How to Avoid the Medicare Part D Late Enrollment Penalty

Did you know that Medicare Part D (prescription drug coverage) has a late enrollment penalty? If this penalty gets applied to your premiums, you'll have to keep paying it for as long as you have Part D coverage, which is usually the rest of your life—it can really add up.

This article will explain the basics of Part D and the Part D late enrollment penalty. You'll learn how the penalty is calculated, when it applies, and how to avoid it.

Medicare Part D, an outpatient prescription drug benefit, is offered to everyone with Medicare. To get Part D drug coverage, you have to join a plan run by a private insurance company that has been approved by Medicare (stand-alone Part D coverage) or enroll in a Medicare Advantage plan that includes drug coverage (most Medicare Advantage plans do include Part D coverage).

This is because Original Medicare (also known as Traditional Medicare, ie Medicare Parts A and B, run by the federal government) does not include coverage for outpatient prescription drugs.

How to Join, Switch, or Drop a Medicare Drug Plan

Medicare has specific rules about when and how you can join, switch, or drop a Medicare Part D drug plan. You can join a Part D drug plan:

• When you first become eligible for Medicare due to age (the seven-month period that begins three months before the month you turn 65, includes the month you turn 65, and ends three months after the month you turn 65).
• If you get Medicare due to a disability, you also have a seven-month window during which you can enroll in Part D, and it's centered around the month that you become eligible for Medicare coverage as a result of your disability. That happens after you've been receiving Social Security disability payments for 24 months, so the enrollment window for Part D starts three months before your 25th month of disability, and ends three months after it. If you've been diagnosed with ALS or end-stage renal disease, you don't have to wait 24 months for Medicare, and you'll also have a chance to enroll in Part D once you're eligible for Medicare.

You can join, switch, or drop a Medicare Part D drug plan:

• Between October 15 and December 7 each year, for coverage effective the first of the following year.
• Anytime, if you qualify for Extra Help from Medicare, or are dual-eligible for both Medicare and Medicaid.
• Between January 1 and March 31, you can switch from a Medicare Advantage plan to Original Medicare, and you can purchase a Part D plan to supplement the Original Medicare coverage. Or you can switch from one Medicare Advantage plan to a different one, which will likely include Part D coverage. This Medicare Advantage Open enrollment period does not grant as much flexibility as the annual election period in the fall, as it does not allow a person with stand-alone Part D coverage to switch to another Part D plan, nor does it allow a person without Part D coverage to newly enroll (unless they're enrolled in a Medicare Advantage plan that doesn't include Part D coverage, and they choose to switch to an Advantage plan that does include Part D coverage). In order to take advantage of this enrollment window, you must already be enrolled in Medicare Advantage.

In most cases, you can't change your Part D plan mid-year; the plan you select during open enrollment or your initial enrollment period is the plan you'll have until the end of the year, assuming you continue to pay your premiums (your plan can drop you if you fail to pay premiums). However, you may be able to join, switch, or drop your Medicare drug plans at other times:

• If you move out of your Part D plan’s service area, such as relocating to another state.
• If you lose other creditable prescription drug coverage (such as an employer or retiree plan that stops covering you).
• If you live in an institution such as a nursing home or other long-term care facility.

The Medicare Part D Late Enrollment Penalty

Medicare’s late enrollment penalty is an amount that is added to your Part D monthly premium. You may owe a late enrollment penalty due to the one of the following:

• You didn’t join a Medicare Part D drug plan when you were first eligible for Medicare, and you didn’t have other creditable prescription drug coverage.
• You didn’t have Medicare prescription drug coverage or other creditable prescription drug coverage for 63 days or more in a row.

You can avoid paying a penalty by:

Joining a Part D drug plan when you’re first eligible for Medicare.

Not going 63 days or more in a row without a Medicare Part D drug plan or other creditable coverage. Creditable prescription drug coverage could include drug coverage from a current or former employer or union, TRICARE, Indian Health Service, Department of Veterans Affairs, or other health insurance coverage. Your plan will tell you each year if your drug coverage is creditable coverage. This information may be sent to you in a letter or included in a newsletter from the plan. Keep this information, because you may need it if you join a Medicare drug plan later.

Making sure to tell your plan about any drug coverage you had if they ask about it: When you join a plan, and they believe you went at least 63 days in a row without other creditable prescription drug coverage, they will send you a letter. The letter will include a form asking about any drug coverage you had. Complete the form. If you don’t tell the plan about your creditable coverage, you may have to pay a penalty.

The Penalty Can Add Up

How much the late enrollment penalty will cost you depends on how long you did not have creditable prescription drug coverage. The late enrollment penalty is calculated by multiplying 1% of the “national base beneficiary premium” by the number of full months that you were eligible for but didn’t join a Medicare drug plan and went without other creditable prescription drug coverage.

That amount is then rounded to the nearest $0.10 and added to your monthly Part D premium. Since the “national base beneficiary premium” changes each year, the penalty amount will also change from one year to the next. You'll generally have to pay this penalty for as long as you have a Medicare drug plan.

Example 1: Mrs. Jones did not join a Part D plan when she was first eligible (in June 2006). She joined a Medicare drug plan during the 2009 enrollment period, for an effective enrollment date of January 1, 2010. Since Mrs. Jones did not join when she was first eligible and went without other creditable drug coverage for 43 months (June 2006–December 2009), she was charged a monthly penalty of $13.90 in 2011, when the national base beneficiary premium was $32.34 ($32.34 x 0.01 x 43 = $13.90) in addition to her plan’s monthly premium.

