Prescription Drug Provisions in the Inflation Reduction Act: What You Need to Know
According to the Centers for Medicare & Medicaid Services, the Inflation Reduction Act, signed by President Biden in August 2022, provides financial relief for millions of people with Medicare by improving access to affordable treatments and strengthening the Medicare Program for the long term. In the first year since the Act was signed, nearly 15 million people saved an average of $800 per year on their health insurance premiums, and the nation’s uninsured rate reached an historic low.
Improvements to Medicare Part D under the Act mean that people with Medicare will benefit from lower prescription drug costs. Benefits introduced in 2023 include a $35/month cap per covered insulin prescription, providing certainty and critical cost savings for seniors who, in some cases, were paying as much as $400 for a month’s supply of insulin. The Act also provided for access to recommended adult vaccines without cost-sharing, saving $70 on average for these vaccines.
Additional changes to the Medicare Part D benefit design will roll out in 2024 and 2025, including a new cap on Part D out-of-pocket prescription drug costs that took effect in January 2024, which will save thousands of dollars for people who take high-cost drugs.
To help Real World Health Care subscribers understand how these changes will impact them, we talked with Charles E. (Chuck) Collins Jr., MS, MBA, president, Healthcare Stakeholder Solutions, a consultancy focused on health care delivery disparities across multiple therapeutic areas. He describes why 2024 is a watershed year for Medicare beneficiaries and provides insights to help beneficiaries navigate changes to their plan in 2024 and beyond.
By sharing this conversation, Real World Health Care hopes to bring a bit of clarity to a complicated policy change. We will share additional insights throughout the year.
Helpful Terms
Real World Health Care: Health insurance is full of buzzwords and jargon that can be difficult to understand. What are a handful of key terms and definitions that Medicare beneficiaries should start to become familiar with as they navigate the changes to their plans in 2024 and beyond?
Chuck Collins
Chuck Collins: Here are a few basic concepts that will help beneficiaries understand the difference among plans:
- Annual Deductible: This is the amount you must pay before your health plan or drug plan begins to pay its share of your medical or covered drug expenses.
- Coinsurance: The percentage of costs of a covered health care service you pay (20% in Medicare Part B, for example) after you’ve paid your deductible.
- Copayment: A fixed amount ($20, for example) you pay for a covered health care service after you’ve paid your deductible.
- Formulary: A list of prescription drugs covered by a prescription drug plan or another insurance plan offering prescription drug benefits. Also called a drug list.
- Initial Coverage Phase: In this phase, you and the prescription drug plan are splitting (generally 25%/75%) the cost of your drugs. You are paying either a fixed amount, or a percentage of the retail costs. That amount is based on which formulary tier the drug falls into. You remain in the cost-sharing phase until your annual prescription drug costs (retail costs, not what you have paid out of pocket) hit the coverage gap threshold.
- Smoothing: Starting in 2025, the law requires Part D sponsors to provide all Part D enrollees the option to pay their out-of-pocket prescription drug costs in monthly installments.
Selecting a Medicare Plan Can Be a Daunting Task
RWHC: As we enter 2024, most Medicare enrollees have already selected their plan for the year. How did the provisions of the Inflation Reduction Act impact their selection process?
CC: Besides the premium price increases for Medicare Part D plans, the Inflation Reduction Act provision changes for 2024 had minimal impact on the plan selection process. However, for 2025, I believe the process of picking a Part D plan will become more time-consuming and cumbersome as we approach the new overhauled Part D benefit design and smoothing option election.
Regardless of the new Inflation Reduction Act provisions, Medicare beneficiaries have a daunting task with the annual plan selection process in general. In 2024, on average, a Medicare beneficiary has approximately 60 plan choices between Part D prescription drug plans (PDPs) and Medicare Advantage drug plans (MA-PDs). In some states, Medicare beneficiaries have up to 80 plan options to choose from, which can be overwhelming.
