Medicare Part D Enrollees to Benefit from Program Changes in 2024 and 2025

With nearly two decades having passed since Medicare Part D became operational, notable program improvements are on the horizon for 2024 and 2025.

For background, Medicare Part D is prescription drug coverage available to Medicare Beneficiaries enrolled in Part A and/or Part B.  Beneficiaries access this voluntary program through private insurance carriers and can obtain coverage through a standalone Prescription Drug Plan (PDP) or a Medicare Advantage Prescription Drug (MA-PD) plan (must have both Medicare Parts A and B to enroll in MA-PD).

Medicare Part D plans run on a calendar year basis (subject to change each year) in distinct stages:

• Deductible – enrollees are responsible for a plan deductible up to a maximum ($505 in calendar year 2023).  Some PDPs do not have any deductible (this feature may come with a higher plan premium).

• Initial Coverage – after the Deductible is reached, enrollees have a copay ($) or coinsurance (%) based on each drug’s “Tier Level” as shown in the plan formulary.  The standard Part D design allows plans to charge up to 25% coinsurance, but actual costs will vary and often are lower.  Medicines must be on the plan formulary, or they will not be covered at all (unless an exception applies).  This stage continues until the consumer’s out-of-pocket costs PLUS the amount the plan pays reaches $4,660 (in 2023).

• Coverage Gap (“Donut Hole”) – in this stage, under the original standard design of the Part D program, enrollees bore the full cost of their medicines.  Prior to 2023, the program was gradually liberalized so that in this stage, enrollees pay only 25% of drug costs (with the remainder covered by manufacturer discounts).  During each year, enrollees exit the Donut Hole once their True Out-of-Pocket (TrOOP) costs reach a threshold level ($7,400 in 2023).  It should be noted that TrOOP includes what the manufacturers pay, in addition to costs paid by the enrollee (it does not include what the plan pays during Initial Coverage).

• Catastrophic Coverage – the final stage in a calendar year once an enrollee has hit the Part D TrOOP.  In this stage, in calendar year 2023, enrollees pay the greater of 5% of drug costs, or $4.15 for generics and $10.35 for brand names.  For very costly medicines, the 5% enrollee portion can add up quickly.

To illustrate actual 2023 out-of-pocket drug costs on a standalone PDP, let's review a hypothetical example for a Medicare beneficiary living in Tampa, Florida and taking one costly medicine -- Pomalyst 3mg capsule.  Then, we will see how much the enrollee's out-of-pocket costs will be reduced in 2024 and 2025.

The monthly premium is ignored, but it should be noted that the Plan Sponsor selected in this example provides the lowest standalone Part D 2023 calendar year costs including premiums and drug copays.

According to the Medicare plan finder, this consumer travels through both Initial Coverage and the Coverage Gap in January.  The $7,400 TrOOP is reached, with the enrollee’s out-of-pocket drug cost equal to $3,080.  For the rest of the year, the enrollee is in Catastrophic Coverage paying $1,188 monthly (5% of $23,762 pharmacy retail cost).  Over the whole calendar year, the enrollee’s out-of-pocket drug costs exceed $16,000 (based on the specific 2023 PDP and retail pharmacy).

So, what will change in 2024 and how will this enrollee be impacted?

In 2024, costs in the Catastrophic stage change so that the 5% coinsurance requirement is eliminated (Part D plans will pay 20% of total drug costs in this phase instead of 15%).  Once Part D enrollees (without low-income subsidies, called LIS), have drug spending high enough to qualify for Catastrophic Coverage, they are no longer required to pay 5% of their drug costs, which in effect caps their expenses.

In 2024, the Catastrophic stage threshold will be set at $8,000.  As noted above, this amount includes what Part D enrollees spend out of pocket plus the value of manufacturer discounts in the Coverage Gap.  Under this construct, Part D enrollees who take only brand-name drugs in 2024 will spend approximately $3,300 out of pocket and then have no further cost for covered medicines.  So, in the example cited, the enrollee reduces out-of-pocket medicine costs from over $16,000 in 2023 to about $3,300 in 2024.

So, what is changing in 2025 and how will this enrollee be further impacted?

Out-of-pocket drug spending will be capped at $2,000.

Beginning in 2025, Part D enrollees’ out-of-pocket drug costs will be capped at $2,000.  This amount will be indexed to rise each year after 2025 at the rate of growth in per capita Part D costs.  (This cap does not apply to out-of-pocket spending on prescription drugs covered under Medicare Part B.)

For Part D enrollees who take only brand name drugs, annual out-of-pocket costs at the Catastrophic threshold will fall from around $3,300 in 2024 to $2,000 in 2025.  In other words, Part D enrollees who take only brand name drugs with costs high enough to reach the Catastrophic stage should expect to realize savings of about $1,300 in 2025 as compared to 2024 spending.

The Coverage Gap will be completely eliminated.

The Coverage Gap stage, where Part D enrollees had faced 100% of total drug costs under the original Part D design and currently face 25% of costs, will be eliminated in 2025.  This means that Part D enrollees will no longer face an increase in cost sharing at the end of the Initial Coverage stage, which is the case in most Part D plans, since today's plans usually vary the cost-sharing amounts instead of charging the standard 25% coinsurance during Initial Coverage.

Part D plans and drug manufacturers will pay a larger share of costs for Catastrophic Coverage, and Medicare will pay a smaller share.

Medicare’s share of total costs in the Catastrophic stage (reinsurance) will decrease from 80% to 20% for brand-name drugs and from 80% to 40% for generic drugs beginning in 2025.  This reduction will help address concerns about the substantial increase in Medicare’s reinsurance payments to Part D plans over time, which accounted for close to half (48%) of total Part D spending in 2022, up from 14% in 2006, based on data from the Medicare Trustees 2023 annual report.  Medicare Part D plans’ share of costs will increase from 15% to 60% for both brands and generics above the cap, and drug manufacturers will be required to provide a 20% price discount on brand-name drugs.

Part D plans and manufacturers will face changes to their share of total drug costs paid in the Initial Coverage stage.

Drug manufacturers will be required to provide a 10% discount on brand-name drugs in the Initial Coverage state beginning in 2025, replacing the 70% price discount in the Coverage Gap stage under the current design.  Part D plans will pay 65% of brand-name drug costs.

For further information and graphics that illustrate upcoming Part D changes in greater detail, please refer to this informative article from the Kaiser Family Foundation:

https://www.kff.org/medicare/issue-brief/changes-to-medicare-part-d-in-2024-and-2025-under-the-inflation-reduction-act-and-how-enrollees-will-benefit/.

Until next time,

Andrew Herman