Prescription-Drug Plans Have Financial Implications before, during Retirement
William G. (Bill) Stuart
Combining gamification and education to optimize employee benefits performance.
The price of drug coverage continues to rise. What can you do during your lifetime to manage this financial burden in retirement?
Drug costs continue to rise. That's no secret to anyone purchasing medical coverage. New, expensive therapies, more Americans with chronic conditions, and bad lifestyle choices are affecting demand for pharmaceutical solutions. According to the federal Centers for Disease Control and Prevention, 65% of Americans age 18 or older were taking at least one prescription medication. For seniors, the figure approaches 90%.
Prescriptions are a financial burden both to patients and purchasers of medical coverage. This article focuses on the burden in retirement and the actions that you can take now and in the future to reduce the impact of prescriptions on your budget.
Medicare Penalties
Medicare imposes surcharges on Americans who do not enroll as of the month that they turn age 65. The reason is straightforward: Medicare, like private insurers, doesn't want healthy people to eschew coverage and the associated premiums, only to jump on board once they fear that their claims will be greater than their premiums. Insurance, properly understood, is protection against catastrophic, unforeseen risk. If people enroll only when they are looking for someone else to pay their claims - not as protection against risk - premiums soar.
To encourage Americans to enroll on Medicare promptly at their 65th birthday, Medicare created a surcharge structure for Part B (outpatient services) and Part D (prescription drugs). The Part B penalty is easy to avoid - just maintain approved group coverage from the month of your 65th birthday to the time that you enroll on Part B (which you must do within eight months of loss of approved group coverage). That's easy for consumers to track - either they are enrolled on approved coverage or they are not.
The Part D rules are different. Beginning with the month that you turn age 65, your commercial drug plan must be at least as rich as Medicare - a standard known as Medicare Creditable Coverage, or MCC. It does not matter whether your coverage is group (a requirement to avoid the Part B penalty) or nongroup. What matters is how rich the coverage is compared to Part D. You are assessed a permanent 1% surcharge to the National Base Beneficiary Premium (NBBP) for every month, beginning with the month of your 65th birthday, that your drug plan does not meet the MCC standard. If you enroll on Part D with 30 months of non-MCC commercial coverage, you pay a permanent 30% surcharge on the monthly $36.78 NBBP in 2025, or an additional $11.04 monthly ($132.48 annually). As with Part B, as the premium rises, the percentage surcharge is applied to a higher dollar figure, increasing the dollar amount of the penalty.
How do you know whether your plan meets the MCC standard? If you are age 64 or older, your plan sponsor (the employer under group coverage) sends a letter in October informing you. It also sends a report to the Centers for Medicare and Medicaid Services (CMS), the agency that oversees Medicare. If that report shows months that you were not covered by an MCC plan, the report is the source of calculating your penalty when you ultimately enroll on Medicare prescription-drug coverage.
Sharp Increases in Part D Premiums in 2026
Part D premiums are increasing dramatically next year. There are three distinct reasons.
Change in plan design. One of the Biden Administration's pieces of pandemic legislation redesigned the Part D benefit to cap out-of-pocket spending at $2,000 annually for most seniors. This change was hailed by the bill's supporters as a benefit for seniors with high drug utilization who sometimes paid more than double that amount under the old design. The change in the law did not, however, reduce the price of drugs (although another provision permits Medicare to negotiate the prices of a handful of high-volume drugs). Instead, this benefit redesign merely shifted existing costs from seniors with high utilization to all Part D enrollees. (For an analogy, consider states that mandate a ceiling of $35 on patient financial responsibility for insulin. The mandate does not reduce the price of insulin by a penny, but rather moves it from the patient to everyone else in the premium pool.)
Reduction in the Part D subsidy. The federal treasury subsidizes about 75% of the Part D premium (which averaged $36.50 in 2025, so taxpayers paid about $110 of the total cost of about $146). With the change in plan design, the Biden Administration created an additional subsidy to blunt the financial effect of what otherwise would have been a sharp premium increase on senior voters during an election season. That subsidy has been reduced, effectively shifting the premium shock from last year to this year.