No More Catastrophic Coverage Phase
RWHC: What will be most surprising to Medicare beneficiaries as they start to access their Part D benefits this year?
CC: The most surprising positive change for Medicare beneficiaries will be the elimination of the catastrophic coverage phase in the Part D benefit. For the first time in the history of this benefit design, there is now a cap on out-of-pocket expenses.
So, what is the impact? Prior to the Inflation Reduction Act’s passage and through 2023, once a Medicare beneficiary satisfied the coverage gap phase (approximately $3,100 in out-of-pocket costs), the beneficiary was responsible for 5% of the cost of their branded drug with no maximum out-of-pocket cap. As an example, if a Medicare beneficiary was taking a specialty medication for, let’s say psoriatic arthritis, and the monthly cost of that drug was $8,000, the beneficiary would be responsible for 5% of the cost of the drug in the catastrophic coverage phase, which would be $400 a month. Under a standard benefit design in 2023 with an $8,000 a month drug, applying the standard $505 deductible, the Medicare beneficiary would hit the catastrophic coverage phase in February and would have paid approximately $7,400 by the end of the calendar year.
Eliminating the catastrophic coverage phase for the Medicare beneficiary in 2024 is a huge deal. To clarify, the catastrophic coverage phase still exists, but the extra 5% the Medicare beneficiary would have paid ($7,400 – $3,100 = $4,300) is now being absorbed by the health plan in 2024.
RWHC: What should Medicare beneficiaries know about the cap on out-of-pocket costs and the point at which they satisfy their coverage gap requirement?
CC: In 2024, the Medicare beneficiary can expect an out-of-pocket cost to be approximately $3,250, due to the $600 increase in the catastrophic coverage phase threshold from 2023. The 2024 catastrophic coverage phase threshold amount, which is $8,000, includes what a Medicare Part D enrollee spends out-of-pocket (this generally includes the deductible, 25% cost of the drug in the initial coverage phase and the 25% cost of the drug in the coverage gap phase) plus the value of the manufacturer price brand discount (70%) in the coverage gap phase, formerly also known as the doughnut hole phase. As stated earlier, in 2024, the catastrophic coverage phase for the Medicare beneficiary has been eliminated.
Relief for Everyone
RWHC: Will the lowered cap on out-of-pocket drug costs be offset somewhat by higher Part D premium costs? Will beneficiaries see real relief, especially those in PDPs versus MA-PDs?
CC: The impact on the cap on out-of-pocket costs far outweighs the increase in Part D premiums. The Medicare Part D base beneficiary premium is $34.70. However, Medicare Part D plan premiums do vary across plans and can be higher or lower than the base beneficiary premium. The average national PDP monthly premium for 2024 is $48, up from $40 in 2023, a 21% increase. In addition, PDP monthly premiums are, on average, 5 times higher than their MA-PD counterparts. As a side note, the Inflation Reduction Act has a Part D premium stabilization provision starting in 2024, through which the Medicare Part D base beneficiary premium is capped at a 6% annual growth rate.
For 2024, Medicare beneficiaries that have a PDP benefit can expect higher cost sharing for brand drugs than for generics. The use of coinsurance, instead of copayment, will increase as well as coinsurance percentages across the board. However, with the elimination of the catastrophic coverage phase, all beneficiaries are now capped on out-of-pocket costs, which provides relief for everyone.
Reference
- The White House, August 16, 2023. https://www.whitehouse.gov/briefing-room/statements-releases/2023/08/16/fact-sheet-one-year-in-president-bidens-inflation-reduction-act-is-driving-historic-climate-action-and-investing-in-america-to-create-good-paying-jobs-and-reduce-costs/
- Explaining the Prescription Drug Provisions in the Inflation Reduction Act. Accessed December 19, 2023. https://www.kff.org/medicare/issue-brief/explaining-the-prescription-drug-provisions-in-the-inflation-reduction-act/
- gov. Glossary. Accessed December 28, 2023. https://www.healthcare.gov/glossary/