A February 2025 study published in JAMA Health Forum has exposed significant overpayment problems within Medicare Part D, revealing how pharmacy benefit managers (PBMs) are inflating costs for retirees far beyond what drugs actually cost to acquire. While the specific $3,400 annual overpayment figure referenced in recent discussions appears to relate to broader out-of-pocket healthcare spending rather than Part D premiums alone, the underlying research confirms that retirees are indeed paying substantially more than necessary for their medications. The study found that generic drugs are being reimbursed by PBMs at rates up to 30 times higher than acquisition costs, directly inflating what seniors pay at the pharmacy counter. Recent data from HealthView Services shows that 2025 Medicare Part D premiums averaged $34 to $46 per month—translating to roughly $408 to $552 annually for basic coverage.
However, when you factor in deductibles, copayments, and coinsurance, the true cost burden becomes much higher. A single retiree paying $450 annually in premiums, plus a $500 deductible, plus significant copayments for chronic medications (like the imatinib example in the JAMA study where patients faced $3,780 reimbursement rates for a generic drug) quickly accumulates thousands of dollars in annual out-of-pocket costs. The problem extends beyond premium increases. What makes this particularly troubling for retirees is that these inflated reimbursement rates directly affect their cost-sharing percentages. Since copayments and coinsurance are often calculated as a percentage of what the pharmacy is being reimbursed—not what the drug actually costs—an artificially high PBM reimbursement rate means seniors pay more, even when they have insurance that’s supposed to be protecting them.
Table of Contents
- Why Are Medicare Part D Costs Rising Faster Than Inflation?
- The Hidden Cost of Deductibles and Cost-Sharing in Part D Plans
- How PBM Practices Directly Impact Your Medication Costs
- What You Can Do to Reduce Your Medicare Part D Costs
- Understanding the Coverage Gap (The “Donut Hole”) and Its Impact
- The Role of Specialty Drugs and Their Outsized Impact on Total Costs
- The Future of Medicare Part D and What Changes Are Coming
- Conclusion
- Frequently Asked Questions
Why Are Medicare Part D Costs Rising Faster Than Inflation?
Medicare Part D premiums surged 33 to 41 percent between 2023 and 2024, far outpacing general inflation rates during the same period. This dramatic increase was driven by multiple factors: rising drug prices set by manufacturers, increasing prevalence of expensive specialty drugs, and administrative costs that have continued to climb. States with the highest concentration of retirees saw even steeper increases, with five states averaging 23 percent premium hikes for 2025 alone. The root cause isn’t simply that medications themselves cost more to develop or produce. The JAMA Health Forum study illuminated a critical structural problem: pharmacy benefit managers operate as intermediaries between insurers and pharmacies, and they’ve created a system where reimbursement rates bear almost no relationship to actual drug acquisition costs.
A generic drug that costs pharmacies $126 per 30-day supply was reimbursed at an average rate of $3,780 according to the study—a markup that gets passed along to both insurers and patients through higher premiums and cost-sharing. This means when you see your Part D premium increase by $100 or more year-over-year, you’re not just paying for higher drug prices. You’re also funding the profit margins of PBMs that have systematized overcharging for generic medications. The February 2025 JAMA study, which was corrected in April 2025, provided comprehensive documentation of this practice across thousands of generic drugs. Retirees and their families need to understand that PBM practices directly affect their own out-of-pocket costs.
The Hidden Cost of Deductibles and Cost-Sharing in Part D Plans
Most Medicare part D plans include a deductible—money you must pay out of pocket before your insurance coverage kicks in. For 2025, standard deductibles can reach $545 or higher, meaning many retirees immediately face hundreds of dollars in costs before they see any benefit from their drug insurance. Even after meeting the deductible, you’re typically responsible for a percentage of the drug cost (coinsurance) or a fixed amount per prescription (copayment). The danger here is that these copayments and coinsurance amounts are calculated based on the PBM’s inflated reimbursement rates, not the drug’s actual cost. The JAMA study demonstrated this clearly with the imatinib example: if a patient’s plan requires 25 percent coinsurance on a generic drug, and the PBM is reimbursing at $3,780 when the actual cost is $126, the patient pays $945 instead of roughly $32.
This is not a hypothetical scenario—it’s documented across multiple generic medications where acquisition costs represent only a small fraction of what insurers and patients are charged. A critical limitation to understand: even when patients find lower-cost pharmacies or use discount programs, they often can’t opt out of their Part D plan’s pricing structure for prescriptions filled through insurance. The plan’s negotiated rates and cost-sharing percentages apply regardless. This means retirees are essentially locked into paying whatever their PBM has negotiated, even when they could buy the same medication cheaper without insurance. Some retirees have discovered they actually save money by paying cash for generics at discount retailers rather than using their Part D coverage—a troubling reality that highlights how broken the current system has become.
