Part D enhancements may impact creditable coverage testing 

Last month, the Centers for Medicare & Medicaid Services released much-needed guidance clarifying how the Inflation Reduction Act’s significant improvements to prescription drug affordability under Medicare Part D may impact group health plan sponsors’ Part D creditable coverage determinations.

With the CMS release of the final CY 2025 Part D redesign program instructions, plan sponsors now have the necessary guidance to review the actuarial value of their prescription drug coverage versus the standard Part D coverage. This analysis will be particularly important for plan sponsors with High-Deductible Health Plans that passed 2024 Part D creditable coverage testing with low margins.

A timely review will help determine if any adjustments need to be made for the group health plan to continue to meet creditable coverage. Fixes could include adjusting the deductible to or around the minimum HDHP deductible amounts, lowering the out-of-pocket maximum or reducing member coinsurance for prescription drugs.

Background

All plan sponsors providing prescription drug coverage must give Part D-eligible individuals enrolled, or seeking to enroll, in the group health plan an annual notice describing whether the group health plan’s prescription drug coverage is creditable. In addition, plan sponsors must annually disclose the creditable coverage status of their prescription drug plans to CMS. The Part D regulations provide that prescription drug coverage is creditable “only if the actuarial value of the coverage equals or exceeds the actuarial value of defined standard prescription drug coverage as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS actuarial guidelines.”

The Creditable Coverage Notice must be provided to all Part D eligible individuals, which includes Medicare beneficiaries who are active employees, disabled, on COBRA and retirees, as well as Medicare beneficiaries who are covered as spouses, dependents or domestic partners under active employee coverage or retiree coverage. If a Part D eligible individual does not sign up for Part D when first eligible, they will likely pay a higher premium permanently if they eventually enroll.

However, late enrollees who have “creditable” prescription drug coverage from the time they were first Part D eligible until the time of actual Part D enrollment (without a coverage gap of at least 63 days) will not be penalized. This means that a Part-D eligible individual who is enrolled in an employer-sponsored group health plan with prescription drug coverage that does not provide creditable coverage will likely pay a higher Part D premium if/when they enroll in Part D.

Plans that apply for the retiree drug subsidy are also required to pass creditable coverage testing in addition to a net value test.\

Impact of the IRA on group health plan creditable coverage status

The IRA will increase the actuarial value of the standard Part D benefit in 2025 to the point where group health plans that have met Part D creditable coverage requirements in previous years may no longer meet those requirements. The standard Part D prescription drug benefit enhancements for 2025 include: Annual out-of-pocket costs will be capped at $2,000 (adjusted annually for inflation); government, manufacturer and plan funding portions will be adjusted.

These changes continue the pattern that has occurred since 2006 of increasing the actuarial value of the standard Part D coverage from the beneficiary’s perspective, thereby making it incrementally more difficult to achieve creditable coverage status, particularly for some HDHPs. While the standard Part D benefit will have a $2,000 out-of-pocket maximum, employer-sponsored group health plans (particularly HDHPs) have maximums often greater than $2,000 since group health plans typically use a single out-of-pocket maximum applicable to both medical and prescription drugs. The assumptions used to determine the proportion of the out-of-pocket maximum amount attributable to solely prescription drugs will impact the estimated actuarial value of the plans.

Outstanding uncertainty addressed

One of the outstanding questions that was addressed by CMS guidance is what the standard Part D coverage actuarial value will be for testing creditable coverage. Helpfully, CMS guidance provided that “discounts paid by manufactures are not included in the [Part D] plan paid amount when making a determination about creditable coverage.”

This helpful clarification confirmed Mercer’s original interpretation that while it may be somewhat harder for some group health plans to pass creditable coverage testing, the passing threshold is not as drastic of an increase as many initial outside reports originally suggested.

In addition, CMS clarified that it will continue to permit use of its 2009 creditable coverage simplified determination methodology, without modification to the existing parameters, for 2025 for group health plan sponsors not applying for the retiree drug subsidy. CMS will re-evaluate the continued use of the existing simplified determination methodology, or establish a revised one, for 2026 in future guidance.

Next steps

If it is determined that a group health plan offered to Part D eligible individuals will not meet creditable coverage requirements, plan sponsors should develop a proactive and compliant communication strategy.

Communications should be drafted carefully to avoid the appearance of suggesting or encouraging enrollment in Part D instead of, perhaps, enrollment in an employer-sponsored group health plan. Communications could also clarify that an otherwise Health Savings Account-eligible individual’s enrollment in Medicare Part D will disqualify that individual from making or receiving HSA contributions.

In addition, plan sponsors that apply for the retiree drug subsidy should review similar plan model changes above and further explore offering benefits through other means, such as Employer Group Waiver Plans, Medicare Advantage Prescription Drug Plans or exchange options.