Changes to Medicare drug coverage have a financial impact on retirees

Medicare Part D is a federal program that provides prescription drug coverage to Medicare beneficiaries. It was established to help reduce the out-of-pocket costs of medications for seniors and other eligible individuals.

Medicare Part D operates through a structured process designed to provide beneficiaries with prescription drug coverage. Individuals can enroll in Part D when they first become eligible for Medicare or during the annual enrollment period. Once enrolled, beneficiaries select from a variety of plans offered by private insurance companies that have been approved by Medicare. Each plan features a formulary, which is a list of covered drugs that may be subject to change annually.

The cost structure of Part D plans typically follows a four-phase model. In the deductible phase, beneficiaries pay the full cost of their medications until they reach their plan's deductible amount. This is followed by the initial coverage phase, where the plan covers a portion of the drug costs and the beneficiary pays copayments or coinsurance. Next comes the coverage gap, often referred to as the "donut hole," during which beneficiaries are responsible for a higher percentage of their drug costs. Finally, once beneficiaries reach a certain out-of-pocket threshold, they enter the catastrophic coverage phase, where they pay significantly less for their medications.

To ensure that their Part D coverage continues to meet their needs, beneficiaries have the opportunity to review and potentially change their plan during the annual enrollment period. This annual review process allows individuals to adjust their coverage based on changes in their health needs or modifications to plan offerings.

Key features of Medicare Part D

• Enrollment options. Beneficiaries can enroll in a stand-alone prescription drug plan (PDP) or a Medicare Advantage plan that includes drug coverage (MA-PD).
• Coverage tiers. Drugs are categorized into different tiers, with each tier having different cost-sharing requirements.
• Costs: Beneficiaries pay monthly premiums, an annual deductible and copayments or coinsurance for their medications.

Upcoming changes to Medicare Part D

• Elimination of catastrophic coverage coinsurance. Starting in 2024, beneficiaries were no longer required to pay 5% coinsurance in the catastrophic phase of coverage.
• Out-of-pocket cap. Beginning in 2025, out-of-pocket spending is capped at $2,000 annually, adjusted for inflation in subsequent years.
• Premium adjustments. Limits on premium increases to no more than 6% per year from 2024 through 2029.

One of the most significant changes brought by the Inflation Reduction Act is the ability for Medicare to negotiate the prices of certain high-cost, single-source drugs. The first round of negotiations, concluded by the Centers for Medicare and Medicaid Services (CMS) in August 2024, included the following 10 drugs:

The drugs were selected based on their high total expenditures and lack of generic competition. They were chosen from the top 50 negotiation-eligible Part D drugs with the highest total Medicare Part D expenditures. The selected drugs for negotiation cover a range of common and costly health conditions – diabetes, heart failure, blood clots, rheumatoid arthritis, psoriasis, blood cancers, Crohn’s disease and ulcerative colitis – making treatments for these conditions more affordable for Medicare beneficiaries.

Conditions not covered

While the first round of negotiations targets several prevalent conditions, other health issues may not see immediate benefits. Conditions not covered by the current list of drugs include:

• Neurological disorders. Such as Alzheimer's and Parkinson's disease.
• Respiratory conditions. Like chronic obstructive pulmonary disease (COPD) and asthma.
• Osteoporosis. Treatments for bone density loss.

The ability to negotiate drug prices is expected to bring substantial financial relief to Medicare beneficiaries, particularly retirees who often face high out-of-pocket costs for their medications.

• Financial benefits

  1. Reduced out-of-pocket costs. Nearly 19 million seniors and other Part D beneficiaries could save an average of $400 per year on prescription drugs when the out-of-pocket cap drops to $2,000 in 2025. Those with the highest drug costs could save an average of $2,500 per year.
  2. Stable copayments. Beneficiaries who rely on the negotiated drugs are expected to experience more stable copayments, thanks to the negotiated prices.

• Improved access to medications

  The drug price negotiation program could improve access to essential medications for Medicare Part D enrollees. Part D plans are required to cover all selected drugs with negotiated maximum fair prices, including all dosage forms and strengths. This ensures that beneficiaries have access to the medications they need without facing restrictive utilization management practices.

• Potential challenges

  While the negotiation process holds promise, it also faces potential challenges:

  • Legal challenges. Several lawsuits have been filed to block the implementation of the negotiation provisions.
  • Industry resistance. Drug manufacturers may resist negotiations, potentially impacting the availability of certain medications.
  • Implementation complexity. The negotiation process involves complex calculations and considerations, requiring careful management by CMS.

The Inflation Reduction Act includes a provision that prevents Medicare Part D base beneficiary premiums from increasing more than 6% each year from 2024 to 2029. However, this limit does not apply to individual plan premiums, which could still increase based on other factors considered by health plans.

The pharmaceutical industry has expressed concerns that the negotiation process could hinder drug research and innovation. However, the Congressional Budget Office predicts that the effect on drug development will be minimal, estimating that only 13 new drugs may not reach the market over the next 30 years out of approximately 1,300 anticipated launches. The negotiation aspect of the Inflation Reduction Act is projected to save the government and taxpayers around $98.5 billion over 10 years.

Medicare beneficiaries should carefully review their plans during open enrollment to ensure they are considering all out-of-pocket costs and coverage. They should also stay informed about the upcoming changes and how they may impact their prescription drug costs.

By understanding the implications of the Inflation Reduction Act and the changes to Medicare Part D, retirees and other Medicare beneficiaries can better navigate their prescription drug coverage and make informed decisions about their health care.

What is the Inflation Reduction Act?

The Inflation Reduction Act is a law signed in August 2022 that includes provisions to lower prescription drug costs for Medicare beneficiaries. A key component is the authority for Medicare to negotiate prices for certain high-cost, single-source drugs.

When will the negotiated drug prices take effect?

The negotiated prices for the first 10 drugs will take effect in 2026.

Which drugs are included in the first round of negotiations?

The first 10 drugs selected for negotiation include Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara and NovoLog.

How will the Inflation Reduction Act impact out-of-pocket costs for Medicare beneficiaries?

The act introduces an out-of-pocket spending cap of $2,000 starting in 2025 and eliminates the 5% coinsurance above the catastrophic coverage threshold. These changes are expected to significantly reduce out-of-pocket costs for beneficiaries.

What are the potential challenges to the implementation of the negotiation provisions?

Potential challenges include legal challenges, industry resistance and the complexity of the negotiation process. Several lawsuits have been filed to block the implementation of the negotiation provisions.