IRA Impact on Group Medicare Part D Plans
TL/DR –
The 2022 Inflation Reduction Act (IRA) includes changes to Medicare Part D to control prescription costs, cap retiree out-of-pocket expenses, and simplify coverage. However, this may pose financial challenges for public sector employers who sponsor group Medicare Part D plans. Under the IRA, changes to Part D include a simpler structure with a $2,000 cap on annual out-of-pocket costs, federal caps on prescription drug cost inflation, and the elimination of provisions like the coverage gap and the “true out of pocket” maximum.
The Inflation Reduction Act (IRA) of 2022 and Part D Changes
The Inflation Reduction Act (IRA) of 2022 implements major changes to Part D, focusing on controlling prescription expenses, creating a cap on retiree out-of-pocket costs, and streamlining coverage for Medicare recipients. These changes present both new opportunities and risks for public sector employers offering group Medicare Part D plans for retired employees.
A brief history of Part D
Established in 2006, Part D introduced a universal prescription drug benefit for senior citizens. However, it also introduced a coverage gap that left certain annual drug expenses uncovered, along with unlimited retiree out-of-pocket costs. Many of these issues were later addressed by the Affordable Care Act of 2010.
Employers were incentivized to retain their group plans by applying for Retiree Drug Subsidy (RDS) payments or adopting a group Part D plan, named an Employer Group Waiver Plan (EGWP). Those less committed to group plans opted for a Medicare exchange approach, allowing retirees to purchase individual medical insurance on a well-supported individual market.
Part D changes in 2025 with the IRA
Despite improvements, Part D’s complex terms leave retirees unclear about their maximum out-of-pocket costs. The new part D structure under the IRA, effective 2025, simplifies things with a $2,000 cap on enrollee’s annual out-of-pocket costs. Additionally, the federal government is stepping in for the first time to cap prescription drug cost inflation and negotiate drug prices.
Starting 2025, if Part D plans have a deductible, cost-sharing applies until the member has reached $2,000 in out-of-pocket costs, after which the plan pays 100% of the cost for the rest of the year.
Impact on Group Part D plan sponsors
EGWP sponsors, incentivized to retain their group plans, receive funding from various sources. However, changes under the IRA may negatively impact EGWP sponsors financially. Firstly, benefits will increase plan costs. Secondly, total funding received by EGWP sponsors is predicted to decline from 2025 onwards.
The IRA will also shift more risk to EGWP sponsors by significantly reducing reinsurance payments for high claims, while increasing fixed direct subsidy payments. The decrease in reinsurance payments may surpass the increase in direct subsidies, potentially leading to a net increase in plan costs per 2025 member.
To handle this potential cost increase, sponsors could either absorb the cost or pass it on to retirees via contribution increases or benefit cuts. However, a third option would be for employers to guide retirees toward individual Part D coverage through a marketplace exchange, with employer funding via a Health Reimbursement Arrangement (HRA).
Strengthening individual Medicare market and group plan sponsors
With the IRA, individual Part D plans will become substantially richer, potentially more generous than the prescription drug benefits provided to an organization’s active employees. Combined with Medicare Advantage and Medicare Supplement plans, the individual market for Medicare seniors offers comprehensive and popular healthcare benefit options enjoying substantial federal funding.
Suggested actions for plan sponsors
We recommend employers conduct a financial assessment to project the IRA’s impact on EGWP net plan costs, and to identify options for managing this cost increase. It’s also important to reassess the original rationale for maintaining group Medicare plans in light of the strengthening of the individual market and additional burdens of EGWP sponsorship. If these rationales no longer hold, explore the potential for converting current group coverage to an individual Medicare market exchange.
As federal government continues to expand coverage for individuals of all ages, the erosion in group retiree medical plan sponsorship will likely accelerate. Therefore, employers must consider their future role in retiree healthcare benefit financing and delivery.
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