Passed in 2022, the Inflation Reduction Act (IRA) includes major changes to Part D intended to control prescription costs, cap maximum retiree out-of-pocket costs and simplify coverage for Medicare enrollees. This strengthening of Part D offers improved coverage for retirees as well as new risks and opportunities for thousands of public sector employers who sponsor group Medicare Part D plans for their former employees. How will these changes affect public sector plan sponsors struggling to balance cost and retiree satisfaction with their health care benefits?
The original Part D design, effective in 2006, reflected several legislative compromises. On one hand, Part D represented the first universal prescription drug benefit for America’s senior citizens. On the other hand, the plan design included a coverage gap (the “donut hole”) during which the benefit disappeared for a portion of an individual’s annual drug spending. Further, total retiree out-of-pocket costs were unlimited. Many, but not all, of these design limitations were addressed by a major expansion of benefits under the 2010 Affordable Care Act.
Employers sponsoring group prescription drug benefits for their Medicare retirees were given an incentive to retain their group plans by either applying for Retiree Drug Subsidy (RDS) payments or adopting a group Part D plan—an Employer Group Waiver Plan (EGWP). Many employers wishing to retain group plan sponsorship adopted the EGWP approach due to its substantial financial advantage over the RDS program. This approach allowed the employer to continue providing prescription drug benefits that were richer than benefits available to individuals.
Other employers who were less wedded to group plan sponsorship shifted to a Medicare exchange approach to allow their retirees to purchase individual prescription drug and medical insurance in a thriving individual market enjoying substantial federal financial support.
In spite of the many improvements over the years, Part D still contains a range of complex program terms that can be confusing to retirees, leaving them without a clear understanding of their maximum annual out-of-pocket cost. With the IRA comes a new (in 2025) Part D benefit approach that adopts a much simpler structure, including a $2,000 cap on an enrollee’s annual out-of-pocket costs.
In addition, for the first time, the federal government is capping prescription drug cost inflation and negotiating drug prices with the pharmaceutical makers for the first time. These changes improve the Part D benefit and control costs to retirees while making the program easier to understand.
For example, under the IRA, the Part D program eliminates provisions such as the coverage gap and the “true out of pocket” (TrOOP) maximum. Also eliminated (in 2024) is the 5% cost share paid by enrollees after their annual spending has reached the TrOOP maximum.
Starting in 2025, Part D plans may have a deductible and then cost-sharing will apply until the member has reached $2,000 in out-of-pocket costs, after which the plan will pay 100% of the cost for the remainder of the year. This design is far simpler compared to the original, which was made more complicated by political compromise related to the overall cost of the Part D program.
As an incentive to retain their group plans, EGWP sponsors receive funding from various sources to offset plan costs. These funding sources include federal direct subsidies, federal reinsurance for high claims, and brand-drug discounts from pharmaceutical makers.
While Part D is becoming more attractive to Medicare-eligible seniors, IRA changes may be financially adverse for EGWP sponsors. First, richer benefits will increase plan cost. Second, total funding received by EGWP sponsors from the sources above is likely to decline starting in 2025.
The IRA will shift more risk to EGWP sponsors by dramatically reducing reinsurance payments for high claims and then increasing fixed direct subsidy payments to offset the reinsurance cuts. Overall, the decrease in reinsurance payments may far exceed the increase in direct subsidies, thus driving an increase in net plan cost of, possibly, $1,000 or more per member in 2025.
What options should plan sponsors consider when addressing an increase in net plan cost? These changes present plan sponsors with some potentially unpleasant choices. For example, the agency can:
To avoid these less-than-ideal options, a third choice is for employers to cease group plan sponsorship and instead direct retirees to obtain individual Part D coverage (and medical coverage) through a marketplace exchange, with employer funding through a Health Reimbursement Arrangement (HRA).
With this approach, retirees gain all the benefits of the new Part D program, while employers enjoy a reduction in their administrative effort and potentially in their coverage costs. Many employers have done exactly this over the years as individual market insurance coverage has become more attractive compared to group plan coverage. With the IRA-driven enhancements to Part D and the additional burdens on EGWP sponsors, 2025 may be the year for some employers to consider (or reconsider) a shift to an individual market for their retirees.
So, what does a strengthening individual Medicare market mean for group plan sponsors?
At the start of Part D, some organizations continued group Medicare pharmacy benefits due to the inadequacy of individual Part D coverage—to fill the coverage gap, for example. These employers also typically retained group medical coverage—in recent years, often through a group Medicare Advantage plan—paired with the prescription drug benefit.
With the IRA, individual Part D plans will become substantially richer, in some cases more generous than the prescription drug benefits provided to an organization’s active employees. The coverage gap is totally filled, and retiree out-of-pocket cost is capped at $2,000. When combined with Medicare Advantage plans (which now enroll more than half of all Medicare beneficiaries) and Medicare Supplement plans (which fill the gaps in Medicare), the individual market for Medicare seniors provides universal access to comprehensive and popular health care benefit options enjoying substantial federal funding.
All these changes strengthen the individual market and erode the original rationale for employers to continue group plans for their Medicare population.
Ultimately, we advise that employers take these steps to assess the impact of the IRA on their EGWP:
The erosion in group retiree medical plan sponsorship that has been underway for many decades will now likely accelerate as the federal government continues to expand coverage for individuals of all ages, both those on Medicare and those not yet eligible for Medicare. All employers should think carefully about the role they’ll continue to play in retiree health care benefit financing and delivery.
This article first appeared in the May/June issue of Public Eye, a publication of The Public Sector HR Association (PSHRA).
