hanks to the Inflation Reduction Act, Medicare beneficiaries will see a significant reduction in their out-of-pocket prescription drug costs. Beginning in 2025, all Medicare plans will feature a $2,000 cap on covered prescription drugs. Once your out-of-pocket spending on these medications reaches $2,000 within a calendar year, you will enter the Catastrophic Stage—where you pay nothing for covered Part D drugs for the remainder of the year.
However, many people don’t realize that reaching this $2,000 cap doesn’t always mean they will personally spend $2,000 out of pocket. In this blog, we’ll break down how the cap is calculated and why your actual costs may be lower than expected. It’s more complex than it seems!
What IS NOT included in the cap?
First, it’s important to clarify what does not count toward the $2,000 cap. Your monthly Part D plan premium is excluded from the cap, regardless of whether you have a stand-alone Part D plan or a Medicare Advantage plan with Part D coverage.
The cap only applies to covered prescription drugs under your plan. If you pay out-of-pocket for a medication that isn’t included in your plan’s formulary, that cost will not count toward the $2,000 limit. The same goes for over-the-counter medications like cold and flu treatments, pain relievers, and allergy medicine. Not only must the drug be covered by your plan, but it must also be purchased through the plan for the cost to apply toward the cap. If you use discount coupons to lower your medication costs—whether from a pharmacy or the drug manufacturer—the amount paid with the coupon will not count toward your out-of-pocket maximum. While these discounts can be a great way to save, it’s important to understand how they impact your total spending.
Finally, the $2,000 cap applies only to Part D drugs. Some medications, particularly those administered in a clinical setting, are covered under Part B instead of Part D. Any costs for these Part B drugs will not contribute to your Part D out-of-pocket limit.
What IS included in the cap?
Now that we’ve covered what does not count toward the $2,000 cap, let’s take a look at what does. Your progress toward the cap is based on Medicare’s True Out-of-Pocket (TrOOP) cost calculation. Since TrOOP is complex, you won’t be able to calculate it yourself, but understanding what counts toward it can be helpful.
TrOOP includes the amount spent on covered Part D drugs, whether paid by the beneficiary or by certain third parties on their behalf. Because of this, some people may reach the $2,000 cap before they personally spend that amount, thanks to contributions from these third parties.
Payments made by the beneficiary that count:
- 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 that count:
- 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.
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.
How is the cap calculated with a Basic Part D plan?
If you have a Basic Plan, then your $2,000 cap 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 the cap 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 Two Below
What you ACTUALLY PAY out of pocket based on your plan’s coverage. OR…..
What you WOULD HAVE paid out of pocket under the 2025 Standard Prescription Drug plan.
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 beneificiaries may reach the Catastrophic Stage before they spend $2,000.
How is the 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. If you have a lot of expensive drugs each month, this means you could reach Catastrophic Stage earlier in the year. If you want to 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?
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 so you can help your clients. Agent quoting tools will automatically calculate these amounts based on current prescriptions. If you want to use our quoting tools and would like to contract with our office, you can contact us here.