A complete understanding of Medicare Part D Out-of-pocket expenses is critical for all Medicare-eligible individuals in order for them to maximize their savings and get the most out of the program.

What are the Out-of-Pocket expenses associated with Medicare Part D? On the Medicare.gov website “Out of Pocket costs” are defined as “health care costs that you must pay on your own because they are not covered by Medicare or other insurance.”

The Out-of-Pocket (OOP) expenses associated with Medicare Part D are basically any costs for an enrollee’s medications that Medicare will not cover and that they must pay for on their own. These OOP expenses include the annual deductible, which ranges from $0 - $250 depending on the individuals chosen plan, and any other portion of their medication cost that they are required to pay such as the drug cost co-payments. It is important to note that an enrollee’s monthly premium is not counted as an Out-of-pocket expense. These premium payments are an additional expense on top of the out-of-pocket expenses.

The majority of Medicare drug plans have a $250 annual deductible and a 25% co-payment for all enrollee’s drug costs until they have reached $2250 in drug expenditures. Under this scenario, at the $2250 expenditure point, enrollee’s will have $750 in Out-of-Pocket expenditures. How do we come up with the figure of $750? This is calculated as such:

The $250 annual deductible + $500 (25% co-payment x $2000 of drug expenditures) = $750

Individuals who have close to or exactly $2250 in annual drug expenditures in 2006 will be the biggest winners of the Medicare Prescription Drug plan. Based on the individual paying only $750 in OOP expenses and assuming that the individual payed the national average monthly premium of $32.20, these individuals save approximately 49% on their drug purchases. However, not surprisingly, the majority of seniors do not fall in this category and the savings drop off sharply when you spend more than or less than the $2250.

For the millions of American seniors who will spend more than $2250 on their drugs in 2006, this is where the Out-of-Pocket expenses start to add up. Beyond the $2250 expenditure amount you are responsible for paying for 100% of your drug cost until you have spent $3600 out-of-pocket (called the Out of Pocket Threshold). This means that between the annual drug expenditure range of $2250 and $5100 you are 100% responsible for paying for the cost of your medications.

How do we come up with the drug expenditure range of $2250 and $5100? Here is the explanation:

When the Medicare Modernization Act was passed in 2003 it was decided at that time that once people had spent $2250 on drug expenditures they would then be 100% responsible for paying for their drugs until they his a threshold of $3600 in drug expenditures.

So between from $0 to $2250 there are $750 in out-of-pocket expenses as we calculated earlier in this article.

$3600 OOP Threshold - $750 in OOP expenses at $2250 = $2850 remaining to reach the OOP Threshold.

Since after $2250 in expenditures enrollees are 100% responsible for their drug costs we can simply add the $2850 remaining to reach the OOP Threshold to the $2250 in drug expenditures to get:

$2250 + $2850 = $5100

That is how we get the drug expenditure range of $2250 to $5100 in which enrollees are 100% responsible for their drug expenditures.

This expenditure range is often called the “doughnut hole”. It is very important that Medicare eligible individuals are aware of the doughnut hole because for the first few months of 2006 they may be budgeting based on only having to pay for 25% of their drug purchases and then all of a sudden when they reach $2250 in drug expenditures they are hit with responsibility of paying for 100% of the drug cost. That is a huge and sudden change in monthly expenditures.

It is also important that Medicare Part D enrollees are aware that not all purchases are necessarily counted towards their Out-of-Pocket expenditures. The following are examples of purchases that will not be counted towards OOP expenses:

1. If a drug that an enrollee requires is not on the formulary of covered drugs for their chosen drug plan (or if their plan removes that drug from its formulary of covered drugs) that drug purchase will not be counted towards their out of pocket expenses and you are 100% responsible to pay for it. Purchasing these non-formulary drugs, that the enrollee must pay full price for, from Canada is an excellent alternative to paying high prices at the local pharmacy. Individuals can save an average of 42% by purchasing these medications in Canada.

2. If an enrollee travels and buys their prescription drug at a pharmacy that is not included in their drug plan’s network of pharmacies they are 100% responsible for the cost of the medication and it will not be counted towards their OOP expenses.

3. If an enrollee currently has an insurance plan and they utilize their insurance coverage to pay for their drug purchase, the purchase will not be counted towards their OOP expenses.

4. If an enrollee purchases their medications from another country that has low-cost, high-quality medications, such as Canada, these purchases, unfortunately, will not be counted towards their OOP expenses. However, these individuals may want to explore this option when they reach the doughnut hole to help them save even more money. In fact, if an individual spends more than $2250 a year on medicines but less than $7050 a year, buying their medicines from Canada once they hit the doughnut hole is an excellent option for them.

Medicare eligible individuals’ knowledge of Out-of-Pocket expenses and what these expenses entail is crucial for them to save as much as they possibly can with the Medicare Prescription Drug plan.

Copyright 2005 Jeremy Cockerill