No More Donut Holes – Part D Benefits in the Inflation Reduction Act of 2022
[This piece was updated 08-12-2022 to give more clarity to the bill’s effect on the Coverage Gap (aka “donut hole”.]
I've been known to occasionally say in my seminars, "getting on Medicare is going to be awesome!... Except possibly for prescription drugs."
Many of you have experienced it: Part D is too complex and allows drug makers to charge too much to retirees and vulnerable people. These issues need to be addressed.
The Inflation Reduction Act of 2022 is making waves across our country. I will not speak to the wisdom of the entire bill (or its dubious title), but I would like to quickly outline how I think it will affect Medicare beneficiaries in a positive way.
Out-of-Pocket Costs for Prescription Drugs Capped and Spread Out Across the Year
- Beginning January 2024, the catastrophic coverage coinsurance will be reduced from 5% to 0%
- For example, I have a client who has cancer and is on a chemotherapy pill that costs $19,000. Today she is out of pocket around $2200 getting to the catastrophic level, and then 5% coinsurance for her equaled $950 a month. In 2024 she will owe $0 once she reaches catastrophic coverage.
- Beginning January 2025, prescription drug costs for all Medicare Beneficiaries will be capped at $2,000 annually.
- Also beginning in January 2025, beneficiaries will have the option to spread out-of-pocket costs evenly across the year.
Insulin Capped at $35
- Beginning next year, in 2023, insulins covered by Part D drug plans and Medicare Advantage plans will be capped at $35 for a one-month supply.
Part D Premium Increases Capped at 6% Per Year
- Starting in 2024, Part D premiums can not increase more than 6 percent a year through at least 2029.
Price Protection for Prescription Drugs
We've all witnessed or read stories about pharmaceutical companies increasing year over year the cost of certain drugs 10% to 50% – even in some cases 100%. This legislation improves price protection through negotiating prices and charging rebates to those bad actors.
Negotiating Prices
- Starting in 2023, Medicare can begin negotiating prices that would go into effect in 2026
- In 2026, 10 Part D drugs may have negotiated prices
- In 2027, 15 Part D drugs may have negotiated prices
- In 2028, 15 Part D or Part B drugs may have negotiated prices
- In 2029, 20 Part D or Part B drugs may have negotiated prices.
By 2029, a total of 60 drugs may be subject to negotiated prices.
Inflation Rebates
- Starting in October of this year (2022), if the price of a Part D drug goes up more than the rate of inflation, the drugmaker would have to rebate Medicare. For Part B drugs (like infusions), the 20% owed by the beneficiary would be adjusted.
More People Will Qualify for Federal Extra Help on Prescription Drugs
- Beginning in 2024, the qualifying income threshold for a subsidy to help pay for Part D out-of-pocket costs will be increased from 135% of the federal poverty level (FPL) ($18,347 for a single adult in 2022) to 150% FPL ($20,385 for a single adult in 2022).
This will be huge for my home state of Mississippi. Approximately 30% of Mississippi's population is at 150% of FPL or below. (Data found here.) It appears an additional 10%-13% of Mississippi retirees could now qualify for Federal Extra Help.
What About the Donut Hole?
The "Donut Hole" is slang for the Coverage Gap in current Part D plans. In 2022, a Part D beneficiary can spend up to $4400 of the insurance company's money after which they are responsible for 25% of all costs up to $7050 when Catastrophic coverage begins.
It is not perfectly clear to me yet in my research, but my sense is the Coverage Gap will no longer exist in 2025. The ability to spread out-of-pocket costs (capped at $2,000) across the year will make any transitions from deductible, initial coverage, or coverage gap invisible to the beneficiary.
Example: a beneficiary expected to hit the $2,000 cap in 2025 will have the option to set up a monthly payment of $166. Now they will be able to budget their year without fear of a $500 deductible in January and out-of-pocket costs doubling or tripling in August when they hit the Coverage Gap.
Final Thoughts
I was originally concerned that these caps would have unintended consequences, like rising premiums and rising deductibles on plans. I was very happy to see they anticipated this and capped premium increases at 6% a year. I am still concerned we'll continue to see costs rise in the system in other ways, but I can't definitively put my finger on where that will be at the time of this writing.
The provision to expand Federal Extra Help to more low-income Americans is not being talked about much in the media, but that is one of the biggest blessings in my mind. It will have a substantial, real-world impact for the most vulnerable. Plus it will be a lot of fun for me to share the good news with these folks!
Finally, I've also been known to joke in my seminars, "congratulations! Your new hobby is going to be playing the prescription drug game." In the future less people will require a strategy for prescription drug savings.
I think this legislation goes a long way in simplifying Part D and making it more affordable for Americans.