Utilization. Part D is affected by the same forces that are driving commercial prescription-drug costs. Consumers are buying more and more expensive drug therapies to manage chronic conditions. Medicare does not yet cover GLP-1 drugs for weight loss alone, but Part D costs have increased with coverage of this expensive class of drugs to prevent heart attacks and strokes.
Managing Part D Costs before Medicare Enrollment
What can you do before you enroll on Medicare to manage your Part D premiums? Keep an eye on your prescription-drug coverage beginning with your first open enrollment before your 65th birthday. If your drug plan does not meet the MCC standard, you will begin to incur the penalty during the month of your 65th birthday. If you have a choice of coverage, you may want to switch to a plan whose prescription rider is as rich as or richer than Medicare's.
On the other hand, you may not want to move to another plan at the expense of continuing to fund your Health Savings Account. Imagine you work until age 70 with five years (60 months) of prescription-drug coverage that is not Medicare Creditable. You will pay a monthly 60% lifetime surcharge on the NBBP. At the same time, if you have self-only coverage, you will contribute about $27,500 more into your Health Savings Account ($5,300 this year, increased in this model by $1000 annually). At a 6% return, you will have increased your account balance by $32,000.
Let's say you dedicate that $32,000 to paying your Part D surcharge. I've modeled the surcharge at $500 during the first year, increasing by 5% annually. I've adjusted the investment return from 6% to a conservative 2%. In this scenario, the breakeven point (the age at which you would have been better off moving to an MCC plan at age 65 versus funding your Health Savings Account for five more years and paying the surcharges) is a month before your 107th birthday. With no earnings on your balance beginning at age 70, the breakeven point drops to eight months before your 100th birthday.
For perspective, 0.03% of Americans live to age 100.
Moral of the Story: If you are frightened by a surcharge labeled penalty, by all means switch your coverage at age 64. If you want to maximize your financial well-being, do the math. You may be better off continuing to fund your Health Savings Account and paying the surcharge with pre-tax withdrawals.
Managing Part D Costs in Retirement
If you begin to think about managing prescription-drug costs after you have enrolled on Part D, you are too late - just as you cannot start to think about post-employment income streams after you retire. But with proper planning, here is what you can do to minimize your prescription expenses:
Shop your prescription-drug coverage annually. Formularies (which drugs are covered, on which cost-sharing tiers) change annually. Your pharmacy can provide a print-out of all prescriptions that you purchased. Your trusted independent Medicare advisor (if you do not have one, find one!) can use this information to identify the best coverage for you.
Consider a Medicare Advantage (MA, or Part C) plan rather than purchasing coverage through Part A (inpatient) and Part B, and then choosing from a menu of Part D plans. Many Medicare Advantage plans impose no premiums beyond the mandatory Part B premium ($185 in 2025). This may be an attractive option - both medically and financially.
If you overfunded your Health Savings Account (contributions greater than distributions), you have money set aside to reimburse qualified medical expenses in retirement. Part D (and Part B, and, if applicable, Part A and Part C) premiums are a qualified expense. Congratulate yourself on proper planning.
If you led a healthy lifestyle or were born lucky in the genetic lottery, you may incur lower medical expenses - including prescriptions - in retirement. The growing prices of prescriptions are not relevant if you can avoid the drugs.
The Bottom Line
The survey cited above shows that 90% of seniors take at least one prescription drug. You may be lucky, but plan on being typical and not the exception. Too few workers think about medical expenses in retirement. As prescription drugs become a larger part of that expense, it behooves you to formulate and execute a plan long before you retire.
#Benegames #HSAWednesdayWisdom #HSAMondayMythbuster #HSAQuestionOfTheWeek #HealthSavingsAccount #HSA #TaxPerfect #ICHRAinsights #ICHRA #WilliamGStuart #HSAguru #HealthSavingsAcademy
HSA Wednesday Wisdom is published every other week, alternating with HSA Question of the Week. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.ost of drug coverage continues to rise. What can you do during your lifetime to manage this financial burden in retirement?
