Thanks to the Inflation Reduction Act, the maximum out of pocket amount that beneficiaries will spend on prescriptions drugs will be drastically lower than previous years. Starting in 2025, all Medicare plans will include a $2,000 Part D maximum out-of-pocket (cap) for prescription drugs covered by the plan. If your out-of-pocket spending on covered drugs reaches $2,000 for the calendar year, then you will enter the Catastrophic Stage. During this stage, you pay nothing for your covered Part D drugs for the rest of the year. But what most people don’t realize is that this $2,000 cap does not always mean $2,000 out-of-pocket for beneficiaries. In this blog we will discuss the $2,000 Part D cap calculation and why your out-of-pocket maximum may be less. It is not as straight forward as many people would think.The calculations for the new $2,000 cap are complicated. Unfortunately, you will not be able to calculate it on your own, but it is helpful to understand how it is calculated. This way, if you reach your $2,000 before the year is up you will know “others” are paying on your behalf. Our licensed agents have technology that completes the Enhanced Plan calculations to help you compare plans in your area.1
What IS NOT included in the $2,000 Part D cap?
First off, we want to make sure everyone understands what is NOT included in the $2,000 Part D maximum out-of-pocket. The monthly Part D plan premium does not count toward the $2,000 maximum out-of-pocket. It doesn’t matter if you get your coverage through a stand-alone Part D plan or a Medicare Advantage plan with Part D coverage, the premium is excluded from the cap.
The Part D cap only includes amounts for prescriptions covered by your plan. This means that if you pay out-of-pocket for a drug that your plan does not cover, then this amount does not count toward your $2,000 cap. This is also true for over-the-counter medications like cold and flu, headache, and allergy medicine. Not only must the drug be covered by the formulary, but it must also be paid for under the plan. Sometimes we find discount coupons that are cheaper than the plan copay. This is a great way to save! However, we want to make sure you are aware that if you use the coupon to pay for the drug then the amount will not count toward your cap. Manufacturer coupons are treated the same way.
Does Medicare Cover Compound Drugs?
Also, the $2,000 cap is only for Part D drugs. There are many drugs that are covered under Part B instead of Part D. If you receive any of these Part B administered drugs, they will not count toward your cap.
What IS included in the $2,000 Part D maximum out-of-pocket?
Now that we know what does not count toward the $2,000 cap, let us look at what is included. How you reach the $2,000 cap is based on Medicare’s calculation of the True Out-of-Pocket cost. Also known as TrOOP. Since the TrOOP calculation is complex, you will not be able to calculate it yourself but it is helpful to understand what is counted in your TrOOP.
TrOOP includes the spending on covered Part D drugs made by the beneficiary or on their behalf by certain third parties. Some people will reach the $2,000 before they personally spend $2,000 due to payments made by third parties.
Payments made by the beneficiary
As mentioned, payments made by the beneficiary for drugs covered by the plan count toward the cap. This amount includes:
- Part D plan deductibles paid by the beneficiary before the plan kicks in.
- Copayments or coinsurance paid by the beneficiary during initial coverage period.
- Drug Costs on some approved formulary exceptions
Payments made by the Third Parties
The following third-party payments can reduce the out-of-pocket expense for beneficiaries and are counted toward the $2,000:
- Enhanced supplemental benefits offered by Part D plans
- Medicare’s Extra Help Program
- Qualified State Pharmacy Assistance Programs (SPAPs)
- Indian Health Service and certain other Native American organizations
- Supplemental commercial health insurance
- Legitimate charities
The most common third-party payments are from enhanced supplemental benefits offered by Part D plans. This is why some will meet their $2,000 without having spent $2,000. Part D plans can either offer Medicare’s defined standard Part D benefit (Basic Plan) or enhanced benefits (Enhanced Plan). Enhanced plans pay a higher percentage of some drug costs covered by the plan. This is an important distinction when calculating your max out-of-pocket. This is an important distinction because the amount the plan pays above the defined standard design counts toward your TrOOP. To understand which costs the Enhanced Plan pays toward your $2,000 cap, let’s look at the 2025 Part D standard benefit design.
