In August 2022, Congress enacted the Inflation Reduction Act (IRA), which made significant modifications to the Medicare Part D prescription drug program. These changes began to take effect in 2023, including a cap on insulin co-pays at $35 and the elimination of cost-sharing for vaccines. For 2024, the maximum Part D “true out-of-pocket cost” (TROOP) is $8,000, although most individuals only contribute between $3,300 and $3,800 toward this cap. In 2025, the out-of-pocket cap will be reduced to $2,000. Collectively, these changes significantly increase the richness of the Part D standard benefit, setting a higher minimum standard for an employer’s pharmacy coverage to be considered creditable. Having creditable coverage allows an individual to delay signing up for Medicare Part D coverage without penalty.
Employers who offer prescription drug coverage through a group health plan are required to determine if the coverage is creditable and then must disclose this information to eligible participants along with the Center for Medicare and Medicaid Services (CMS) on an annual basis (and at other prescribed times). This responsibility applies to all plan sponsors, regardless of whether the plan is fully insured or self-insured. CMS provides Model Notices to help with this requirement. CMS defines creditable prescription drug coverage as coverage that is expected to pay, on average, at least as much as Medicare’s standard prescription drug coverage.
When coverage is non-creditable, the Notice must inform individuals of the following:
This notice helps individuals make informed decisions about whether to enroll in Medicare Part D. Medicare-eligible beneficiaries who delay enrolling in Part D must have creditable prescription drug coverage to avoid late enrollment penalties if they later decide to enroll. The penalty can be substantial depending on how long an individual goes without creditable coverage. CMS charges a beneficiary a permanent penalty equal to 1% of the base beneficiary premium (which is $34.70 in 2024) for every month that a beneficiary was not enrolled in a creditable plan. Here is an example:
Jane loses creditable prescription drug coverage as of January 1, 2025 (the first day of the 2025 plan year) and fails to enroll in Part D by March 1, 2025 (the end of their special enrollment period). Jane elects to enroll in Part D coverage during Medicare’s 2026 annual enrollment period for a 1/1/2026 effective date. Since Jane has a 12-month gap in creditable coverage, their monthly base premium amount may permanently increase by as much as 12%.
Here is a sample calculation (for illustrative purposes, this assumes the 2024 base premium rate):
Under existing CMS guidance, there are several ways for plan sponsors to determine if their prescription drug coverage is creditable:
Importantly, CMS is considering the ongoing availability of the simplified determination method. Per CMS’ 2025 Part D Redesign Program Instructions, the simplified method will be allowed in 2025 but may be revised or eliminated starting in 2026. If eliminated, plan sponsors will need to use an actuarial valuation method for determining creditable coverage status. Employers should await future CMS guidance regarding the use of the simplified determination method for 2026 and beyond.
With a richer benchmark plan to compare to, satisfying the creditable coverage standard could be more difficult in 2025 depending on the employer’s plan design. Plan sponsors offering rich prescription drug coverage likely won’t be impacted, while those whose coverage barely passed the standard for 2024 will likely not pass in 2025. Some employers will want to make benefit enhancements to maintain creditable status, while others will opt to let their plans become non-creditable based on a cost-benefit analysis. Plan sponsors should confirm creditable status early this year to allow ample time to evaluate options and make final decisions.
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