The Inflation Reduction Act (IRA) recently overhauled Medicare’s prescription drug coverage, including imposing a new $2,000 cap on enrollees’ out-of-pocket spending. In practice, this cap is likely more generous than many observers realize and may be contributing to instability in the market.
The IRA introduced several provisions that were expected to increase plans’ costs, including the new out-of-pocket cap where there was no such limit before. If beneficiaries pay less out of pocket, plans must pay more. However, plans’ expected costs for 2025 were higher and more variable than expected, increasing by an average of 180 percent.
One potential reason for this surge in plan “bids” is that, in practice, the $2,000 out-of-pocket cap is often much lower. And the lower the true cap, the higher the plan’s costs.
A recent MedPAC report illustrates how, under current guidance, a beneficiary in an enhanced plan can hit that $2000 cap with less than $500 in actual spending. In essence, this is because enrollees who choose plans that are more generous than the standard, such as plans with lower cost sharing, get “credit” for what they would have spent under a standard plan.
To illustrate how this works I’ve reproduced an example from MedPAC’s report in which a beneficiary takes two brand drugs and is enrolled in an enhanced plan with a $47 copay for each (or $94 total per month). If they had instead enrolled in a standard plan, they would have spent $776 in January. The $682 difference is considered the value of the enhanced plan’s supplemental benefits.
Critically, this $682 is treated as if the enrollee spent that out-of-pocket (specifically, it counts towards the enrollee’s “true out-of-pocket cost,” which is the measure used to determine when the beneficiary reaches the cap on spending). After five months, the enrollee reaches the out-of-pocket cap with $470 in spending. This phenomenon is relevant to a large share of the market since most beneficiaries choose a more generous enhanced plan.
On one hand, this broad definition of out-of-pocket costs will benefit enrollees with enhanced plans who take prescriptions drugs as they will face even lower financial exposure. However, this imposes greater liability on plans in ways that may negatively affect the Part D market.
The current approach makes it more costly for insurers to offer plans with lower cost sharing, which will be reflected in premiums and may affect the availability of such plans. This is particularly true if enrollees begin to systematically enroll in enhanced plans that have generous supplemental coverage of drugs that they take. Moreover, once enrollees hit their out-of-pocket cap, it becomes difficult for plans to manage further spending. Uncertainty about these dynamics may have been a contributing factor to high and variable bids from insurers this year.
This is worth emphasizing because the Part D market is already facing a host of uncertainties. The federal government is currently spending billions of dollars to contain premium increases through multiple channels while also limiting insurer liability. Policy choices that create uncertainty and increase premiums exacerbate this situation. Given these realities, efforts to reduce sources of uncertainty are worth considering.
The current administration could consider changing the guidance from the Biden Administration and, for example, stipulate that enhanced benefits do not count towards reaching the out-of-pocket cap. Congress could also pass legislation to accomplish similar goals. Doing so would remain consistent with the out-of-pocket cap stipulated in the IRA while increasing the stability of the Part D market.
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