The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) created an outpatient prescription drug program, Medicare Part D, for Medicare beneficiaries. The program began on January 1, 2006 and delivers subsidized prescription drug coverage through Medicare-approved private insurers.

While the MMA created a standard benefit, most plans have their own benefit structure and differ greatly. Generally, beneficiaries pay a co-payment or coinsurance for each prescription for the first $2,250 in total drug spending. Following, they reach a benefit gap ("donut hole"), in which they are responsible for all of their drug costs, unless they are enrolled in a plan that fills the gap, until they have reached $5,100 in total drug spending. Beneficiaries then reach catastrophic coverage, during which beneficiaries are responsible for 5 percent of their drug costs.

The Medicare drug benefit also includes subsidies for low-income Medicare beneficiaries. Those below 135 percent of poverty pay no premium, no deductible, pay no more than $5 for each prescription, and do not face a "donut hole." Those between 135 and 150 percent of poverty pay a sliding scale premium, $50 deductible, 15 percent coinsurance for each prescription, and avoid the "donut hole."

Dual eligibles, those eligible for both Medicare and Medicaid, previously had their drug coverage provided by Medicaid. The MMA switched the dual eligibles to the new Medicare drug benefit and now they receive subsidized drug coverage through one of the Medicare prescription drug plans. Medicaid continues to wrap around Medicare’s benefits for the dual eligibles. While they are no longer providing prescription drug coverage to the dual eligibles, the states are responsible for payments to the federal government to provide for the dual eligibles’ drug coverage, called the "clawback."