Overview: Part D was added to Medicare in 2006 to address the program's original gap in prescription drug coverage, and it underwent its most significant restructuring in 2025 under the Inflation Reduction Act.

How Part D Is Structured

Part D coverage is provided by Medicare-approved private insurance companies through two mechanisms: stand-alone Prescription Drug Plans (PDPs) that work alongside Original Medicare, or Medicare Advantage Prescription Drug (MA-PD) plans that bundle medical and drug coverage. Each plan maintains a formulary — a list of covered drugs organized into pricing tiers. Generic drugs sit in lower tiers with lower cost-sharing; specialty drugs sit in the highest tiers with the greatest cost-sharing.

Plans are required to cover at least two drugs in every therapeutic class and must cover all drugs in six protected categories without restriction: HIV/AIDS antiretroviral drugs, antipsychotics, antidepressants, anticonvulsants, immunosuppressants, and antineoplastic (cancer) agents.

The Three-Phase Structure (Post-Inflation Reduction Act)

The infamous "donut hole" coverage gap that once forced beneficiaries to pay sharply higher costs during a middle phase has been eliminated. As of 2025–2026, Part D operates as a three-phase system with a meaningful annual cap:

Phase 1 — Deductible: The beneficiary pays 100% of drug costs until reaching the plan's deductible. The standard maximum deductible for 2026 is $615, though individual plans may charge less or offer $0 deductibles.

Phase 2 — Initial Coverage: After the deductible, the beneficiary pays approximately 25% coinsurance (or a tier-based copay), and the plan pays the rest. This phase continues until the beneficiary's total out-of-pocket spending reaches the annual cap.

Phase 3 — Catastrophic Coverage: Once the beneficiary's out-of-pocket spending hits $2,100, they enter the catastrophic phase. From that point forward, the beneficiary pays $0 for covered Part D drugs for the rest of the calendar year. The plan and the federal government absorb all remaining costs.

The Late Enrollment Penalty for Part D

If a Medicare beneficiary goes 63 or more consecutive days without creditable prescription drug coverage after their Initial Enrollment Period, they owe a permanent late enrollment penalty. The penalty is calculated as 1% of the national base beneficiary premium for every full month without creditable coverage. For 2026, the base premium is $38.99, so each uncovered month adds roughly $0.39/month — permanently. A beneficiary who went 24 months without coverage would owe 24 × 1% = 24% × $38.99 ≈ $9.36 extra per month for as long as they have Part D.