On April 1, 2024, CMS issued their Final Calendar Year (CY) 2025 Part D Redesign Program Instructions (draft instructions issued 1/31/24), and in doing so, provided the industry with final guidance for CY 2025 regarding implementation of §11201 of the Inflation Reduction Act of 2022 (IRA), landmark legislation intended to provide meaningful relief for Medicare beneficiaries by expanding prescription drug benefits, lowering drug costs, and keeping premiums stable, among other changes. The following takeaways represent highlights from the Part D Redesign guidance.
Updated Standard Part D Drug Benefit
In CY 2025, the structure of the Part D benefit is updated to reflect provisions of the IRA that become effective on January 1, 2025, including three phases: annual deductible, initial coverage, and catastrophic coverage:
Annual Deductible: The enrollee pays 100% of their gross covered prescription drug costs (GCPDC) until the deductible of $590 for CY 2025 is met.
Initial Coverage: The enrollee pays 25% coinsurance for covered Part D drugs. The sponsor typically pays 65% of the cost of applicable drugs and 75% of the cost of all other covered Part D drugs. The manufacturer, through the Discount Program, typically covers 10% of the cost of applicable drugs. This phase ends when the enrollee has reached the annual OOP threshold of $2,000 for CY 2025.
Catastrophic: The enrollee pays no cost sharing for covered Part D drugs. Sponsors typically pay 60% of the costs of all covered Part D drugs. The manufacturer pays a discount, typically equal to 20%, for applicable drugs. CMS pays a reinsurance subsidy equal to 20% of the costs of applicable drugs and equivalent to 40% of the costs of all other covered Part D drugs that are not applicable drugs.
The below graphic provides a visual representation of this new structure:
Previously Implemented IRA Benefits
It is important to note that other previously implemented IRA benefits will also continue in CY 2025, including no beneficiary cost sharing above the annual OOP threshold (i.e., in the catastrophic phase of coverage), opting into the Medicare Prescription Payment Plan (M3P) program and thereby providing participants with the ability to spread OOP costs over the year, no deductible or cost sharing applied with respect to adult vaccines recommended by the Advisory Committee on Immunization Practices (ACIP), and OOP costs for insulin capped at $35 per month’s supply of a covered insulin product.
Creditable Coverage
CMS is required to pay a subsidy to sponsors of qualified retiree prescription drug plans that provide equivalent or better coverage to the actuarial value of standard prescription drug coverage. Additionally, Medicare beneficiaries may incur a Part D late enrollment penalty (Part D LEP) if there is a continuous period of 63 days or more at any time after the end of the individual’s Part D initial enrollment period during which the individual was eligible but was not enrolled in a Part D plan and was not covered under any creditable prescription drug coverage. The current regulatory definition of creditable prescription drug coverage (§423.56(a)) specifies that the actuarial value of such coverage does not consider the value of any discount or coverage provided in the coverage gap.
Since the IRA eliminated the coverage gap phase and discount program, CMS has revised the existing definition of creditable prescription drug coverage to include specific reference to discounts “provided under section 1860D-14C of the Social Security Act”. Additionally, whereas CMS indicated in the Draft Program Instructions that the simplified creditable coverage determination methodology would no longer be valid, they have rescinded that decision in this final issuance in an effort to “mitigate potential disruptive effects of the Part D redesign on the group health plan market and the Part D eligible individuals served by such group health plans.” Notwithstanding, CMS will re-evaluate the continued use of the existing creditable coverage simplified determination methodology, or establish a revised one, for CY 2026 in future guidance.
True Out-Of-Pocket Costs (TrOOP)
Section 11201 of the IRA effectively updated which costs count toward True Out-of-Pocket (TrOOP) spending. TrOOP is spending on covered Part D drugs by the beneficiary or on their behalf by certain third parties and determines when a beneficiary becomes eligible for the Discount Program (established by the IRA, the Discount Program requires participating manufacturers to provide discounts on applicable drugs in the initial coverage and catastrophic phases), reaches the annual OOP threshold, and enters the catastrophic coverage phase. In addition to the third-party arrangements that already count toward TrOOP, the IRA specifically amends the definition of incurred costs that count toward TrOOP for CY 2025 to include payments for previously excluded supplemental benefits provided by Part D sponsors and Employer Group Waiver Plans (EGWPs) and exclude payments under the new Discount Program.
Specialty Tier Cost Sharing Thresholds
On an annual basis, CMS sets the maximum allowable cost sharing for specialty tiers based on plan deductibles. The intent of this policy is to ensure a plan’s value is reflective of the defined standard (DS) benefit. In CY 2025, as the initial coverage limit (ICL) will be eliminated, CMS is establishing a new methodology to determine the specialty tier coinsurance/deductible ranges to represent the effective coinsurance for a beneficiary under the redesigned Part D benefit.
To ensure that a plan’s value is reflective of the DS benefit, CMS is adopting a similar methodology used to calculate the cost-sharing requirements; for Part D plans with the full deductible provided under the DS benefit, the coinsurance is 25%, consistent with the DS benefit. Using the CY 2025 DS benefit parameters of a $590 deductible, a $2,000 annual OOP threshold, and a 25% coinsurance after the deducible is met and before the annual OOP threshold is reached, the total drug costs can be calculated at $6,230.
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You can read the Face Sheet and access the full Program Instructions here.