Medicare Part D is the prescription drug coverage component of Medicare, offered through private insurance plans that are approved and regulated by Medicare. Part D is technically optional — but it comes with a late enrollment penalty if you go without creditable drug coverage for an extended period, which makes the timing of your enrollment decision more consequential than it may appear.
This article covers how Part D works, when and how to enroll, what the late enrollment penalty actually costs, and how to compare plans before making a decision.
How Part D Works
Part D plans are structured around four cost components. Understanding each one matters when comparing plans — a plan that looks inexpensive based on premium alone may cost you significantly more depending on what drugs you take.
Monthly premium. Each Part D plan sets its own monthly premium, which varies by plan and location. There is no single standard premium. Plans with lower premiums often have higher cost-sharing on individual drugs. Plans with higher premiums may cover your specific medications at lower copays. The right comparison is total annual cost, not monthly premium alone.
Annual deductible. Most Part D plans include an annual deductible — the amount you pay before the plan begins sharing costs. In 2026, the maximum allowable deductible is $590, though many plans set it lower or waive it entirely for lower-tier (generic) drugs.
Drug tiers and cost-sharing. Part D plans organize covered drugs into cost tiers. A typical structure:
- Tier 1: Preferred generic drugs — lowest copay
- Tier 2: Generic drugs — low copay
- Tier 3: Preferred brand-name drugs — moderate copay
- Tier 4: Non-preferred brand-name drugs — higher coinsurance
- Tier 5: Specialty drugs — highest coinsurance
What tier your drug falls into — and whether it is covered at all — depends on the specific plan’s formulary (its list of covered drugs). This is why two people taking different medications can have very different cost experiences with the same plan.
The $2,000 out-of-pocket cap. Starting in 2025, the Inflation Reduction Act capped annual out-of-pocket costs for Part D at $2,000. Once you reach $2,000 in covered drug costs in a calendar year, you pay nothing for covered drugs for the remainder of that year. The old “donut hole” coverage gap — which previously required beneficiaries to pay a substantially higher share of drug costs above a certain threshold — no longer applies in its prior form. This is one of the most significant changes to Part D in years, and many beneficiaries are not yet aware of it.
When to Enroll
Part D enrollment happens through four windows. Which window applies to you depends on your situation.
- Initial Enrollment Period (IEP) — When you first become eligible for Medicare, you have a 7-month window around your 65th birthday to enroll in a Part D plan. If you want drug coverage from the start of your Medicare enrollment, enroll during your IEP. Waiting past your IEP without creditable drug coverage starts the late enrollment penalty clock.
- Annual Enrollment Period (AEP) — October 15 through December 7 — AEP is when existing Medicare beneficiaries can join, switch, or drop a Part D plan for the coming year. Coverage changes take effect January 1. If your current plan’s formulary changed, a better plan is available in your area, or your prescriptions have changed, AEP is when to act. See our Medicare Annual Enrollment Period guide for the full AEP rules and what else you can change during this window.
- Special Enrollment Period (SEP) — Qualifying life events — losing employer drug coverage, moving out of a plan’s service area, gaining or losing Medicaid — may trigger a Special Enrollment Period to enroll in or change Part D outside the standard windows. See our Medicare Special Enrollment Periods guide for qualifying events and window lengths.
- Medicare Advantage Open Enrollment Period — January 1 through March 31 — If you are enrolled in a Medicare Advantage plan that includes drug coverage and want to switch to a different Advantage plan or return to Original Medicare, you can do so during this window. Coverage changes take effect the first of the following month.
The Late Enrollment Penalty
If you go without creditable prescription drug coverage for 63 or more continuous days after your Initial Enrollment Period ends, you will owe a late enrollment penalty when you eventually sign up for Part D. This threshold is specific — 63 days, not two months — and the penalty that results is permanent.
The penalty is calculated as 1% of the national base beneficiary premium for each month you went without creditable coverage. In 2026, the national base beneficiary premium is approximately $36.78, meaning each month of delay adds roughly $0.37 to your monthly Part D premium — every month, for as long as you have Part D coverage.
To put that in practical terms: if you went 24 months without creditable drug coverage, your penalty is approximately 24% added to your base premium, permanently. Over a 20-year retirement, even a modest monthly penalty adds up to a meaningful total.
What counts as creditable coverage? Drug coverage through an employer, union, VA, TRICARE, or another source that meets Medicare’s standard qualifies as creditable coverage and prevents the penalty from accruing. If you have creditable drug coverage through another source, keep documentation — you may need to show it when you eventually enroll in Part D.
If you are about to lose drug coverage or are unsure whether your current coverage counts as creditable, act before the 63-day clock runs.
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How to Compare Part D Plans
The best Part D plan for you depends entirely on the drugs you take, where you fill prescriptions, and how much your current plan costs. Here is a practical approach:
- Use medicare.gov/plan-compare. Enter your zip code and your current prescriptions — drug name, dosage, and quantity per month. The tool calculates estimated annual costs for each available plan based on your specific drugs. This is the most direct way to compare plans in your area.
- Compare total estimated annual cost, not just premium. A plan with a $0 premium but high cost-sharing on your drugs may cost significantly more than a plan with a modest monthly premium that covers your medications at low copays. The tool does this math for you.
- Check the formulary for each drug you take. The formulary is the plan’s list of covered drugs. A drug not on the formulary is not covered at any tier — you would pay full price. Confirm your prescriptions appear on the formulary before enrolling.
- Confirm your pharmacy is in-network. Many plans have preferred pharmacy networks where copays are lower. If you use a specific pharmacy, verify it is in-network — and ideally a preferred pharmacy — for any plan you are considering.
- Check the plan’s star rating. Medicare rates Part D plans on a 1 to 5 star scale based on quality and member satisfaction. Star ratings are not the only factor, but they are a useful signal when comparing otherwise similar plans.
- Review annually during AEP. Plans change their premiums, formularies, and cost-sharing every year. Even if you are satisfied with your current plan, checking alternatives during AEP (October 15 – December 7) takes 15 minutes and can save hundreds of dollars annually.
Part D and Medicare Advantage
If you enroll in a Medicare Advantage plan, prescription drug coverage is almost always included — you do not need to add a separate standalone Part D plan. In fact, enrolling simultaneously in a Medicare Advantage plan with drug coverage and a standalone Part D plan is not permitted. If you choose Original Medicare instead of Medicare Advantage, you need to add a standalone Part D plan separately to have any prescription drug coverage.
If you are unsure whether Original Medicare with standalone Part D or Medicare Advantage with bundled drug coverage is the better fit — a licensed advisor can compare total costs across both options based on your specific prescriptions and doctors.
🆓 Don’t navigate enrollment alone — free help is available.
Our partner Chapter Medicare can help you confirm your enrollment window, avoid penalties, and choose the right plan before your deadline.
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Disclosure: We may receive a referral from Chapter if you choose to use their service. Chapter is a licensed health insurance agency and is not affiliated with or endorsed by Medicare or any government agency.
Money Instructor does not provide tax, legal, or investment advice. This material has been prepared for educational and informational purposes only. You should consult your own advisors regarding your own financial situation.
Related Medicare guides
Medicare Annual Enrollment Period — The October 15 – December 7 window when you can join, switch, or drop a Part D plan for the coming year
Medicare Enrollment Deadlines & Penalties — Every enrollment window, the late penalties, and how to avoid them
Medicare Special Enrollment Periods — When qualifying life events let you enroll or make changes outside the standard windows
Free Medicare Help from Chapter Medicare — What Chapter is, who they help, and what to expect before you call
Medicare Overview — How Medicare is structured, what each part covers, and how to navigate the system