IRA Influence on Group Medicare Part D Plans
TL/DR –
Passed in 2022, the Inflation Reduction Act (IRA) includes significant changes to Part D, which is designed to control prescription costs, cap maximum retiree out-of-pocket costs, and simplify coverage for Medicare enrollees. These changes could pose new risks and opportunities for public sector employers who sponsor Medicare Part D plans for their former employees. Starting in 2025, Part D plans will have a simpler structure, including a $2,000 cap on annual out-of-pocket costs for enrollees, and the federal government will, for the first time, cap prescription drug cost inflation and negotiate drug prices with pharmaceutical manufacturers.
Understanding the Inflation Reduction Act’s Impact on Medicare Part D
The Inflation Reduction Act (IRA) of 2022 was passed with significant changes to Part D, aimed at controlling prescription costs, capping retiree maximum out-of-pocket costs, and simplifying coverage. This act affects retirees, public sector employers, and thousands who sponsor group Medicare Part D plans for their former employees. Let’s discuss how this will impact public sector plan sponsors and healthcare benefits for retirees.
Historical Background of Part D
Part D, introduced in 2006, was the first universal prescription drug benefit for American senior citizens. It included a coverage gap (the “donut hole”) and unlimited retiree out-of-pocket costs. Several of these limitations were addressed by the 2010 Affordable Care Act expansion. Employers who sponsored group prescription drug benefits for their Medicare retirees were given incentives to retain their group plans using the Retiree Drug Subsidy (RDS) payments or the Employer Group Waiver Plan (EGWP).
Changes to Part D in 2025
The IRA will introduce a simpler Part D benefit structure in 2025, including a $2,000 cap on enrollee’s annual out-of-pocket costs. The federal government will cap prescription drug cost inflation and negotiate drug prices with pharmaceutical makers. It removes provisions like the coverage gap and the “true out of pocket” (TrOOP) maximum, making the program much easier to understand.
Effects on Group Part D Plan Sponsors
While Part D is becoming more attractive to Medicare-eligible seniors, IRA changes may be financially challenging for EGWP sponsors. Richer benefits will increase plan costs and total funding received by EGWP sponsors is likely to decline. To cope with these changes, sponsors can absorb the cost increase or pass it on to retirees. Alternatively, sponsors can direct retirees to obtain individual Part D coverage through a marketplace exchange, with employer funding through a Health Reimbursement Arrangement (HRA).
Strengthening Individual Medicare Market
With the IRA, individual Part D plans will become substantially richer and more generous than some organization’s active employees’ prescription drug benefits. With the coverage gap filled and retiree out-of-pocket cost capped at $2,000, the individual market for Medicare seniors provides universal access to comprehensive and popular healthcare benefit options.
Next Steps for Plan Sponsors
Employers should assess IRA’s impact on their EGWP, determine options for managing cost increase, and reassess the rationale for maintaining group Medicare plans. If the original rationale no longer holds, they should explore the feasibility of converting current group coverage to an individual Medicare market exchange.
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