Medicare Part D and the Inflation Reduction Act

Here is what you’ll find in this week’s newsletter!

1. Important links 🔗 - the best articles we found this week about the Medicare Market along with links to Jared’s recent LinkedIn posts.

2. Deep Dive 📚 - Medicare Part D and the Inflation Reduction Act

3. Compliance Chatter 📢 - New Jersey provides special guarantee issue rights.

4. Sponsor Snapshot 🚀 - brought to you by Telos Actuarial

5. Data Visual of the week 📊 - Part D Redesign Fact Sheet

It’s only a 5 minute read, but it will make you 10x smarter.

DEEP DIVE 📚

Medicare Part D and the Inflation Reduction Act

Back in early February, we provided an overview of the Medicare Prescription Drug Program (Part D). 

This week, we will build on that prior post and look at how the 2022 Inflation Reduction Act (“IRA”) will impact Part D.

The IRA contains several provisions that will impact Part D. These provisions range from capping the cost of insulin at $35/month to a major redesign of the Part D benefit structure. 

The combination of the provisions is expected to yield a savings of $250 Billion to the Medicare program over the 10-year estimation period (2022-2031). 

However, as shown in the following table, not all the provisions are expected to generate savings.

In this week’s Deep Dive, we will look at some details behind two of the larger items:

1. Drug Price Negotiations

2. Part D Benefit Design Changes

Drug Price Negotiations

The original Part D law prohibited the U.S. Department of Health and Human Services (HHS) from interfering with the negotiations between drug manufacturers, pharmacies, and Part D plan sponsors. The IRA updates that original law to include an exception so that HHS can negotiate the price of a specified number of drugs covered by Part D and Part B. 

The negotiated prices for these drugs will begin in 2026. 

In that first year there will be 10 drugs that are subject to the negotiation process. Then, in each subsequent year there will be another set of drugs added to the list. 

Here is a schedule that shows the number of new drugs that will be added to the negotiation list and how they accumulate over time. There will be another 20 drugs added to the list in 2029 and subsequent years.

Drugs subject to price negotiation will be selected from a list of the 50 highest Part D spending and includes several restrictions on which drugs are eligible. Some notable restrictions:

• Selected drugs cannot have a generic or biosimilar available and

• Selected drugs cannot be within 9 years of FDA approval (13 years if a biological drug)

Once a drug has been added to the negotiation list it will be subject to the following price caps:

• Average Part D price (net of all concessions);

• Average Part B price;

• Average general market price times an aging factor

  • 75% for drugs 9-12 years old

  • 65% for drugs 12-16 years old

  • 40% for drugs 16+ years old

The initial list of drugs that will go through the price negotiation process can be found here.

One of the positive outcomes for drug manufacturers is that if a drug becomes subject to negotiation, then it will be required to be covered by all Part D plans. Under prior rules, Part D plans could exclude certain drugs if they did not want to offer it under their plans.

In addition to the $98.5 Billion in Medicare savings that this provision expected to generate, it is also expected to reduce Part D plan premiums and reduce the out-of-pocket costs for beneficiaries that use these specific drugs.

Part D Benefit Changes

The second IRA provision that we will cover implements a new benefit design that will dramatically change the cost-sharing structure between the beneficiary, the plan sponsor, the drug manufacturer, and Medicare. 

The last coverage year under the prior benefit design was 2023 and the IRA changes will be implemented piecemeal over the 2024 and 2025 coverage years. 

We are going to focus this comparison on the 2023 and 2025 coverage years.

Under the pre-IRA rules, Part D plans had four phases: (1) Deductible; (2) Initial Coverage; (3) Coverage Gap (a.k.a., the ‘Donut Hole’); and (4) Catastrophic Coverage. The IRA eliminates the Coverage Gap phase and shifts how drug costs will be split in the Initial Coverage Phase and the Catastrophic Coverage Phase.

Initial Coverage Phase

During the Initial Coverage phase under the old benefit design, the beneficiary was responsible for 25% of their drug costs and the plan sponsor covered the other 75%. 

With the implementation of the IRA, the beneficiary is still responsible for 25% of their drug costs but the drug manufacturers will be required to cover 10% so that the plan sponsors’ coverage is reduced to 65%.

Catastrophic Coverage Phase

This is where the really big changes occur! 

In addition to changing how the drug costs are split amongst the four stakeholders, the IRA also implements a lower threshold for where the Catastrophic Coverage Phase begins.

Under the old benefit design, drug costs in the Catastrophic Coverage Phase were split between the beneficiary (5%), the plan sponsor (15%), and Medicare (80%). 

Under the IRA plan design, drug costs are now split between the drug manufacturers (20%), Medicare (20%), and the plan sponsor (60%). 

Notice that the beneficiary no longer has any liability once they enter the Catastrophic Coverage Phase.  This essentially places a hard cap on their drug costs every year.  In 2025, that cap is set at $2,000 and will increase along with the average drug costs in future years.

The implementation of this maximum out-of-pocket amount will result in significant savings for beneficiaries that have the highest costs today.

Shifting of the cost-sharing will place more responsibility on both plan sponsors (from both the higher percentage share and a lower attachment point) and the Medicare program (from the lower attachment point). 

It is expected that this component of the IRA will result in higher Part D plan premiums.

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For a visual representation of the changes to Part D, see the “data visual of the week” below.

Earlier this week CMS released “Final CY 2025 Part D Redesign Program Instructions” and “Final CY 2025 Part D Redesign Program Instructions Fact Sheet”. We recommend reading these for more details on how IRA impacts Part D in 2025.

That is all for this week!

DATA VISUAL of the Week 📊

The data visual of the week comes from “Final CY 2025 Part D Redesign Program Instructions Fact Sheet” showing changes to the Part D design.

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