Major concerns are emerging that standalone Part D (PDP) plans are seeing skyrocketing premiums due to the unintended consequences of major Part D restructuring and out-of-pocket (OOP) cost reduction passed as part of the Inflation Reduction Act (IRA). A new report by the Council for Affordable Health Coverage (CAHC) asks Congress to intervene on what will be growing impacts in 2025 after premium rises in 2024.
The increased costs in Part D are tied to a number of changes in the IRA. I went in-depth on all the Part D changes included in the IRA in an earlier blog on April 15, 2024: https://www.healthcarelabyrinth.com/major-changes-occurring-in-medicare-part-d/ .
New costs to plans in Part D due to IRA
Here is a brief summary of additional costs in the IRA now borne or will be borne in whole or part by plans since the IRA passed:
2023:
- The cost of insulin was capped at no more than $35 per month.
2024:
- The 5% cost-sharing for members in the Catastrophic Phase was eliminated.
2025:
- Elimination of the Coverage Gap phase: There will no longer be a per drug 25% cost-sharing for members. The initial phase essentially is extended into the Catastrophic Phase and members will pay their Initial Phase copays or cost-sharing in the benefit for brands and generics.
- Costs in the Catastrophic Phase are moved from Medicare to plans and brand drug manufacturers. Medicare’s direct costs drop from 80% to 20%. Plan responsibility will move from 15% to 60% in this phase. There will be a 20% discount from brand drug makers. This addresses rising reinsurance costs for Medicare. While catastrophic funding is being moved by the government to upfront payments to plans, the ongoing risk is definitively transferred from Medicare to plans and represents a huge exposure and liability.
- In an offsetting change for plans, in the initial phase brand drug makers have to give a 10% brand discount in addition to rebates negotiated with plans. Thus, a plan’s obligations for brand costs drop to 65% from 75%, assuming the rebates do not change from brand drug makers.
- A new cap of $2,000 on out-of-pocket spending. Based on how the program works, with the elimination of the catastrophic cost-sharing, a person in 2024 is currently capped at about $3,300.
- Members can choose to enroll in a program with their Part D plan to spread their estimated monthly cost-sharing over 12 months. It amounts to a significant administrative cost to plans and pharmacy benefits managers (PBMs).
In addition, PBMs are now required to pass certain price concessions on to pharmacies.
How does a Medicare beneficiary get Part D benefits
As we know there are two ways for seniors and those with qualified disabilities to receive Medicare Part D retail drug benefits.
- Individuals enrolled in the traditional Medicare fee-for-service (FFS) program and those enrolled in a Medicare Advantage (MA) plan without Part D coverage (MA Part C only) enroll in a standalone Part D plan (PDP). There are about 20.2 million in traditonal FFS and 2.8 in an MA Part C only plan, for a total of 23.0 million, who have standalone Part D coverage.
- If individuals are enrolled in an MA plan that offers Part D (MA-PD), they obtain their retail drug benefit from your private MA-PD plan. There are about 31.3 million in MA-PDs.
The impacts
While the increase in costs in the Part D program impacts both MA-PDs and PDPs, the MA-PDs are allowed to comingle Part C and Part D revenues from the government to fashion integrated benefits. The large revenue in Part C protects the smaller Part D benefit in MA-PDs. As such, MA-PDs work to reduce impacts to their integrated premiums. Overall integrated MA-PD premiums are very low historically. But it is clear that MA-PDs will need to reduce overall benefits in 2025 for many reasons – rate cuts, low Star scores, regulatory changes, and the Part D changes.
But the bigger worry is the free-standing PDP plans, which again offer the retail drug benefit only. Retail drugs are a small part of overall Medicare and PDPs are unable to absorb the huge costs transferred to them in the IRA.
CAHC’s report says that average premiums in standalone PDPs went up on average 21.5% in 2024 due in part to the IRA changes, from about $40 in 2023 to about $48. The Kaiser Family Foundation (KFF) found recently that existing members switching to and new members enrolling in lower premium plans reduced that projected premium hike to an enrollment-weighted average of about $43 or about 5%. For sure, people made sacrifices in terms of higher ongoing out-of-pocket (OOP) costs in favor of lower monthly premiums. According to Avalere Health, 45 percent of PDP enrollees faced premium increases of more than 25 percent if they had not switched plans during the enrollment period.
CAHC’s says most enrollees are facing higher cost-sharing for brand-name drugs in 2024. Preferred brands saw a 4% increase in coinsurance and non-preferred brands had a 1% increase in coinsurance.
In addition, plan offerings diminished as many private plans left or contracted offerings in given markets. CAHC says choices for PDPs are the lowest they have been since Part D launched in 2006. The number of available PDPs has decreased 25% since 2020. The report says premium-free Part D stand-alone drug plans for Low-Income Subsidy (LIS) eligible beneficiaries decreased 34% from 2023 and only 20% of plans now offer a $0 premium.
The real problem is that the CAHC says that premiums could go up 50% to 100% or more from 2024 to 2025 due to the ongoing IRA costs, the new $2,000 OOP cap, and other IRA changes. Plan switiching and new enrollment in lower-premium plans could reduce the enrollment-weighted average premium increase projection (again, enrollees will opt for lower monthly premiums and higher OOP costs). Regardless, premium increases will be major. What is troubling, as CAHC notes, is that premiums were very stable before the passage of the IRA, increasing only 9.2% from 2010 to 2023. CMS
CMS tries to argue that all will be fine because the IRA had a new premium stabilization subsidy that caps the base premium amount to no more than a 6% increase per year from 2024 to 2029. But this is based on the standard Part D benefit. Part D plans enhance beyond the standard benefit and will be on the hook for additional costs due to the transfer of liability to the plans from the government and OOP costs. This will mean additional premiums, major cuts to enhancements, or both.
We will get a small glimpse at the fallout in the Part D program in late July when the Centers for Medicare and Medicaid Services (CMS) releases preliminary information on 2025 bids. But the real impact won’t be known until October’s enrollment season.
The message
Public policy changes always have unintended consequences. Many championed the passage of the IRA changes to Part D without really understanding the fallout. Any time benefits change or cost-sharing is reduced, it stands to reason that a plan will need to increase premiums to offset the higher costs. Of course, policymakers and lawmakers will blame it all on “the greedy insurance companies,” but they are to blame. They did not fund or fully fund the OOP reductions through government appropriations and levied the cost on private plans.
There will still be some winners with all these changes even with higher premiums. Those with high drug costs benefit from cost-sharing reductions, eliminations, and caps. But everyone will be hurt by mammoth increases in premiums. In 2023, the average PDP premium was $40. If CAHC is right, it could go to $65 to $86 per month — or even just short of $100. Those on fixed income cannot afford this. While there are benefits to some (for sure the sickest), the vast majority could have huge affordability issues. Some could drop coverage, while others could move from FFS to MA-PD and accelerate growth in that program. Fewer and sicker folks in PDPs then could send premiums up even more as adverse selection sets in.
In the end, the IRA Part D changes were too good to be true. They were not financed adequately by the government and the costs were placed on plans. This was entirely predictable.
Additional reading:
https://cahc.net/wp-content/uploads/2024/07/CAHC-IRA-Part-D-Issue-Brief.pdf
#medicareadvantage #partd #pdp #ira
UPDATE:
To deal with anticipated surging premiums, on July 29 the Centers for Medicare & Medicaid Services (CMS) announced an additional voluntary premium stabilization demonstration program for standalone Part D (PDP) plans. The proposed new premium stabilization program for PDPs features a number of caps and reductions to premiums and enhances risk corridor protections.
— Marc S. Ryan