We’ve received several questions on the creditable coverage changes coming in relation to the Inflation Reduction Act (IRA) and Final Calendar Year (CY) 2025 Part D Redesign Program Instructions.
Here are the updates to Medicare creditable drug coverage and how they may impact plans and beneficiaries.
New Creditable Drug Coverage Definition
What is Medicare Part D creditable coverage? Put simply, it means the prescription drug insurance offered by a plan is at least as good (it could be better!) as what is available through Medicare. With the 2025 Part D changes, this will remain true; however, there are some more technical parts of its definition in the Part D Communication Requirements that are changing, which affect how everyone can calculate the value of coverage.
With the Medicare Part D redesign 2025 updates, the coverage gap phase will no longer exist and the Coverage Gap Discount Program (CGDP) will be replaced by the Manufacturer Discount Program. Since these are specifically mentioned in the current definition of creditable coverage, the Centers for Medicare & Medicaid Services (CMS) revisions state:
“Creditable prescription drug coverage means any of the following types of coverage listed in paragraph (b) of this section only if the actuarial value of the coverage equals or exceeds the actuarial value of defined standard prescription drug coverage under Part D in effect at the start of such plan year, not taking into account the value of any discount provided under section 1860D-14C of the Social Security Act, and demonstrated through the use of generally accepted actuarial principles and in accordance with CMS guidelines.”
What This Means
Discounts paid under the Manufacturer Discount Program will not count toward the actuarial value of the standard Part D benefit and a plan sponsor’s plan. The value will include the amount the plan pays and the federal reinsurance subsidy in the catastrophic phase.
Determination Methodology Changes
Group health plans have two ways to determine if they provide creditable drug coverage: an actuarial determination methodology and a simplified determination methodology. Group health plans not applying for the retiree drug subsidy tend to use the latter since it’s less expensive and less complicated.
Draft guidance for the Part D redesign suggested that plans would no longer be able to use the simplified determination to calculate the value of their plans; however, CMS is continuing to allow the use of both methods for CY2025 to mitigate the impact on group health plans.
CMS is evaluating what Medicare Part D creditable coverage determination methods to allow for CY2026 and beyond.
What This Means
When evaluating whether they offer creditable coverage, group health plans not applying for the retiree drug subsidy can use the simplified determination method for 2025 but may have to use the actuarial determination method in the future.
Why These Changes Matter
We expect the benefit changes from the IRA will increase the actuarial value of the Part D benefit in 2025. Group health plans — for active employees or retirees — that have met creditable coverage requirements in the past may no longer meet those requirements, which could significantly impact plans and enrollees.
Benefit Offerings & Affordability
To maintain creditable coverage status, some group health plans may have to make substantial enhancements to their benefit offerings. This could cause significant disruption in the employer group market as they try to balance benefit enhancements with affordability. Plans may have to make significant premium increases.
Allowing the simplified methodology will help group health plans that do not receive the retiree drug subsidy (RDS) maintain some affordability. Eliminating it may result in further increased benefit costs since the actuarial determination method is more costly and labor-intensive for plans.
Retiree Drug Subsidies
An increase of the value of the standard Part D benefit means some plans may lose their eligibility for the Retiree Drug Subsidy (RDS) program, unless they increase their benefits. (Plans participating in the RDS program must offer a benefit equal to or better than the standard Part D benefit.)
A loss of federal funding would result in added costs to the plans, which could result in higher premiums for beneficiaries.
Late Enrollment Penalties
If a group health plan does not enhance their Part D benefits and/or their prescription drug coverage no longer qualifies as creditable, enrolled beneficiaries may face a Part D late enrollment penalty if they were to leave their group plan and enroll in other Medicare coverage in the future.
“Group health plans are not required to offer coverage that’s creditable. However, if they provide prescription drug coverage to individuals who are eligible for Medicare Part D, they must inform them and CMS whether or not their coverage is creditable on an annual basis. In cases where the coverage is not creditable, the late enrollment penalty will be added to the beneficiary’s monthly Part D premium. Its cost depends on how long the individual went without Part D or creditable coverage upon becoming Medicare eligible. This penalty will generally be imposed for as long as you have Medicare coverage.” — Kendra Fulmer, Carrier Team Manager
It will become increasingly important for agents to educate their clients so active employees and retirees understand their options and make informed decisions about their coverage.
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We hope this helps answer your questions on CMS’ creditable coverage for 2025 and beyond. If you have any additional questions, please reach out to your sales specialist.
These aren’t the only Part D changes coming. See all the Medicare Part D redesign changes in one place
