Medicare Part D

Part D is Medicare's outpatient prescription drug benefit — the pills you pick up at a pharmacy, as opposed to drugs a clinic administers (that's Part B, priced on ASP). Here's how it's structured and how the money moves.

It's run by private plans, not the government directly

Medicare doesn't sell drug coverage itself. It pays private insurers to run Part D plans — either standalone (“PDPs”) or bundled into Medicare Advantage (“MA-PD”). Each plan builds its own formulary (the list of covered drugs) and sorts drugs into tiers with different copays: generics cheapest, preferred brands mid, specialty drugs highest.

Behind almost every plan sits a PBM (pharmacy benefit manager) that negotiates prices with manufacturers and pharmacies. That negotiation runs on rebates — a manufacturer pays the PBM/plan back a chunk of the list price in exchange for good formulary placement. This is why a drug's list price and its net price can be wildly different.

The four benefit phases

A Part D patient moves through phases as their yearly drug spending adds up:

• Deductible: you pay 100% until you hit the plan deductible.
• Initial coverage: you pay a copay or coinsurance, the plan pays the rest.
• The “donut hole” (coverage gap): for years, a middle zone where patients suddenly paid much more. Widely hated, widely misunderstood.
• Catastrophic: after high spending, costs dropped to a small share.

What the Inflation Reduction Act changed (this is big)

The IRA rewrote Part D economics, phasing in through 2025–2026:

• A hard $2,000 out-of-pocket cap (2025). Once a patient's own spending hits $2,000 in a year, they pay $0 for covered drugs the rest of the year — the first true ceiling Part D has ever had.
• The donut hole is effectively gone, replaced by a simpler structure where manufacturers, plans, and Medicare share the cost above the cap.
• Insulin capped at $35 per month, and many recommended vaccines are free.
• Smoothing: patients can spread their out-of-pocket costs across the year instead of paying a big lump in January.

Medicare is now negotiating some prices directly

For the first time, the IRA lets Medicare negotiate the price of a small number of very-high-spend drugs directly with manufacturers, setting a Maximum Fair Price (MFP). The first 10 negotiated prices take effect in 2026, with more drugs added each year.

This is a genuine shift: for decades, federal law barred Medicare from negotiating drug prices at all. The negotiated drugs are the biggest-ticket items — blood thinners, diabetes drugs, arthritis biologics — where the spending is concentrated.

Next: how Medicaid prices drugs — and the rebate machine behind it →