National Conference on Public Employee Retirement Systems

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The Inflation Reduction Act’s Impact on Medicare Part D and Retiree Healthcare Plans

By: Alisa Bennett, Cavanaugh Macdonald Consulting
Alisa Bennett of Cavanaugh Macdonald Consulting summarizes the upcoming changes to Medicare Part D and drug pricing due to the Inflation Reduction Act of 2022, and the relevance to public sector retiree healthcare plans and retirement systems.
The Inflation Reduction Act’s Impact on Medicare Part D and Retiree Healthcare Plans
This is an excerpt from NCPERS Winter 2024 issue of PERSist, originally published January 16, 2024.
The Inflation Reduction Act of 2022 (IRA) was signed into law on August 16, 2022. Of particular interest to public sector retiree healthcare plans and retirement systems are the changes to Medicare Part D and drug pricing. These provisions are relevant even to retirement systems who do not sponsor retiree healthcare plans because a significant portion of a retiree's pension benefit goes to healthcare costs. 
The provisions applicable to members with Medicare Part D plans include:
  • The copay for insulin is capped at $35 per month.
  • Price negotiations will take effect in 2026 for 10 drugs covered by Medicare, increasing to 20 drugs in 2029.
  • Drug companies will pay rebates for drugs used by Medicare beneficiaries if prices rise faster than inflation.
  • The 5% coinsurance for catastrophic coverage in Medicare Part D is eliminated in 2024, there will be a $2,000 cap on Part D out-of-pocket spending in 2025, and annual increases in Part D premiums will be limited for 2024-2030.
Prescription drugs are expensive and are only becoming more expensive with biologics and other specialty drugs being approved.  These drugs represent a positive outcome for preservation and quality of life of the users, but someone has to pay for them.
When it comes to Medicare, costs are shared between various entities:
  • the Federal Government,
  • the Health Plan (commercial Part D plan or employer sponsored plan),
  • the participant in the form of premiums and/or out of pocket costs such as deductibles, coinsurance and copays,
  • and the drug manufacturers in the form of price concessions and rebates. 
The IRA is intended to lower drug prices and catastrophic retiree costs, but plan design changes shift costs from one payer to another. A potential implication of these provisions is that the drug companies will attempt to make up any lost revenue on Medicare beneficiaries by increasing costs for everyone else. This would impact the active employee population as well as pre-Medicare retirees.
The limits on price increases to that of general inflation could impact launch prices, meaning that the drug manufacturers could increase the initial price of a new drug that enters the market to protect against restrictions on their ability to increase prices later.
Drug negotiations do have the potential to encourage additional lower-cost biosimilars. The law limits biologics eligible for Medicare negotiation to those which have been on the market for 11 years and which do not have a biosimilar version in the pipeline. This may alter incentives for brand-name biologic companies and drive more low-cost biosimilars. 
By 2025, the Medicare Part D plan design will cap participant out of pocket spending at $2,000 and alter the cost sharing between the participant, the Part D Plan, the drug manufacturers and Medicare. The chart below shows how this will work.

For very expensive drugs, the participant's current 5% share in the catastrophic phase can be significant. Under the 2025 design, plan participants out of pocket costs will be capped at $2,000 which is protection for those with very high-cost drugs. At the same time, drug manufacturers will have some liability in the catastrophic phase which could potentially encourage them to bring down costs on very expensive specialty drugs. Stakeholders will be watching carefully to see how the cost impacts of the law unfold over the next few years.
About the author: Alisa Bennett, FSA, EA, MAAA, is a President and Consulting Actuary at Cavanaugh Macdonald Consulting. Alisa has 30 years of consulting experience providing healthcare and pension actuarial valuation services to public sector clients. Alisa is a Fellow of the Society of Actuaries and an Enrolled Actuary.



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