What is the Part D standard Benefit Design?
Basic Part D plans use the standard benefit design. The standard benefit design for 2025 includes a $590 per year deductible, 25% cost share for medications, and then $0 for drugs after $2,000. This means the $590 deductible and 25% of drug costs during the Initial Coverage stage count toward the $2,000 maximum out-of-pocket.
Note about Part D covered vaccines: Since Part D covers ACIP-recommended vaccines at zero dollar cost-share, they do not contribute to the $2,000.
How is my $2,000 Part D maximum out-of-pocket calculated with a Basic Part D plan?
If you have a Basic Plan, then your $2,000 Part D maximum out-of-pocket is based on what you actually pay out of pocket at the pharmacy based on your plan’s coverage. This is because the plan is using the standard plan design set by Medicare so only the amount you pay out of pocket will count towards the $2,000 cap.
| $2,000 Spending Cap for Basic Plan = What you ACTUALLY PAY out of your pocket based on your plan’s coverage |
How is my $2,000 Part D maximum out-of-pocket calculated with an Enhanced Part D plan?
Since Enhanced plans pay a higher percentage of drug costs than the Standard Benefit Design, the plan is contributing toward your $2,000 cap. This means you could reach your $2,000 cap before your actual out-of-pocket reaches $2,000. It also means a more complicated calculation for TrOOP. When enrolled in an Enhanced Part D plan, the cap is calculated as shown below:
| $2,000 spending cap = Greater amount of the 2 below |
| What you ACTUALLY PAY out of your pocket based on your plan’s coverage OR What you WOULD HAVE paid out of pocket under the 2025 Standard Prescription Drug plan. |
As you can see, the Enhanced Part D plan calculation is more complicated. Here is an example to help you understand how the calculations work in this scenario.
Enhanced Drug Plan Example:
Beth is enrolled in a Medicare Advantage plan that includes a Part D Enhanced plan for 2025. The plan has a $0 premium and $0 deductible for Tier 1, 2, and 3 drugs. She takes one expensive drug that costs $590 per month. Her plan formulary lists her drug as a tier 3 drug with a $47 copay.
On a Basic Part D plan, she would have paid a $590 deductible and 25% coinsurance. But since this is an enhanced plan, the plan is paying a higher portion of the drug and Beth is only paying the $47 copay. Remember, the $2,000 cap is based on the greater of either her actual out-of-pocket costs or what she would have paid on a Basic plan.
The cost on a Basic plan would reach $2,000 by November. But her actual costs are only $47 x 11 = $517 as shown below. This means she is reaching the Catastrophic Stage and will pay $0 even though her out of pocket cost did not reach $2,000.
This scenario is simplified for example purpose and many real-world scenarios may not be this low for actual out-of-pocket expenses. But it is intended to clarify why some beneficiaries may reach the Catastrophic Stage before they spend $2,000.
How is my $2,000 cap calculated with Medicare Extra Help?
If you receive Extra Help, the amount that Extra Help pays to reduce your deductible and copays will count toward the $2,000. This means you could reach Catastrophic Stage earlier in the year if you have a lot of expensive drugs. Learn more about Extra Help and see if you qualify, visit our blog What is Extra Help and how can it help you save on prescriptions?
Looking for other ways to save on Medicare expenses? See our Resources to Help with Medicare Expenses page.
Conclusion
The calculations for the new $2,000 cap are complicated. Unfortunately, you will not be able to calculate it on your own, but it is helpful to understand how it is calculated. This way, if you reach your $2,000 before the year is up you will know “others” are paying on your behalf. Our licensed agents have technology that completes the Enhanced Plan calculations to help you compare plans in your area. Reach out to one of our local agents today!
- Part D drug information from https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/catastrophic-coverage ↩︎