How PBM Practices Directly Impact Your Medication Costs
Pharmacy benefit managers control what medications are available, at what copayment tiers they’re placed, and what rates they reimburse pharmacies for filling prescriptions. Despite claiming to negotiate lower prices on behalf of insurers, the February 2025 JAMA Health Forum study revealed that PBMs frequently reimburse pharmacies at rates wildly exceeding what the drugs cost to acquire. This creates a perverse incentive structure: the higher the PBM’s reimbursement to the pharmacy, the more the PBM can claim they’ve negotiated a “good deal” while simultaneously charging insurers and patients higher amounts. Consider a concrete example from the research: a 30-day supply of generic imatinib (a cancer medication many retirees take) has an acquisition cost of $126. The average PBM reimbursement was $3,780—nearly 30 times the actual cost. A Medicare beneficiary with coinsurance responsibility for this drug would pay based on that inflated $3,780 figure, not the $126 it actually costs.
If their plan requires 25 percent coinsurance after the deductible, they’d pay $945 instead of roughly $32. Over the course of a year, a retiree taking multiple medications could easily face thousands in additional costs due solely to these inflated reimbursement practices. The research also showed that this practice was corrected and reissued in April 2025, suggesting some acknowledgment of the severity of these findings. However, the fundamental business model that created this situation remains unchanged. Until Medicare policies directly address how PBMs can charge reimbursement rates that are 30 times higher than acquisition costs, retirees will continue bearing the burden of this inflated system. The solution isn’t simple—PBMs are deeply embedded in how Medicare Part D operates—but transparency about these practices is the first step.
What You Can Do to Reduce Your Medicare Part D Costs
The most practical first step is to shop among Part D plans every single year during the annual enrollment period (October 15 to December 7). Do not assume your current plan remains the best option. Drug formularies change, copayments shift between tiers, and some plans may add or remove medications from coverage. A plan that cost $450 annually this year might cost $600 next year, while a competitor’s plan drops to $380. The difference between the cheapest and most expensive plans for your specific medications can exceed $2,000 per year. Use the Medicare Plan Finder tool to compare plans based on your actual medications rather than choosing based on premium alone.
Enter the specific drugs you take, and the tool will show your estimated annual out-of-pocket costs for each plan. This is crucial because a slightly cheaper premium might come with higher copayments for your specific medications, making it more expensive overall. Second, consider using GoodRx, RxSaver, or similar discount programs for medications where your copayment seems unusually high compared to the cash price. It’s frustrating that this is necessary—you’re paying for insurance but often find you’d pay less without it—but the math sometimes works in your favor, particularly for generics. A practical warning: if you go several months without Part D coverage, you may face a penalty when you finally do enroll (approximately 1 percent of the national base beneficiary premium amount for each month you were uninsured, applied for the life of your coverage). This is why some retirees take the frustrating step of maintaining Part D coverage even when the cash prices are cheaper—the long-term penalty makes it more expensive to go uninsured. Generic medications often have the biggest pricing disparities between what PBMs reimburse and actual costs, so asking your pharmacist whether a cash price exists before running the prescription through insurance is always worth doing.
Understanding the Coverage Gap (The “Donut Hole”) and Its Impact
Medicare Part D includes a coverage gap known as the “donut hole.” After you and your plan spend $5,850 combined on covered drugs in 2025, you enter this gap and become responsible for a higher percentage of drug costs. Once your out-of-pocket spending reaches $7,050, you exit the gap and enter catastrophic coverage, where Medicare covers 80 percent and you pay 20 percent. For retirees taking expensive or multiple medications, the gap can represent a critical financial squeeze—months when medications that cost $10 per month with insurance might cost $75 when you’re in the coverage gap. The coverage gap has been closing gradually due to the Inflation Reduction Act, with the government covering more of the gap costs going forward. However, limitations remain.
While Medicare has increased the discount on brand-name drugs within the gap from 50 percent to 55 percent for 2025, generic drugs still face higher cost-sharing within the gap. Additionally, the gap spending threshold of $5,850 is where your combined Part D deductible, copayments, and coinsurance start counting. If you have a $545 deductible, then pay copayments on four medications for the rest of the year, you can reach the gap threshold relatively quickly—particularly if any of those medications are expensive specialty drugs or branded drugs. A critical limitation: if you qualify for Extra Help (also called Low-Income Subsidy), the coverage gap may not apply to you, but the application process requires navigating Social Security or Medicare directly. Many eligible retirees never apply because they don’t realize they qualify. If you have limited income—roughly under $20,000 annually for single individuals or $27,000 for married couples—you should check whether you qualify for Extra Help, which can cover your deductible, premium, and reduce your cost-sharing significantly.
The Role of Specialty Drugs and Their Outsized Impact on Total Costs
Specialty drugs—medications for conditions like cancer, rheumatoid arthritis, hepatitis C, and other complex diseases—have become increasingly common among Medicare beneficiaries, and they create a disproportionate impact on Part D costs and out-of-pocket spending. While specialty drugs represent a minority of all prescriptions, they account for a substantial portion of total drug spending. A single month’s supply of some specialty drugs can exceed $2,000, placing retirees immediately into the coverage gap with no financial protection. For many retirees, the existence of a specialty drug on their medication list fundamentally changes the financial calculus of Part D.
