Reed Smith In-depth

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”),1 an omnibus budget law that contains significant reforms affecting prescription drug pricing and reimbursement. This Client Alert is the third in a series addressing these reforms.2 Below, we describe the changes being made to the Medicare Part D benefit design, subsidies for Part D plan sponsors and mandatory manufacturer discounts, and their implications.3
Dozens of prescription medicine bottles in a jumble.

Highlights of the changes summarized in additional detail below include the following:

  • Benefit design changes that eliminate beneficiary cost-sharing in the catastrophic phase of the benefit in 2024 and establish a new $2,000 cap on out-of-pocket spending beginning in 2025;
  • Beginning in 2025, elimination of the coverage gap, such that the Part D benefit design will now entail (i) a deductible (which may be eliminated by the Part D plan sponsor), (ii) an initial coverage phase, and (iii) a catastrophic coverage phase.
  • Also beginning in 2025, replacement of the current manufacturer coverage gap discounts (in the amount of 70 percent of the negotiated price of the given drug) with new mandatory manufacturer discounts payable on utilization of applicable drugs (generally branded drugs, biologics, and biosimilars, other than “selected drugs” subject to government price negotiation) during both the initial coverage and catastrophic phases, at the rates of 10 percent and 20 percent of the negotiated price, respectively, or at lower rates for certain manufacturers during a phase-in period;
  • Replacement of current catastrophic reinsurance subsidies (in the amount of 80 percent of a plan’s net costs for drugs dispensed in the catastrophic phase) with a reduced subsidy in the amount of 20 percent or 40 percent of such net costs, for applicable drugs and non-applicable (generic) drugs, respectively; and
  • Limitations on the negotiated price for a selected drug to the “maximum fair price” established under the IRA’s drug price negotiation provisions.

Current Medicare Part D Benefit Design

In order to more easily describe the changes made by the IRA, we begin with a brief summary of the current Medicare Part D benefit design, prior to any of the IRA amendments taking effect. 

Medicare Part D is prescription drug coverage offered to Medicare beneficiaries as an optional benefit by competing private sponsors of Medicare Part D plans, funded by beneficiary premiums, various federal subsidies, mandatory drug manufacturer “coverage gap discounts,” and certain other amounts.4 Part D plan sponsors have a significant degree of flexibility in designing the benefit of the Part D plans that they offer, including differences in the drugs covered under the plan’s formulary, whether a deductible is payable, and the cost-sharing levels (in the form of copayments or coinsurance percentages) applicable to specific drugs. 

These benefit designs must satisfy certain tests relating to actuarial equivalence to a statutorily-defined standard Part D benefit design (“defined standard coverage”). Part D sponsors typically offer Part D plans with increasing levels of coverage, ranging from “basic alternative coverage” (coverage that is actuarially equivalent to defined standard coverage) to varying levels of “enhanced alternative coverage” (basic alternative coverage plus “supplemental benefits,” such as reduced cost-sharing, which increase the actuarial value of the benefit). The added cost of plans providing enhanced alternative coverage is reflected in higher premiums payable by beneficiaries. 

In general, the Part D benefit currently consists of the following phases:

  • Statutory deductible. The deductible under defined standard coverage is adjusted annually, and is $505 for 2023. The deductible is reduced or eliminated for beneficiaries entitled to low-income cost-sharing subsidies (“LIS” beneficiaries). Additionally, Part D plan sponsors can reduce or eliminate the deductible for all or a portion of the drugs on the plan formulary either as a supplemental benefit or by increasing the level of cost-sharing that would otherwise be required for covered drugs after the deductible is satisfied.
  • Initial coverage phase. Under the defined standard benefit, after the deductible is satisfied, non-LIS beneficiaries pay 25 percent coinsurance for covered Part D drugs until the total expenditures for those drugs (including cost-sharing) reach an “initial coverage limit,” which is $4,660 for 2023. Virtually all Part D plans replace the 25 percent coinsurance with varying levels of cost-sharing, consisting of flat copayment amounts or coinsurance percentages, based upon the “tier” of the plan’s formulary on which a given drug is placed (e.g., generic tier, preferred brand tier, specialty tier, non-preferred drug tier). For LIS beneficiaries, these cost-sharing obligations are reduced or eliminated in accordance with statutory parameters.
  • Coverage gap. After the initial coverage limit is reached, beneficiaries enter the “coverage gap” phase of the Part D benefit. When the Part D benefit was first available in 2006, there was no plan payment of drug costs during this phase (hence the name “coverage gap”, aka “donut hole”), but the Affordable Care Act (“ACA”) “filled in” this gap with a combination of rebates that drug manufacturers are required to pay (known as “coverage gap discounts”) and Part D plan payment of the remaining costs. As a result, cost-sharing for non-LIS beneficiaries during the coverage gap under basic alternative coverage is typically substantially the same as before the initial coverage limit is reached. Coverage gap discounts are payable by manufacturers of “applicable drugs” (drugs approved by the Food and Drug Administration (“FDA”) under a new drug application (“NDA”), authorized generics, biologics, and biosimilars) dispensed to non-LIS beneficiaries during the coverage gap, and are currently 70 percent of the “negotiated price” of the applicable drug (i.e., the price the plan or its pharmacy benefit manager (“PBM”) has agreed the dispensing pharmacy will receive for the drug, excluding dispensing fees).
  • Catastrophic phase. Once beneficiaries have “incurred costs” (a term defined to include cost-sharing amounts paid by beneficiaries or covered by low-income cost-sharing subsidies, coverage gap discounts, and certain other amounts) equal to the incurred cost threshold for the given year ($7,400 for 2023), they enter the “catastrophic phase” of the Part D benefit. Cost-sharing in this phase for non-LIS beneficiaries is the greater of 5 percent coinsurance or a copayment (for 2023, in the amount of $4.15 for a generic or preferred multisource drug or $10.35 for any other drug). Most beneficiaries who reach the coverage gap are taking one or more very expensive drugs, and as such, the 5 percent coinsurance can be a significant cost-sharing obligation. Prior to the IRA amendments, there has been no out-of-pocket cap on cost-sharing for non-LIS beneficiaries.