Plan sponsors that offer retiree health benefits will need to take a close look at that coverage in 2024 to ensure that it reflects new changes coming in 2025. Plan sponsors also may want to consider whether a Medicare Advantage program might be the right solution for their retirees.

Overview

Plan sponsors that offer retiree coverage understand that federal government support for retiree benefits is available — either through the Retiree Drug Subsidy (RDS) program, which directly reimburses plan sponsors for prescription drug expenses, or through an EGWP, which is a form of a Part D plan offered by an employment-based plan.

In 2025, the amount of federal subsidies available in the RDS program versus an EGWP prescription drug plan (or Medicare Advantage prescription drug plan) will change dramatically. Consequently, plan sponsors will need to take a close look to ensure that they know about the Inflation Reduction Act changes and are offering the most cost-effective benefit to plan retirees. Refer to our chart summarizing the changes.

What’s changing?

The Inflation Reduction Act enacted significant changes to the Medicare prescription drug program. While some changes took effect in 2023 and 2024, the majority are effective in 2025.

In 2024, the Part D benefit no longer requires retirees to pay cost sharing during the catastrophic phase of the benefit. This means that retirees who have very high drug costs will not be responsible for paying for them once they reach the catastrophic limit. The Inflation Reduction Act also eliminated cost sharing for adult vaccines under Part D and put a cap of $35 per month on patient costs for insulin.

For 2025, the Inflation Reduction Act will make further changes to the Part D prescription drug program, including reducing the annual out-of-pocket amount payable by patients to $2,000. It also eliminates the coverage gap phase of the benefit; meaning the prescription drug benefit will now have three phases instead of four: the deductible phase, the initial coverage phase and the catastrophic phase.

Sponsors of EGWPs will be able to design benefits as they feel is appropriate for their group within the deductible and initial coverage phases but must maintain the same catastrophic phase as commercial Part D plans.

The Inflation Reduction Act also repealed the existing Coverage Gap Discount Program and established a new Manufacturer Discount Program. Under the new Discount Program, participating manufacturers are required to provide discounts on certain drugs (e.g., brand drugs, biologics and biosimilars) both in the initial coverage phase and in the catastrophic coverage phase of the Part D benefit. Certain discounts will be given during a multi-year phase-in period.

Additionally, the Inflation Reduction Act changed the amount that Medicare beneficiaries, plan sponsors, manufacturers and the federal government pay throughout the benefit. Payments in the catastrophic phase by the federal government to Part D plans (federal reinsurance) will decrease, with plans picking up a larger share of the costs during the period after which an individual has met their out-of-pocket costs.

Further affecting beneficiary costs, Medicare beneficiaries will be allowed to elect to smooth out-of-pocket costs over the year, instead of paying large amounts in a single month. Finally, the Inflation Reduction Act expanded income eligibility for benefits under the Medicare Part D Low-Income Subsidy Program.

Guidance published in an Advance Notice

CMS published an Advance Notice on January 31, 2024, which also includes detailed guidance on the Part D Redesign for 2025. The guidance provides additional information on how the new benefit changes will affect EGWPs.

First, the type of costs that count toward a beneficiary’s True Out of Pocket (TrOOP) costs is changing. For 2025, previously excluded supplemental benefits provided by EGWPs will count toward a beneficiary’s TrOOP costs. In addition, any manufacturer payments under the manufacturer discount program will not count toward a beneficiary’s TrOOP. Under this new policy, the retiree would reach their TrOOP limit more quickly, resulting in getting to the catastrophic phase of the benefit where federal reinsurance payments begin and drug manufacturers may pay more.

Moreover, CMS announced that it is modifying how it will pay EGWP plans the prospective reinsurance amount, currently paid based on the average per member per month actual reinsurance paid to plans for the most recently reconciled payment year. CMS stated that if it used previous years to calculate reinsurance payments it would be overpaying the plan because of the new benefit changes. Consequently, for 2025, CMS will modify the prospective reinsurance payments based on bids for non-EGWP plans. This means plans will receive fewer prospective reinsurance dollars than in previous years, due to the amount of reinsurance paid to all part D plans decreasing from 80 percent to either 20 or 40 percent (depending on the drug).

Creditable coverage

Plan sponsors must currently provide Medicare-eligible active and retiree participants with a Notice of Creditable Coverage on an annual basis, which states whether the coverage offered by the plan is equivalent to or better than coverage of the standard Medicare Part D prescription drug coverage.

CMS revised the existing definition of creditable coverage to state that creditable coverage does not take into account the value of any discounts provided under the new Manufacturer Discount Program, effective in 2025. However, the plan would be responsible for covering any differential between the full discount and the phased-in discount. Therefore, this differential is included for purposes of determining creditable coverage.

Based on the changes made to the Part D benefit, CMS has indicated that a previously used “simplified determination methodology” for determining creditable coverage may no longer be used.

This rule may result in some plans that currently are considered creditable coverage losing that status. This could affect active employees who are Medicare eligible. If those employees do not have creditable coverage, they could face a Part D penalty when they later enroll in Medicare.

Retiree Drug Subsidy

The Inflation Reduction Act did not make any direct changes to the RDS or how it is reimbursed. However, because the Part D benefit has changed, the calculation of whether a retiree health plan provides a benefit that is “actuarially equivalent” to the Part D benefit is also changing.

Plans that received the RDS are required to annually attest that the actuarial value of prescription drug coverage under the plan is at least equal to the actuarial value of the standard Part D benefit. CMS guidance indicates that the changes discussed in this post will affect the determination of the value of the standard Part D benefit.

Overall Medicare changes

In addition to the changes that affect the Part D benefit design, the Inflation Reduction Act implemented two significant changes to the overall program:

1. Beginning in 2023, manufacturers are required to pay rebates to Medicare if drug prices rise faster than inflation.
2. Medicare will negotiate with manufacturers for prices for certain drugs, which takes effect in 2026. A list of the first 10 drugs that will be negotiated is available here.

Impact on plan sponsors with EGWPs

As discussed, the cumulative changes enacted in the Inflation Reduction Act are expected to increase benefit costs for EGWPs, including both prescription drug plans and Medicare Advantage prescription drug plans. In addition, federal reinsurance payments are decreasing. However, the federal government also pays a direct subsidy to these plans, which may increase because the value of the plans is increasing.

It will be important for plan sponsors with EGWPs to monitor the potential impact of these changes with their actuarial consultants.

Impact on plan sponsors with RDS

The Inflation Reduction Act is improving the Part D benefit, which means that the standard against which the plan’s retiree drug benefit is tested is higher than in previous years. If the plan sponsor does not provide a benefit that is equivalent to or better than the Part D benefit, it will lose the RDS.

Plan sponsors in danger of losing the RDS may wish to either increase benefits or consider switching to an EGWP. They should work with their actuaries to understand the impact of the new law on their retiree health plan.

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