing employer drug coverage, gaining or losing Medicaid or Extra Help eligibility, or living in a disaster-affected area. People who qualify for Extra Help or Medicaid have a continuous SEP and can switch plans once per quarter during the first nine months of the year.

There is also the Medicare Advantage Open Enrollment Period from January 1 through March 31. During this window, Medicare Advantage enrollees can switch to a different MA plan or drop Medicare Advantage and return to Original Medicare with a standalone Part D plan.

The Bottom Line

Medicare Part D is an essential piece of your overall Medicare coverage. Prescription drug costs are among the fastest-rising expenses in healthcare, and going without coverage exposes you to both immediate financial risk and the permanent late enrollment penalty.

The Inflation Reduction Act has fundamentally improved Part D. The $2,000 out-of-pocket cap, $35 insulin limit, free vaccines, and Medicare drug price negotiation provide savings that compound over time — particularly for the millions of beneficiaries who rely on costly brand-name or specialty drugs.

The single most important thing you can do to control your Part D costs is to review your plan every year during the Annual Enrollment Period. Use the Medicare Plan Finder at Medicare.gov, enter your medications and pharmacy, and compare plans by total estimated annual cost. If your income is limited, apply for Extra Help — it can eliminate most or all of your drug costs.

Whether you get Part D through a standalone plan paired with Original Medicare and a Medigap policy, or through a Medicare Advantage plan that bundles drug coverage, make sure you have creditable coverage from the day you are first eligible. Enroll on time, compare your options annually, and take advantage of the protections the Inflation Reduction Act now provides.