Drug costs continue to rise. That's no secret to anyone purchasing medical coverage. New, expensive therapies, more Americans with chronic conditions, and bad lifestyle choices are affecting demand for pharmaceutical solutions. According to [QuickStats: Percentage of Adults Aged ≥18 Years Who Took Prescription Medication During the Past 12 Months, by Sex and Age Group — National Health Interview Survey, United States, 2021 | MMWR] the federal Centers for Disease Control and Prevention, 65% of Americans age 18 or older were taking at least one prescription medication. For seniors, the figure approaches 90%.
Prescriptions are a financial burden both to patients and purchasers of medical coverage. This article focuses on the burden in retirement and the actions that you can take now and in the future to reduce the impact of prescriptions on your budget.
Medicare Penalties
Medicare imposes surcharges on Americans who do not enroll as of the month that they turn age 65. The reason is straightforward: Medicare, like private insurers, doesn't want healthy people to eschew coverage and the associated premiums, only to jump on board once they fear that their claims will be greater than their premiums. Insurance, properly understood, is protection against catastrophic, unforeseen risk. If people enroll only when they are looking for someone else to pay their claims - not as protection against risk - premiums soar.
To encourage Americans to enroll on Medicare promptly at their 65th birthday, Medicare created a surcharge structure for Part B (outpatient services) and Part D (prescription drugs). The Part B penalty is easy to avoid - just maintain approved group coverage from the month of your 65th birthday to the time that you enroll on Part B (which you must do within eight months of loss of approved group coverage). That's easy for consumers to track - either they are enrolled on approved coverage or they are not.
The Part D rules are different. Beginning with the month that you turn age 65, your commercial drug plan must be at least as rich as Medicare - a standard known as Medicare Creditable Coverage, or MCC. It does not matter whether your coverage is group (a requirement to avoid the Part B penalty) or nongroup. What matters is how rich the coverage is compared to Part D. You are assessed a permanent 1% surcharge to the National Base Beneficiary Premium (NBBP) for every month, beginning with the month of your 65th birthday, that your drug plan does not meet the MCC standard. If you enroll on Part D with 30 months of non-MCC commercial coverage, you pay a permanent 30% surcharge on the monthly $36.78 NBBP in 2025, or an additional $11.04 monthly ($132.48 annually). As with Part B, as the premium rises, the percentage surcharge is applied to a higher dollar figure, increasing the dollar amount of the penalty.
How do you know whether your plan meets the MCC standard? If you are age 64 or older, your plan sponsor (the employer under group coverage) send a letter in October informing you. It also sends a report to the Centers for Medicare and Medicaid Services (CMS), the agency that oversees Medicare. If that report shows months that you were not covered by an MCC plan, the report is the source of calculating your penalty when you ultimately enroll on Medicare prescription-drug coverage.
Sharp Increases in Part D Premiums in 2026
Part D premiums are increasing dramatically next year. There are three distinct reasons.
Change in plan design. One of the Biden Administration's pieces of pandemic legislation redesigned the Part D benefit to cap out-of-pocket spending at $2,000 annually for most seniors. This change was hailed by the bill's supporters as a benefit for seniors with high drug utilization who sometimes paid more than double that amount under the old design. The change in the law did not, however, reduce the price of drugs (although another provision permits Medicare to negotiate the prices of a handful of high-volume drugs). Instead, this benefit redesign merely shifted existing costs from seniors with high utilization to all Part D enrollees. (For an analogy, consider states that mandate a ceiling of $35 on patient financial responsibility for insulin. The mandate does not reduce the price of insulin by a penny, but rather moves it from the patient to everyone else in the premium pool.)
Reduction in the Part D subsidy. The federal treasury subsidizes about 75% of the Part D premium (which averaged $36.50 in 2025, so taxpayers paid about $110 of the total cost of about $146). With the change in plan design, the Biden Administration created an additional subsidy to blunt the financial effect of what otherwise would have been a sharp premium increase on senior voters during an election season. That subsidy has been reduced, effectively shifting the premium shock from last year to this year.
