Inflation Reduction Act Updates, Medicare Changes May Impact You

The Inflation Reduction Act, a United States federal law passed in 2022, includes major changes to Medicare Part D intended to control prescription drug 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 employers that sponsor group Medicare Part D plans.

This article breaks down some recent and upcoming changes to Part D as well as some corresponding changes to consider for your plan strategy.

Part D Changes: Good for Consumers, Less So for Plan Sponsors

The current Medicare Part D benefit contains a range of complex program terms, which may confuse retirees and leave them without a clear understanding of their maximum out-of-pocket cost liability. With the Inflation Reduction Act comes a new — in 2025 — Part D benefit approach that eliminates the prior complexities by adopting a much simpler structure plus 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. These changes go far to realize the vision of Part D as a comprehensive and fully adequate source of Medicare prescription drug coverage.

The new Part D program eliminates provisions such as the coverage gap (also known as the “doughnut hole”) 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. It’s generally as simple as that.

While these changes are highly beneficial to enrollees, there may be financial risks to employers that sponsor group Medicare Part D plans (i.e., employer group waiver plans, or EGWPs).

How the Inflation Reduction Act Impacts Part D Plan Sponsors

While Part D is becoming far more attractive to Medicare seniors, the changes under the Inflation Reduction Act may not be beneficial for EGWP sponsors. This is because the Act is mandating substantial benefit enhancements and changing how it pays Part D plans in a way that could be unfavorable to EGWP sponsors.

Under Part D, EGWP sponsors receive funding from various sources to offset the cost of the group plan. The U.S. government provides these funding sources to EGWP sponsors as an inducement to retain group post-age-65 prescription drug coverage. Changes in 2025 to the formulas for determining these funding sources (e.g., direct subsidies, pharmaceutical discounts, federal reinsurance) could reduce the total level of these third-party payments to an EGWP sponsor, thus increasing their net plan cost. This presents plan sponsors with some unpleasant choices:

• Absorb the cost increase, making retirees happy but the finance department unhappy.

• Pass the cost increase onto retirees in the form of contribution increases or benefit cuts, leading to a happy finance department but less-than-happy retirees.

What Are Plan Sponsors to Do?

To avoid these unpleasant options, employers may consider ceasing group plan sponsorship and instead directing retirees to obtain individual Medicare Part D coverage (and medical coverage) through a marketplace exchange, with employer funding through a health reimbursement arrangement (HRA). With this approach, retirees can gain all the benefits of the new Part D program while employers can enjoy a reduction in their administrative effort and potentially in their coverage costs.

A portion of U.S. employers have done exactly this over the years as individual market insurance coverage has become more attractive compared to group plan coverage. These enhancements to Part D in 2025, driven by the Inflation Reduction Act, may lead some employers to consider (or reconsider) such a shift.