Medicare Part D prescription drug plans operate under a defined structure with multiple coverage phases. Familiarizing yourself with how these phases work helps you plan for your drug costs over the course of the year.
The Three Coverage Phases
Thanks to the Inflation Reduction Act, the Part D benefit structure has been simplified starting in 2025. The old four-phase model — which included a coverage gap (donut hole) and a separate catastrophic threshold — has been replaced by a streamlined three-phase structure. The donut hole is eliminated.
1. Deductible Phase
At the start of each plan year, you may be required to pay a deductible before the plan begins to share costs with you. In 2026, the maximum Part D deductible is $615, although many plans set a lower deductible or eliminate it entirely. Some plans waive the deductible for generic or preferred medications.
2. Initial Coverage Phase
Once you have satisfied your deductible, you move into the initial coverage phase. During this stage, you and your plan split the cost of your prescriptions. You pay 25% coinsurance based on the tier your medications are assigned to, while the plan picks up the remainder.
This phase continues until your true out-of-pocket spending reaches $2,100.
3. Catastrophic Coverage Phase
Once your out-of-pocket spending reaches $2,100 in 2026, you pay $0 for covered prescriptions for the remainder of the year. This annual out-of-pocket cap, introduced by the Inflation Reduction Act, provides a hard ceiling on your drug costs and replaces the old catastrophic phase where beneficiaries still owed small copays or coinsurance.
Formulary and Drug Tiers
Every Part D plan uses a formulary organized into tiers:
- Tier 1 (Preferred Generic): Lowest cost, covering the most common generic drugs
- Tier 2 (Generic): Other generic medications at a slightly higher cost
- Tier 3 (Preferred Brand): Lower-cost brand-name drugs
- Tier 4 (Non-Preferred Brand): Higher-cost brand-name drugs
- Tier 5 (Specialty): High-cost medications, typically for complex conditions
The specific medications included and their tier placement differ from plan to plan, which makes it essential to verify that your drugs are covered before selecting a plan.
Pharmacy Networks
Part D plans contract with networks of pharmacies. Filling prescriptions at an in-network or preferred pharmacy generally results in lower costs. Many plans also provide mail-order pharmacy options for maintenance medications, often at discounted prices for 90-day supplies. For a detailed look at Part D premiums, deductibles, and copays, see our pricing guide.
Step Therapy and Prior Authorization
Some plans impose utilization management requirements:
- Step therapy: Requires you to try a less expensive drug before the plan will cover a costlier alternative
- Prior authorization: Requires the plan to approve a specific drug before coverage kicks in
- Quantity limits: Restricts the amount of a medication you can obtain within a given time frame
Picking the Right Plan
When evaluating Part D plans, keep these factors in mind:
- Whether your current medications appear on the plan's formulary
- Which tier your drugs are placed in
- Whether your preferred pharmacy participates in the plan's network
- The plan's total estimated annual cost, not just the monthly premium