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NJ Life & Health Insurance Group
  • Writer's pictureKen Connolly

How Do I Calculate Drug Costs on Medicare?

Calculating what you will pay for prescriptions on Medicare can be overwhelming. There are 4 coverage phases that affect pricing, different drug tiers, and many plans to choose from. One could pull their hair out trying to make sense of it all. The easiest way to make sure you are getting the lowest cost is to talk to a trusted, licensed broker. They can guide you through the entire process and make it more digestible. If you want to understand the details yourself, which we always recommend, this article is for you.

A Note Before We Get Started:

Medicare prescription drug plans can feel overly complicated. Luckily, the vast majority of people don’t have to get into the weeds when it comes to their drug coverage. With a little help you may see that the situation is much easier than you think. Most people pay around $10-25 a month for their prescription plan and set copays for medications. And this stays stable throughout the year.

On the other hand, there are some people that have expensive medications and heavily fluctuating prescription prices. This article will help them understand why. If you are on an extensive list of expensive prescriptions, we recommend you view our video on how to use ( or talk to us to avoid making a mistake that may set you back hundreds or even thousands of dollars a year.

The Premium

Every prescription plan is going to have a monthly premium. These premiums can range anywhere from $7/month to $100/month, but the coverage will follow the same set of guidelines. Each plan will have a Formulary, Tiered Copays, and follow a standard set of Coverage Phases. These are discussed in detail below. On average, most people pay between $10-25 in monthly premium.

The Formulary

Every prescription plan abides by what is called a formulary. This is a list of the generic, brand name, and specialty medications each plan covers and at what cost. Formulary lists often have several thousand drugs available but must cover at least 2 brand name and 2 generic drugs in every therapeutic category. This means every plan has coverage for medication in every category.

Each formulary operates on a tier system. Most plans have Tiers 1-5, and some more recently operate on tiers 1-6. Tiers 1-2 are reserved for generic medications. These come at little to no cost to the member. Tiers 3-5 or 3-6 are reserved for brand name and specialty drugs. These are generally much higher in price. As a rule of thumb, the higher the tier of the formulary, the higher the price for the medication.

The goal is to find the plan that covers your medications in the most favorable manner. This has little to do with how much you pay the insurance company each month, and more to do with what your prescriptions are. Each plan covers your prescriptions at a different price, so you must find the plan that covers all your medication, while giving you the lowest monthly cost. There is a section on our website on how to use the tool to determine this. Otherwise, talk to your broker to make sure your plan is the lowest cost it could be given your prescription needs.

The Coverage Phases

One of the most frequent questions we get is “what the heck is the donut hole?” You should know that unlike the health insurance you had before you were on Medicare, Medicare Prescription plans often cost different amounts depending on what “coverage phase” you are in. There are four coverage phases with Medicare Prescription Plans, which leads to fluctuations in coverage and cost. Below is a graphic that will help illustrate how this works, but we will also break it down section by section.

Part 1: The Deductible Phase

If your plan has a deductible, this is where your coverage will start. In the deductible phase, you must pay the full retail price of your prescriptions until the deductible is met. Luckily, this deductible often only applies to Tier 3, 4 & 5 prescriptions. This means most Tier 1 & 2 generics usually do NOT apply towards the deductible, even if you have one. Check your summary of benefits to see where your deductible applies and how much it costs. The average deductible in 2022 is $480.

If you are taking expensive medications and your deductible applies, your first month or two may be very costly. You may have to shell out several hundred dollars. Just know that your price will stabilize shortly. If you want to avoid a deductible you can, as some plans do not have them. These plans, however, usually have a much higher monthly premium.

Part 2: The Initial Coverage Phase

Once you have paid your deductible, you enter the initial coverage phase where your insurance company starts to do more of the heavy lifting. In this initial coverage phase, medication costs will drop dramatically from the retail cost to a set copay. Prescriptions that were $500 may suddenly become $40.

You stay in the initial coverage phase until both you and your insurance company have spent a combined $4,430 in drug costs. Remember, that number is the total cost of the prescriptions; not just what YOU paid. If you are paying $40 a month for a medication that is $600 a month, the insurance company is counting that $600 towards the limit as well. If you have expensive medications, you will reach this limit quickly and move onto the next phase.

Part 3: The Coverage Gap or Donut Hole Phase

Once you have reached $4,430 in cost of drugs paid, you enter the “donut hole” or coverage gap phase. This is where your insurance company lowers their share of the cost by giving you more payment responsibility. In the donut hole, you are responsible for 25% of the cost of your prescriptions. This counts towards generics as well, not just Tiers 3-6. If you get this far, this will be the most expensive part of your plan.

The donut hole lasts until the total cost spent by you on drugs including 70% manufactures

discounts exceeds $7,050.

Part 4: The Catastrophic Phase

If you have a few expensive prescriptions, may you end up in what is called “The Catastrophic Phase.” At this point you will be responsible for only 5% of your cost of drugs, or $3.95 for generics and $9.85 for brand name; whichever is lower. This is a relief to many who have been stuck in the Donut Hole for a few months. The catastrophic phase lasts until the end of the year.


If you are scratching your head in confusion, you are not alone. Medicare drug pricing can be complicated to just about anyone. Talk to the trusted brokers at NJ Life & Health to get a better understanding of what your medication costs are. Call 848-226-6897 or visit our website at to schedule an appointment today.

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