A senior managing three chronic conditions with low-cost generic medications might spend $1,200 out-of-pocket annually. Add a specialty drug for a new diagnosis, and that annual total could jump to $4,000 or more. The 2025 data showing 23 percent premium increases in high-retiree states partially reflects the increasing prevalence of specialty drugs and their costs. If you or your spouse were recently prescribed a specialty medication, immediately run that scenario through the Medicare Plan Finder to identify which Part D plans offer the best coverage and cost-sharing structure for your new medication.
The Future of Medicare Part D and What Changes Are Coming
The legislative landscape around Medicare Part D is beginning to shift, though changes take time to implement. The Inflation Reduction Act includes provisions to negotiate drug prices, and the first round of negotiations began in 2023, with additional drugs included in subsequent years. However, these negotiations currently exclude most generic drugs and focus on a limited list of high-cost medications. The JAMA study from February 2025 has intensified pressure on lawmakers to address PBM practices more directly, including the ability to reimburse at rates so far above acquisition costs.
Several policy changes are being discussed: limitations on what PBMs can charge pharmacies relative to acquisition costs, increased transparency requirements about how PBMs calculate reimbursement rates, and potential expansion of Medicare’s negotiating power. However, these changes face resistance from the pharmaceutical and pharmacy benefit management industries, which have substantial lobbying presence. For retirees planning their healthcare finances, it’s important to prepare for the possibility that Medicare Part D remains largely unchanged structurally for the next several years, even as incremental reforms chip away at the worst practices. The immediate priority should be mastering the current system—using Plan Finder, comparing plans annually, and using discount programs where they make financial sense—rather than waiting for legislative fixes that may take years to implement.
Conclusion
While the exact $3,400 annual overpayment figure may represent a broader measure of Medicare out-of-pocket costs rather than Part D premiums alone, the underlying research from the February 2025 JAMA Health Forum study conclusively demonstrates that retirees are indeed overpaying substantially for their medications. Pharmacy benefit managers’ practice of reimbursing pharmacies at rates 30 times higher than acquisition costs directly inflates the copayments and coinsurance that seniors pay. Combined with rising premiums (up 33-41 percent in recent years), deductibles, and coverage gaps, the total financial burden of Medicare Part D has become substantial for most retirees—often exceeding several thousand dollars annually. The most actionable step you can take today is to review your current Part D plan and compare alternatives during the annual enrollment period using Medicare’s Plan Finder tool.
Enter your specific medications to see actual out-of-pocket cost estimates, and don’t assume your current plan remains optimal. If you find that cash prices for generics are cheaper than your copayments, ask your pharmacist before running prescriptions through insurance. Finally, if you have limited income, investigate whether you qualify for Extra Help, which can dramatically reduce your drug costs. The current system is complex and often works against retirees’ financial interests, but informed choices can substantially reduce what you pay.
Frequently Asked Questions
What is the difference between Medicare Part D premiums and Part D out-of-pocket costs?
Part D premiums are the monthly fees you pay to have the insurance (averaging $34-46 monthly in 2025). Out-of-pocket costs include the deductible, copayments, and coinsurance you pay when you actually fill prescriptions. Many retirees spend far more on copayments and deductibles than they do on premiums.
Why do some retirees pay cash instead of using their Part D insurance?
Because of how PBMs reimburse pharmacies at inflated rates, the copayment amount (which is often based on that inflated reimbursement rate) sometimes exceeds what you’d pay as a cash customer. This is particularly common with generic drugs, where the reimbursement-to-acquisition cost ratio is most distorted.
When can I switch Medicare Part D plans, and how often should I review my coverage?
You can switch plans during the annual enrollment period from October 15 to December 7 each year. You should review your coverage at least annually, particularly if you’ve had a change in your medications or health conditions, or if your current plan has announced premium or copayment increases.
What happens if I skip Medicare Part D coverage because premiums are expensive?
If you go more than 63 days without Part D coverage and later enroll, you’ll face a late enrollment penalty of approximately 1 percent of the national base beneficiary premium amount for each month you were uninsured. This penalty applies for the life of your coverage, making it financially penalizing to skip coverage entirely.
Does the coverage gap (donut hole) apply to everyone, and is it changing?
The coverage gap applies to most Part D beneficiaries but not those receiving Extra Help (Low-Income Subsidy). The gap is gradually closing due to the Inflation Reduction Act, with improved discounts on brand-name drugs in the gap for 2025, but it remains a significant financial challenge for retirees taking expensive medications.
Where can I find information about generic drug prices and whether cash is cheaper than my copayment?
Use GoodRx, RxSaver, or similar discount programs to check cash prices. Ask your pharmacist to compare your copayment with the cash price before running the prescription through insurance. Medicare’s Plan Finder tool at Medicare.gov can also show estimated costs for your specific medications across different plans.