The Inflation Reduction Act of 2022 includes several provisions to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government, including a number of changes to the Medicare Part D drug benefit. These changes include a cap on out-of-pocket drug spending for enrollees in Medicare Part D plans and requiring Part D plans and drug manufacturers to pay a greater share of costs for Part D enrollees with high drug costs. This brief provides an overview of the Part D benefit design and Part D enrollee cost-sharing requirements in 2023 and changes coming in 2024 and 2025.
What Does the Medicare Part D Benefit Look Like in 2023?
The standard design of the Medicare Part D benefit currently has four distinct phases, where the share of drug costs paid by Part D enrollees, Part D plans, drug manufacturers, and Medicare varies (Figure 1). (The Part D enrollee shares reflect costs paid by enrollees who are not receiving low-income subsidies.)
- In the deductible phase, Part D enrollees pay 100% of their drug costs, up to $505 in 2023. Not all Part D plans charge a deductible, but many enrollees in stand-alone PDPs are in a plan that charges the standard deductible in 2023.
- In the initial coverage phase, Part D enrollees pay 25% of total drug costs and Part D plans pay 75%, up to total drug costs of $4,660 in 2023. However, most Part D plans charge a mix of copayments and coinsurance in this phase rather than a standard 25% coinsurance rate.
- In the coverage gap phase, Part D enrollees pay 25% of total drug costs for both brand-name and generic drugs. Part D plans pay the remaining 75% of generic drug costs and 5% of brand drug costs, and drug manufacturers provide a 70% price discount on brands (there is no manufacturer price discount on generics).
- In the catastrophic phase, Medicare pays 80% of total drug costs (known as “reinsurance”), Part D plans pay 15%, and Part D enrollees pay 5%. Part D enrollees qualify for catastrophic coverage when the amount that they pay out of pocket plus the value of the manufacturer discount on the price of brand-name drugs in the coverage gap phase exceeds a certain threshold amount. In 2023, the catastrophic threshold is set at $7,400, and enrollees themselves will pay about $3,100 out of pocket before reaching the catastrophic phase (this estimate is based on using brand drugs only).
How Is the Medicare Part D Benefit Changing in 2024?
In 2024, costs in the catastrophic phase will change: the 5% coinsurance requirement for Part D enrollees will be eliminated and Part D plans will pay 20% of total drug costs in this phase instead of 15%.
The 5% coinsurance requirement for Part D enrollees in the catastrophic phase will be eliminated
In 2024, once Part D enrollees without low-income subsidies (LIS) have drug spending high enough to qualify for catastrophic coverage, they will no longer be required to pay 5% of their drug costs, which in effect means that out-of-pocket spending for Part D enrollees will be capped. In 2024, the catastrophic threshold will be set at $8,000. This amount includes what Part D enrollees spend out of pocket plus the value of the manufacturer price discount on brands in the coverage gap phase. At this amount, Part D enrollees who take only brand-name drugs in 2024 will have spent about $3,300 out of their own pockets and will then face no additional costs for their medications.
To understand the impact of this change, it helps to consider what Part D enrollees without LIS currently pay for high-cost medications. For example, for the five drugs with the highest per capita Part D expenditures in 2021 used by more than 10,000 Part D enrollees – Revlimid, Pomalyst, Imbruvica, Jakafi, and Ibrance, all cancer treatments – annual out-of-pocket costs per drug in 2023 range from over $11,000 to nearly $15,000, and out-of-pocket costs for each drug in the catastrophic phase alone range from around $8,000 to nearly $12,000 (see methods for details) (Figure 2). (These estimates exclude the cost of other drugs that users of these drugs might be taking.) Eliminating the 5% coinsurance requirement in the catastrophic phase in 2024 means that Part D enrollees without LIS who use these or other high-cost medications covered by Part D will see thousands of dollars in savings.
Part D plans will pay a somewhat larger share of total drug costs above the catastrophic threshold
With the elimination of the 5% coinsurance requirement for Part D enrollees in the catastrophic coverage phase, Part D plans will be required to pay 20% of total drug costs in this phase in 2024, up from 15% in 2023 and prior years.
How Is the Medicare Part D Benefit Changing in 2025?
Changes in 2025 include a new $2,000 out-of-pocket spending cap, elimination of the coverage gap phase, a higher share of drug costs paid by Part D plans in the catastrophic phase, along with a new manufacturer price discount and reduced liability for Medicare in this phase, and changes to plan costs and the manufacturer price discount in the initial coverage phase.
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 Part B drugs.)
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 (Figure 3). In other words, Part D enrollees who take only brands and have drug costs high enough to reach the catastrophic threshold could see savings of about $1,300 in 2025 relative to what they will spend in 2024.
The coverage gap phase will be eliminated
The coverage gap phase, where Part D enrollees had faced 100% of their total drug costs under the original Part D benefit design and currently face 25% of costs for brand and generic drugs, will be eliminated in 2025. This means that Part D enrollees will no longer face a change in their cost sharing for a given drug when they move from the initial coverage phase to the coverage gap phase, which is the case in most Part D plans today, since most plans charge varying cost-sharing amounts, rather than the standard 25% coinsurance, in the initial coverage phase.
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 phase (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 (Figure 4).
Part D plans and manufacturers will face changes to their share of total drug costs paid in the initial coverage phase
Drug manufacturers will be required to provide a 10% discount on brand-name drugs in the initial coverage phase beginning in 2025, replacing the 70% price discount in the coverage gap phase under the current benefit design. Part D plans will pay 65% of brand-name drug costs.
What Other Changes Are Being Made to Part D?
- As of 2023, the out-of-pocket cost of insulin products is limited to no more than $35 per month in all Part D plans. In addition, adult vaccines covered under Part D, such as the shingles vaccine, are covered with no cost sharing.
- Starting in 2024, people with Medicare who have incomes up to 150% of poverty and resources at or below the limits for partial low-income subsidy benefits will be eligible for full benefits under the Part D Low-Income Subsidy (LIS) Program. The law eliminates the partial LIS benefit currently in place for individuals with incomes between 135% and 150% of poverty.
- Also starting in 2024, the calculation of the base beneficiary premium will be adjusted, as needed, to limit increases in the base premium to no more than 6% from the prior year. (Premiums for individual Part D plan premiums and annual plan-level premium increases will continue to vary, however.)
- Starting in 2025, Part D enrollees will have the option of spreading out their out-of-pocket costs over the year rather than face high out-of-pocket costs in any given month.