Understanding the Key Changes to Medicare Part D

The Inflation Reduction Act made a lot of headlines when it was enacted in August.

Most of those headlines were for its provisions related to climate change, but the new law also made significant changes to Medicare’s Part D prescription drug program.

The most significant near-term reforms are to the coverage gap, also known as the donut hole, in Part D.

First, let’s have a brief review.

Part D prescription drug coverage policies are issued by private insurers who determine the policy terms and premiums, subject to regulation and oversight by the Centers for Medicare and Medicaid Services (CMS).

A Part D policy has several layers of coverage.

In the first layer, you pay all prescription medicine costs until your spending reaches the deductible.

The deductible is determined by the insurer and in 2022 can range from $0 to $480.

Next is the coverage stage.

You pay a set amount for each covered prescription, which is either a fixed dollar amount per prescription or a fixed percentage of each prescription’s cost.

The amount might vary with the medication purchased. You’ll pay less for generic medications than for brand-name drugs.

The third stage is the coverage gap or doughnut hole.

In 2022, this kicks in after you and the insurer jointly spend $4,430 on prescriptions.

In the current version of the coverage gap, you pay no more than 25% of the cost of both brand-name and generic drugs.

Yet, almost the full cost of brand-name drugs counts as part of your out-of-pocket costs, though you’re only paying 25%.

The amount you actually pay out of pocket for generic drugs in this stage also counts toward your out-of-pocket expenses.

Also, you’ll pay no more than 25% of any dispensing fee charged for each prescription.

After you spent a total of $7,050 out-of-pocket for prescription drugs in 2022, you leave the coverage gap and enter the catastrophic coverage stage.

In this stage you pay no more than 5% of the cost of each prescription. But there’s no dollar limit on the amount you spend in this stage.

Someone who needs an expensive brand-name drug can spend thousands of dollars.

Under the Inflation Reduction Act, in 2024, after the catastrophic level is reached, the policyholder won’t have to pay the 5% coinsurance.

The insurer and Medicare pay all prescription drug costs above that level.

Then, in 2025 and later years, the Part D coverage terms change completely.

There’s a $2,000 cap on annual out-of-pocket spending for prescription drugs. The $2,000 limit is adjusted annually for inflation.

Remember, to qualify for the $2,000 out-of-pocket spending limit you must have a Part D policy. The Inflation Reduction Act makes other changes in Part D.

Most vaccines will be free to Medicare beneficiaries and there will be a $35 per month ceiling on insulin. Those provisions take effect for 2023.

Another change is that from 2024 to 2029 premium increases for Part D policies will be limited to no more than 6% per year.

Annual price increases for medications will be limited to the inflation rate. If a manufacturer has a higher price increase, it will have to rebate the excess to CMS.

You’re probably aware that the law also authorizes CMS to negotiate prices for select brand name drugs with the first negotiated prices taking effect in 2026.

The numbers of drugs subject to price negotiation will increase each year.

It will be interesting to see the effect these changes have on premiums for Part D policies and the availability of them. They also could increase the Part B premium.

I’ll cover more on this important topic in future editions of Retirement Watch Weekly.