Article Summary –
The Inflation Reduction Act (IRA) of 2022 brings major changes to Medicare’s Part D, aiming to control prescription costs, cap retirees’ maximum out-of-pocket costs, and simplify coverage. Starting in 2025, Part D will have a simpler structure, including a $2,000 cap on annual out-of-pocket costs, and the federal government will cap prescription drug cost inflation and negotiate drug prices for the first time.
2022 Inflation Reduction Act Brings Major Changes to Part D Prescription Costs
In 2022, the Inflation Reduction Act (IRA) introduced significant changes to Part D, with the aim of controlling prescription costs, capping maximum retiree out-of-pocket costs, and simplifying coverage for Medicare enrollees. Thousands of public sector employers who sponsor group Medicare Part D plans for their former employees must navigate new challenges and opportunities.
An Overview of Part D’s History
The original Part D design introduced in 2006 included a coverage gap (the “donut hole”), where benefits disappeared for a portion of an individual’s annual drug spending. These design limitations were mostly addressed through the 2010 Affordable Care Act’s expansion of benefits. Employers were given incentives to retain their group plans. One option was adopting a group Part D plan—an Employer Group Waiver Plan (EGWP), which provided richer prescription drug benefits.
Changes to Part D for 2025
With the IRA, a new Part D benefit approach will be implemented in 2025. This approach includes a simpler structure with a $2,000 cap on an enrollee’s annual out-of-pocket costs. Also, the federal government will cap prescription drug cost inflation and negotiate drug prices with pharmaceutical makers. The coverage gap and the “true out of pocket” (TrOOP) maximum will be eliminated. Part D plans may apply a deductible and cost-sharing until the member has reached $2,000 in out-of-pocket costs.
Impact on Group Part D Plan Sponsors
While Part D is becoming more appealing to Medicare-eligible seniors, IRA changes could adversely affect EGWP sponsors. The IRA will shift more risk to EGWP sponsors by reducing reinsurance payments for high claims and increasing direct subsidy payments. The decrease in reinsurance payments might drive an increase in net plan cost. Plan sponsors may need to absorb the cost increase or pass it on to retirees. Alternatively, they could direct retirees to obtain individual Part D coverage through a marketplace exchange, using employer funding through a Health Reimbursement Arrangement (HRA).
What Does a Stronger Individual Medicare Market Mean for Group Plan Sponsors?
At the start of Part D, some organizations retained group Medicare pharmacy benefits to fill the coverage gap. But the IRA has enriched individual Part D plans. The coverage gap is fully filled, and retiree out-of-pocket cost is capped at $2,000. All these changes strengthen the individual market and erode the original rationale for employers to continue group plans for their Medicare population.
What Should Plan Sponsors Do Next?
Employers should conduct a financial assessment to project the IRA impact on EGWP net plan cost, determine options for managing this cost increase and assess the rationale for maintaining group Medicare plans. If the original rationale no longer holds, considering a shift to an individual Medicare market exchange might be beneficial.
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