Utilization. Part D is affected by the same forces that are driving commercial prescription-drug costs. Consumers are buying more and more expensive drug therapies to manage chronic conditions. Medicare does not yet cover GLP-1 drugs for weight loss alone (Medicare Coverage of GLP-1 Drugs | Congress.gov | Library of Congress), but Part D costs have increased with coverage of this expensive class of drugs to prevent heart attacks and strokes.
Managing Part D Costs before Medicare Enrollment
What can you do before you enroll on Medicare to manage your Part D premiums? Keep an eye on your prescription-drug coverage beginning with your first open enrollment before your 65th birthday. If you drug plan does not meet the MCC standard, you will begin to incur the penalty during the month of your 65th birthday. If you have a choice of coverage, you may want to switch to a plan whose prescription rider is as rich as or richer than Medicare's.
On the other hand, you may not want to move to another plan at the expense of continuing to fund your Health Savings Account. Imagine you work until age 70 with five years (60 months) of prescription-drug coverage that is not Medicare Creditable. You will pay a monthly 60% lifetime surcharge on the NBBP. At the same time, if you have self-only coverage, you will contribute about $27,500 more into your Health Savings Account ($5,300 this year, increased in this model by $1000 annually). At a 6% return, you will have increased your account balance by $32,000.
Let's say you dedicate that $32,000 to paying your Part D surcharge. I've modeled the surcharge at $500 the first year, increasing by 5% annually. I've adjusted the investment return from 6% to a conservative 2%. In this scenario, the breakeven point, (the age at which you would have been better off moving to an MCC plan at age 65 versus funding your Health Savings Account for five more years and paying the surcharges) is a month before your 107th birthday. With no earnings on your balance beginning at age 70, the breakeven point drops to eight months before your 100th birthday.
For perspective, 0.03% of Americans live to age 100.
Moral of the Story: If you are frightened by a surcharge labeled penalty, by all means switch your coverage at age 64. If you want to maximize your financial well-being, do the math. You may be better off continuing to fund your Health Savings Account and paying the surcharge with pre-tax withdrawals.
Managing Part D Costs in Retirement
If you begin to think about managing prescription-drug costs after you have enrolled on Part D, you are too late - just as you cannot start to think about post-employment income streams after you retire. But with proper planning, here is what you can do to minimize your prescription expenses:
Shop your prescription-drug coverage annually. Formularies (which drugs are covered, on which cost-sharing tiers) change annually. Your pharmacy can provide a print-out of all prescriptions that you purchased. Your trusted independent Medicare advisor (if you do not have one, find one!) can use this information to identify the best coverage for you.
Consider a Medicare Advantage (MA, or Part C) plan rather than purchasing coverage through Part A (inpatient) and Part B, and then choosing from a menu of Part D plans. Many Medicare Advantage plans impose no premiums beyond the mandatory Part B premium ($185 in 2025). This may be an attractive option - both medically and financially.
If you overfunded your Health Savings Account (contributions greater than distributions), you have money set aside to reimburse qualified medical expenses in retirement. Part D (and Part B, and, if applicable, Part A and Part C) premiums are a qualified expense. Congratulate yourself on proper planning.
If you led a healthy lifestyle or were born lucky in the genetic lottery, you may incur lower medical expenses - including prescriptions - in retirement. The growing prices of prescriptions are not relevant if you can avoid the drugs.
The Bottom Line
The survey cited above shows that 90% of seniors take at least one prescription drug. You may be lucky, but plan on being typical and not the exception. Too few workers think about medical expenses in retirement. As prescription drugs become a larger part of that expense, it behooves you to formulate and execute a plan long before you retire.
#Benegames #HSAWednesdayWisdom #HSAMondayMythbuster #HSAQuestionOfTheWeek #HealthSavingsAccount #HSA #TaxPerfect #ICHRAinsights #ICHRA #WilliamGStuart #HSAguru #HealthSavingsAcademy
HSA Wednesday Wisdom is published every other week, alternating with HSA Question of the Week. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.