The Centers for Medicare & Medicaid Services (CMS) recently issued crucial guidance on how the Inflation Reduction Act’s enhancements to prescription drug affordability under Medicare Part D will affect group health plan sponsors’ determinations of Part D creditable coverage.

The release of the final CY 2025 Part D redesign program instructions helps plan sponsors compare the actuarial value of their prescription drug coverage against the standard Part D coverage. This assessment is particularly vital for sponsors of High-Deductible Health Plans (HDHPs) that narrowly passed 2024 Part D creditable coverage tests.

Following a review, potential adjustments could include aligning the deductible with the minimum HDHP deductible amounts, reducing the out-of-pocket maximum, or decreasing member coinsurance for prescription drugs.

Background
Plan sponsors offering prescription drug coverage must annually notify Part D-eligible individuals enrolled in their group health plans by October 15 whether the plan’s prescription drug coverage is creditable. Additionally, plan sponsors must disclose the creditable coverage status of their plans to CMS each year. According to Part D regulations, prescription drug coverage is considered creditable if its actuarial value meets or exceeds that of the standard prescription drug coverage, as demonstrated through accepted actuarial principles and CMS guidelines.

The Creditable Coverage Notice must be provided to all Part D-eligible individuals, including active employees, disabled individuals, those on COBRA, retirees, and their spouses, dependents, or domestic partners. If a Part D-eligible individual does not enroll in Part D when first eligible, they may face permanently higher premiums if they enroll later.

Please note, those who maintain “creditable” prescription drug coverage from the time they were first eligible until actual Part D enrollment (without a coverage gap of 63 days or more) will avoid this penalty. Plans applying for the retiree drug subsidy must also pass creditable coverage testing and a net value test.

Impact on Coverage Status
The Inflation Reduction Act will significantly increase the actuarial value of the standard Part D benefit in 2025, potentially disqualifying group health plans that previously met Part D creditable coverage requirements. The 2025 enhancements to the standard Part D benefit include an annual out-of-pocket cost cap of $2,000 (adjusted for inflation), with adjusted contributions from the government, manufacturers, and plans.

It’s progressively harder for some HDHPs to achieve creditable coverage status because these changes continue the trend of increasing the actuarial value of standard Part D coverage from the beneficiary’s perspective. While the standard Part D benefit will have a $2,000 out-of-pocket maximum, employer-sponsored group health plans (especially HDHPs) often have higher maximums, as they typically combine medical and prescription drug out-of-pocket costs. The assumptions regarding the portion of the out-of-pocket maximum attributable to prescription drugs will affect the plans’ actuarial value.

Clarification & Next Steps
CMS clarified that discounts paid by manufacturers are not included in the Part D plan’s paid amount when determining creditable coverage. They also confirmed that the 2009 creditable coverage simplified determination methodology can still be used for 2025 for group health plan sponsors not applying for the retiree drug subsidy. CMS will reassess this methodology or establish a revised one for 2026 in future guidance.

Plan sponsors are responsible for proactively reviewing* their group health plans to ensure they meet creditable coverage requirements. If adjustments are necessary, they should implement a compliant communication strategy to inform Part D-eligible individuals.

Any associated communications should avoid implying that individuals should enroll in Part D instead of the employer-sponsored group health plan and should clarify that enrolling in Medicare Part D disqualifies individuals from making or receiving Health Savings Account (HSA) contributions.

* Chelko performs this service for clients as a part of the annual forecasting process. Our actuaries are available to do this for other organizations as well. Please let us know if you are interested in receiving an estimate.