TL/DR –
The 2022 Inflation Reduction Act (IRA) includes major changes to Medicare Part D aimed at controlling prescription costs, capping out-of-pocket costs for retirees and simplifying coverage. From 2025, Part D will have a simpler structure with a $2,000 cap on out-of-pocket costs, eliminate provisions like the coverage gap, and introduce a first-ever cap on prescription drug cost inflation. However, these changes could have financial drawbacks for employers who sponsor Employer Group Waiver Plans (EGWP), who could face either absorbing increased costs themselves or passing them onto retirees, as reinsurance payments decrease and direct subsidies increase.
The Impact of the 2022 Inflation Reduction Act on Medicare Part D
The Inflation Reduction Act of 2022 brings significant modifications to Medicare Part D to regulate prescription costs, cap retirees’ out-of-pocket expenses, and simplify coverage. This transformation poses new risks and opportunities for public sector employers who sponsor Medicare Part D group plans for retirees. Here’s how these changes might impact plan sponsors balancing costs and retiree satisfaction.
Understanding Part D: A Brief Recap
Introduced in 2006, Part D was the first comprehensive prescription drug benefit for America’s elderly. Despite its coverage gap and unlimited retiree out-of-pocket costs, it improved with the 2010 Affordable Care Act. Employers sponsoring retiree drug benefits were incentivized to maintain their group plans using the Retiree Drug Subsidy (RDS) or by adopting an Employer Group Waiver Plan (EGWP). Additionally, some employers transitioned to a Medicare exchange approach, allowing retirees to purchase individual drug and medical insurance.
What’s New in Part D for 2025?
Despite improvements, Part D’s complex terms often confuse retirees about their maximum annual out-of-pocket cost. The 2025 IRA introduces a simplified Part D benefit structure with a $2,000 cap on an enrollee’s annual out-of-pocket costs. For the first time, the IRA also caps prescription drug cost inflation and negotiates drug prices with manufacturers, benefiting retirees and simplifying the program. The IRA eliminates the coverage gap and the 5% cost share for enrollees, replacing it with a straightforward deductible system.
How IRA Changes Impact Group Part D Plan Sponsors
EGWP sponsors receive funding from various sources to offset plan costs, including federal subsidies, reinsurance for high claims, and brand-drug discounts from pharmaceutical makers. However, IRA changes could negatively impact EGWP sponsors financially, by increasing plan costs and potentially reducing funding from these sources beginning in 2025. The IRA shifts more risk to EGWP sponsors by reducing reinsurance payments for high claims and increasing fixed direct subsidies. This may result in a significant increase in net plan cost per member.
Plan sponsors faced with increased costs can absorb the cost increase or pass it on to retirees through contribution increases or benefit cuts. Alternatively, they may direct retirees to acquire individual Part D coverage through a marketplace exchange, funded through a Health Reimbursement Arrangement (HRA). This approach provides retirees with the new Part D benefits while reducing administrative effort and potential coverage costs for employers.
Strengthening of Individual Medicare Market: Implications for Plan Sponsors
With the IRA, individual Part D plans will become more generous than many organizations’ prescription drug benefits for active employees. Coupled with Medicare Advantage plans and Medicare Supplement plans, the IRA improves the individual market for Medicare beneficiaries and challenges the original rationale for employers to continue group plans for their Medicare population.
Recommended Actions for Plan Sponsors
Plan sponsors should conduct a financial assessment to project the IRA’s impact on their EGWP net plan cost, determine options for managing this cost increase, and assess whether maintaining group Medicare plans remains valid given the strengthening of the individual market and EGWP sponsorship burdens. If not, they should explore the feasibility of moving current group coverage to an individual Medicare market exchange.
As the federal government expands individual coverage, the role of employers in retiree health care benefit financing and delivery may need to be reevaluated.
Originally published in the May/June issue of Public Eye, a publication of The Public Sector HR Association (PSHRA).
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