The Inflation Reduction Act of 2022 made significant design changes to Medicare Part D effective January 1, 2025. The changes will cause an increase in the actuarial value of Medicare Part D coverage, which will impact whether a group health plan's prescription drug coverage qualifies as creditable coverage. Plan sponsors should consult with their carrier or third-party administrator to determine whether their prescription drug coverage will require any enhancements to qualify as creditable coverage in 2025.

Background

Group health plans that provide prescription drug coverage to Medicare-eligible individuals must determine whether the coverage is "creditable." Prescription drug coverage is "creditable" if the actuarial value of the coverage equals or exceeds the actuarial value of standard Medicare Part D prescription drug coverage. The plan's insurance carrier or third-party administrator will generally make this determination. Employer plans must notify Medicare-eligible individuals and CMS as to whether the coverage is creditable. Medicare-eligible individuals who enroll in their plan sponsor's creditable prescription drug coverage may delay enrollment in Medicare Part D without incurring premium penalties for delayed enrollment.

Changes to Medicare Part D

The Inflation Reduction Act makes significant changes to Medicare Part D to provide financial relief for Medicare beneficiaries by expanding benefits and lowering drug costs. In 2025, the changes will increase the actuarial value of the coverage. Some of these changes are described below.

Out-of-Pocket Limit. The maximum out-of-pocket limit will decrease from $8,000 to $2,000.

Manufacturer Discount Program. Medicare Part D will add a manufacturer discount program. The program will eliminate the current coverage gap discount program and the coverage gap phase, leaving only the deductible phase, the initial coverage phase, and the catastrophic phase. Note: A Medicare Part D beneficiary moves through "phases" of coverage. The cost of drugs varies by phase.

Catastrophic Phase. CMS will significantly reduce the amount it reimburses for drugs when a Medicare Part D beneficiary is in the catastrophic phase. Medicare Part D plan sponsors will make up some of the difference by paying an increased portion of coverage for these drugs.

Conclusion

Changes to Medicare Part D coverage in 2025 will increase the actuarial value of coverage. Accordingly, prescription drug coverage in 2024 that is as rich as or only slightly richer than Medicare Part D may not be creditable in 2025. Plan sponsors should address this issue with their carrier or third-party administrator and determine whether changes will be required to keep the prescription drug coverage creditable in 2025.