Crunching the numbers: Why it's so hard to get bottom-line Medicare drug plan costs

The monthly premium for Christine's renewing policy under the Medicare Prescription Drug Plan was set to rise from  $87.30 this year to $102.90 on January 1. There's no deductible. So what would it cost her to use this plan over the next 12 months?

A whopping $10,885.09. Unfortunately, the insurance company didn't tell her that. But with the aid of a spreadsheet, the Medicare Prescription Drug Plan Finder, and calls to local pharmacies and participating insurance companies I was able to get a more accurate bottom-line cost on her plan -- and find another that brought that tab down to $37.70 a month and total cost of $3,876.98 - a $7,000 savings.

If you know someone who uses Medicare Part D, the prescription drug insurance program, and you're a techie or analyst who's good with research and data, keep reading. You have just five days to get going and help them. After the open enrollment period ends on December 7th they will be stuck with their existing plan for the next 12 months, for good or ill. And the price differentials can make seniors's wallets very ill indeed.

According to a plan specialist at my local CVS, many seniors that come through the door don't even know that they're paying far more than they should. Sometimes, she says, they see their premiums go down and think they're paying less. Unfortunately, they may be paying more -- sometimes thousands of dollar more. But that fact is often hidden behind a confusing array of numbers. I'll explain why in a minute.

Cruel reality

In Christine's situation (not her real name) a letter arrived this fall announcing that her current plan provider was exiting the business and that she would be transitioned to a new plan offered by a different insurer effective January 1. Christine has a medication list that includes nine prescription drugs. She received information about the new plan but nothing on its bottom-line cost. Christine's total cost this year, including premiums, drug-co pays and deductibles, came to about $4,200. Had we not reviewed and changed her plan, her total out of pocket costs to partipate in this program would have risen 260% to nearly $11,000 -- and provided less coverage because this particular insurer won't cover one of her most expensive drugs. (You can appeal that, but who would bother when shopping for a plan?).

Christine's situation was unique in that her insurer exited the business and had set her up to automatically transition to a more expensive plan. But even when the same plan renews, total costs can rise. In past years going through this exercize I have seen total plan costs rise to the point where a competitive plan one year can be one of the more expensive the next. A few years ago Christine's plan became prohibitively expensive. A search turned up another plan from the same insurer that was more cost competitive. This has lead me to wonder if the company wasn't trying to have it both ways -- offer an attractive plan to shoppers while picking up some extra profits from seniors who stayed with their existing plan and didn't -- or couldn't -- figure out their total costs.

The cruel reality about these plans is that they're so complicated to figure out when it comes to bottom-line costs that I doubt most seniors know what they're paying. Sure, some insurers will tell you if you ask exactly how much an individual drug will cost, but that may be expressed as a percentage of "retail" cost. And costs for the same drug can vary widely depending on if a senior is in the initial coverage period, in the "donut hole," where they have to pay full cost of the drugs (they face this when their total out of pocket costs for drugs exceeds $2,970), or in the catastrophic coverage phase, which takes over after out of pocket costs hit another threshold.

Doing the math

While the federal government subsidizes the drug costs (Christine's medications cost nearly $20,000 a year at full retail), the participating insurers determine (within the guidelines of the program) the monthly premium, deductibles, and what seniors pay for each drug, in each phase of the program.

According to a specialist at my local CVS, the plan you're in determines what the full "retail" cost of the drug will be, and that is based on the rate negotiated between the plan and each pharmacy. That may be discounted, or it may cost more than actual full retail, depending on the plan. For example, the "full cost" for one brand of insulin purchased at CVS is $336.41 in one plan and $271.78 in another. According to CVS, the cash price at her local store is $306.99.

Here's another example, for another drug in Christine's formulary:


Plan 1

Plan 2

Plan 3

"Full Retail"




Cost during initial coverage period




During coverage gap (donut hole)




Catastrophic coverage




The cash price at her local CVS for this drug is $208. In this case all three plans offer a lower "full price" but the price Christine would pay varies substantially. Given that, it's easy to see how these price variations can add up over 12 months. Plan 2 reflects what Christine would have paid had she stayed with her current plan. Because the retail cost of her medication comes to nearly $20,000 (not hard to do these days), Christine hits the "donut hole" (as about one quarter of plan members do) and phases into catastrophic coverage by mid-year, so she pays three different prices for each drug throughout the year.

Insurers also create tiers, from Tier 1 to Tier 5, that determine drug pricing. The higher the tier, the more you pay. When tiers varied during my research, it was usually only by one level. But not always.

Finally, not all drugs are on the formulary (translation: not covered). In Christine's case, one of her most expensive drugs was not covered by her default 2013 plan. Under her plan she would have paid $336.41 per month for that prescription.

So how do you get to the bottom of this? You just need to document your list of prescriptions and dosages per month, know how the costs are calculated in the initial coverage period for every drug, put the costs into a monthly schedule, determine when you hit the $2,970 donut hole and apply the plans' full retail costs until the maximum is reached, then apply the catastrophic costs for each, add it all up, subtract any deductible, add in the annual premiums and --viola! You're done.

Using the  Plan Finder

Fortunately, Medicare has done a lot of that work for you with its Plan Finder, which finds the most reasonably priced plans and lets you compare them on price, features and how users have rated them. It's an indispenable tool, and everyone should use it every year as the starting point.

Unfortunately, Medicare's data isn't always accurate. When I called insurers after running a few reports I found the drugs were often assigned to the wrong tier for plans listed in the Medicare database. In one case a drug listed as Tier 3 actually wasn't covered at all. You can enroll directly online from the Medicare site by clicking a button, so had I not double checked with the insurer, Christine might have had to pay out of pocket all of next year for one her most expensive drugs. In another case a plan actually covered that same drug when the Plan Finder report showed it was not on the formulary.

So how do you get through this? Here's the process I went through. 

  • Use the Medicare prescription drug Plan Finder to find and compare the most reasonably priced plans based on your location, preferred pharmacies, and other criteria.
  • Select the three least expensive plans and click on Plan Comparison. Then click the print hotlink at the very top of the page to create a report of the Drug Costs & Coverage results tab. This gives you more detailed month-by-month individual drug cost breakouts.
  • Click the Plan Ratings tab to see user satisfaction ratings for the plans under consideration.
  • Call the insurance companies for the plans you're interested in, and tell them you will give them the list of prescription medications and pharmacy you want to use if they can give the total, bottom-line cost, rather than a list of premiums, ratios, co-pays, etc. (Some insurers may have tools on their Web sites to help with this process). If they can't do that, they may offer to give you the costs and ratios to add up yourself. But that's messy, so unless you're ready to do some spreadsheet modeling, I'd go elsewhere.
  • If they can provide those numbers, give them the formulary, and review the tiers with them to make sure they map to what your Plan Finder report says. Do the bottom-line numbers match the Plan Finder results? if not you need to go line by line to figure out what's different. The data from the Medicare isn't always accurate, so don't sign on until you've confirmed all of the numbers.
  • Choose the best plan and sign up on or before December 7th.
  • Punch in a calendar reminder and repeat next year.

What do I do until then? Well, there's always tax season.

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