Keenan Briefings

Briefing

Changes to Medicare Part D Benefit May Affect Creditable Status of Employer Plans

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.

AT A GLANCE

• Prescription drug coverage that is borderline creditable for the 2024 plan year is likely to be considered non-creditable for the 2025 plan year.
• Plan sponsors are not required to provide creditable coverage, but they must inform their Medicare-eligible plan participants of their pharmacy plan’s creditable status and whether it is or isn’t as rich as the standard Medicare Part D benefit.
• Most employers distribute the Creditable or Non-Creditable Coverage Notice (whichever one applies) to all eligible participants to ensure all required recipients are properly informed; targeting the Notice to only Part D eligible individuals is generally not a worthwhile endeavor.
• Individuals without creditable coverage who don’t enroll in Medicare Part D when they are first eligible may incur late enrollment penalties when they do eventually enroll in Part D coverage; individuals who lose employer-sponsored creditable coverage have a special enrollment window to enroll in Part D without penalties.
• Employers should confirm whether their prescription drug coverage for 2025 is creditable or non-creditable earlier in 2024 to allow enough time to make decisions and communicate appropriately.

BACKGROUND

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.

RELEVANCE OF CREDITABLE STATUS

When coverage is non-creditable, the Notice must inform individuals of the following:

• Coverage is not creditable relative to Medicare Part D prescription drug coverage;
• There are limitations on when the individual may enroll in Part D during the year; and
• A late enrollment penalty may apply.

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:

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):

• .12 (12% penalty) × $34.70 (2024 base beneficiary premium) = $4.164
• $4.164 rounded to the nearest $0.10 = $4.20
• $4.20 = Jane’s monthly late enrollment penalty for 2025 (the actual amount for 2025 and future years will depend on the base premium rate for that year).

DETERMINING CREDITABLE STATUS

Under existing CMS guidance, there are several ways for plan sponsors to determine if their prescription drug coverage is creditable:

• Employers with fully insured health plans should ask their carriers for the creditable status of their prescription drug coverage.
• Employers with self-insured health plans may use a simplified determination method when coverage meets certain design requirements. Otherwise, plan sponsors must use an actuarial determination method. Some, but not all, TPAs and PBMs offer this service. Those that do typically charge a fee. When needed, there are independent actuarial firms that employers can use for creditability testing.

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.

IN CLOSING

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.

Keenan is not a law firm and no opinion, suggestion, or recommendation of the firm or its employees shall constitute legal advice. Clients are advised to consult with their own attorney for a determination of their legal rights, responsibilities, and liabilities, including the interpretation of any statute or regulation, or its application to the clients’ business activities.