By 2017, the national base beneficiary premium had increased to $35.63, so the penalty for Mrs. Jones had grown to $15.32 per month ($35.63 x 0.01 x 43 = $15.32).

But the national base beneficiary premium was a little lower by 2020, at $32.74. So in 2020, her penalty amount was $14.08 per month ($32.74 x 0.01 x 43). And it had increased only slightly by 2022, to $33.37, meaning that her penalty amount will be $14.35 per month ($33.37 x 0.01 x 43).

Even with the lower penalty amount in recent years, if Mrs. Jones continues with her Part D drug plan for ten years, her penalty will cost her over $1,700.

Example 2: Mr. Smith did not join a Part D plan when he was first eligible (in February 2010). He joined a Medicare drug plan during the 2010 enrollment period (November 15—December 31, 2010), for an effective enrollment date of January 1, 2011.

Since Mr. Smith did not join when he was first eligible and went without other creditable drug coverage for 11 months (February 2010-December 2010), he was charged a monthly penalty of $3.56 in 2011 ($32.34 x.01 x 11 = $3.56) in addition to his plan’s monthly premium.

By 2017, Mr. Smith's penalty (assuming he still had Medicare Part D coverage) had grown to $3.92 per month, in addition to his plan's regular premium ($35.63 x 0.01 x 11 = $3.92). 

In 2020, since the national base beneficiary premium was a little lower, his penalty amount was $3.60 per month ($32.74 x 0.01 x 11). And for 2022, it's $3.67 per month ($33.37 x 0.01 x 11). His penalty is a lot smaller than the penalty Mrs. Jones has to pay, because he was only 11 months late in enrolling, instead of 43 months. But even a few dollars a month adds up over the rest of a person's life.

Continuous Drug Coverage: More Than Just Avoiding a Penalty

When you're first eligible for Medicare, you can pick from among any of the Part D plans available in your area (or you can select a Medicare Advantage plan that includes Part D coverage).

If you're perfectly healthy and not taking any prescriptions, you might be tempted to skip Part D in order to avoid the monthly premium. As you can see from the penalty examples above, that could end up being a costly mistake if you later have to pay a late enrollment penalty for the rest of your life.

But it's also important to understand that skipping Part D when you're first eligible—assuming you don't have other creditable coverage in place—could put you in a more immediate bind if you end up being diagnosed with a condition that requires costly medications.

That's because you generally won't be able to sign up for Part D outside of the annual enrollment window each fall. So let's say you skip Part D initially, and then a few years later, in February, you get diagnosed with MS or cancer or rheumatoid arthritis or some other condition that requires expensive medications.

Yes, you're going to have to pay the Part D late enrollment penalty once you eventually enroll. But the more pressing concern is the fact that you will have to wait until the following January to have outpatient drug coverage. You'll be able to sign up in the fall, and your plan will take effect in January, but you'll be on your own to pay for your medications for 11 months.

Instead of skipping Part D altogether if you're not taking any medications when you enroll in Medicare, a wiser choice is to just choose one of the least expensive plans available in your area (generally under $10/month for a stand-alone Part D plan; there are often free options for Medicare Advantage plans with Part D coverage, although it's important to understand the pros and cons of choosing an Advantage plan).

You'll be able to change to a more expensive, more comprehensive plan during the fall open enrollment period in a future year, if necessary. But even the least expensive Part D plans have to follow the government's rules for maximum deductibles and catastrophic drug coverage.

And although each plan has its own covered drug list (formulary), there's an appeals process that you and your healthcare provider can use if the plan won't cover a drug you need. In short, it's far better to have even the cheapest Part D plan than no drug coverage at all.

Summary

If you don't enroll in Medicare Part D (drug coverage) when you're first eligible, and don't have creditable coverage from another source, you'll face a late enrollment penalty when you eventually do sign up for Part D. The penalty amount is 1% of the national base beneficiary premium (which changes each year), multiplied by the number of months you went without drug coverage after you were eligible for Part D. This amount is added to the monthly premium of the Part D plan you choose, and you'll continue to pay it for the rest of the time you have Part D (generally, for the rest of your life).

To avoid the penalty, you need to maintain continuous drug coverage the whole time you're eligible for Medicare. This means enrolling in Part D as soon as you're eligible, or maintaining creditable drug coverage from another source. This also helps to ensure that you won't find yourself in need of medications and having to wait months until the next enrollment opportunity.

A Word From Verywell

Original Medicare doesn't cover prescriptions, which means you need a private plan for that (either a stand-alone Part D plan, or a Medicare Advantage plan that has integrated Part D coverage) unless you have creditable drug coverage from another source.

Going without drug coverage might seem like a good idea if you don't take any medications when you first enroll in Medicare. But that's likely to be a bad choice in the long run. It would leave you without drug coverage (and there's no option to enroll outside of the annual enrollment window) and on the hook for a late enrollment penalty when you do eventually need Part D coverage.

If you don't have any prescription needs when you first enroll in Medicare, a much better option is a low-cost Part D plan (or even a free Medicare Advantage plan that includes Part D coverage). You can always switch to a more robust Part D plan during a future open enrollment period, but you'll have continuous drug coverage and you won't have to contend with the late enrollment penalty.