What’s changing in 2025?

In 2025, the annual out-of-pocket amount payable by retirees who have Part D coverage will be reduced to $2,000. The coverage gap phase of the benefit will be eliminated, reducing the number of phases from four to three: 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The Inflation Reduction Act also repealed the existing coverage gap discount program and established a new manufacturer discount program.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 plan sponsor and beneficiary costs, the Medicare Prescription Payment Plan will begin in 2025. Under this new program, Part D sponsors must give enrollees the option to pay out-of-pocket costs monthly. Finally, the Inflation Reduction Act expanded income eligibility for benefits under the Medicare Part D Low-Income Subsidy Program.

For more information about the Inflation Reduction Act changes to Medicare Part D, refer to our chart summarizing them. For information on prior guidance, see our February 20, 2024 insight and our March 19, 2024 webinar.

The final guidance

Plans that receive money from the federal government under the Retiree Drug Subsidy (RDS) program 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. The final guidance, which was published on April 1, 2024, clarifies that when determining actuarial value for the attestation plan sponsors may:

• Include federal reinsurance when calculating actuarial value
• Exclude manufacturer discounts when calculating actuarial value

The final guidance also clarifies that the “simplified determination methodology” can still be used for a 2025 creditable coverage determination.

Determining actuarial value

The final guidance confirms that actuarial value of the standard Part D benefit and a plan sponsor’s plan is based on the plan paid amount, which does include the federal reinsurance subsidy in the catastrophic phase. (CMS notes that draft guidance incorrectly stated the federal reinsurance subsidy in the catastrophic phase is not included.)

The final guidance also states that the determination of actuarial value does not take into account the value of discounts paid by manufacturers under the discount program.

While the guidance clarifies how the RDS actuarial determination is made, current plans should make sure to test their plan as soon as possible, because the changes in the Part D benefit mean that some plans who are currently eligible for the RDS may not pass the test for 2025.

The simplified determination methodology

In the final guidance, CMS clarifies that plans that cover active employees may continue to use the “simplified determination methodology” for determining creditable coverage for 2025. (The draft guidance suggested that methodology would no longer be available.) CMS noted in its guidance that it realized that changing the methodology for creditable coverage determination at this late date for the 2025 plan year could cause substantial disruption for both plan sponsors and participants.

Future guidance will indicate whether the creditable coverage simplified determination methodology can be used for 2026.

Implications for plan sponsors

The final guidance provides some relief for plan sponsors with active plans and helpful clarification for those who take advantage of the RDS program. Plan sponsors that offer retiree health benefits will need to take a close look at that coverage this year to ensure that it reflects new changes coming in 2025.

Plans that test for creditable coverage for active employees will be able to continue to use the current testing methodology for 2025, which means it is less likely that plans would be found to not be creditable coverage. Consequently, it is unlikely that participants could be forced to enroll in Medicare to avoid paying a late enrollment penalty.

Plan sponsors that offer an EGWP program will have several challenges for 2025, including monitoring Part D reimbursements and premium changes. Plan sponsors should begin working with their actuarial advisors on these changes. In addition, plan sponsors that offer an EGWP program should work with their PBMs, legal counsel and plan experts to ensure compliant implementation of the Medicare Prescription Payment Plan by January 1, 2025. This includes timely dissemination of communication materials notifying individuals of their rights.

Plan sponsors that participate in the RDS program must provide a benefit is equal to or better than the standard Part D benefit, which is improving under the Inflation Reduction Act. 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.

Plan sponsors also may wish to consider whether a Medicare Advantage program might be the right solution for their retirees.