Overview

On January 1, 2023, the Medicare outpatient prescription drug benefit (Medicare Part D) began its 18^th year of operation. Congress created the voluntary Part D program in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA; P.L. 108-173), effective January 1, 2006. The law also made Part D the primary source of drug coverage for individuals covered under both Medicare and Medicaid (also called dual eligibles). Part D has been modified by a series of statutes since its enactment including, most recently, the 2022 budget reconciliation measure referred to as the Inflation Reduction Act of 2022 (IRA; P.L. 117-169). The IRA includes some of the most significant changes to the Part D benefit since the program was created, including an annual cap on enrollee out-of-pocket spending, beginning in 2024. (See "Standard Benefit" and "Appendix B. IRA Drug Price Negotiation in Part D.")

Part D coverage is provided through stand-alone prescription drug plans (PDPs), which offer only drug coverage, or through Medicare Advantage (MA) prescription drug (MA-PD) plans, which offer drug coverage as part of a broader Medicare Part C managed care benefit that also includes medical services. Commercial insurers that offer Part D plans bear some financial risk, although federal subsidies cover most program costs in an effort to encourage participation and keep benefits affordable. All Part D plans must meet certain minimum requirements, but there are significant variations among plans in terms of premiums and benefit design, including differences in drug formularies (i.e., lists of covered drugs) and cost sharing for particular drugs.

Most Part D plans are individual products, but a number of employers and unions offer retirees Part D benefits through special employer group waiver plans (EGWPs). (See "Employer Group Waiver Plans.") In addition, the MMA provides separate subsidies for employers that agree to provide retiree drug benefits outside of Medicare, as an incentive for employers to continue offering retiree health benefits. (See "Retiree Drug Subsidy.")

The Part D program provides additional subsidies to low-income enrollees. Individuals with incomes up to 150% of the federal poverty level (FPL) and limited assets are eligible for a low-income subsidy (LIS) that reduces their out-of-pocket spending by paying for all, or some, of the Part D monthly premium and annual deductible and that limits co-payments or coinsurance.¹ An estimated 14.2 million beneficiaries received the LIS in 2023.²

Monthly enrollment numbers are available for 2023.³ For 2023, a total of 801 PDPs were offered nationwide, a slight increase from 2022. On average, Medicare beneficiaries have 24 PDPs and 35 MA-PD plans to choose from in their geographic area.⁴

During the next several years, the Centers for Medicare & Medicaid Services (CMS) is to phase in wide-ranging changes to Part D, as required by the IRA. Effective in 2023, the IRA eliminated enrollee cost sharing for certain Part D vaccines and set a $35 cap on enrollee cost sharing for insulin.⁵ Effective in 2024, the IRA caps annual enrollee out-of-pocket spending at $8,000. In 2025, the IRA reduces the Part D out-of-pocket spending cap to $2,000 (and then adjusts the cap based on drug price inflation in subsequent years). The IRA also expands LISs (effective in 2024) and limits annual premium increases from 2025 to 2029, among other changes.⁶

This report provides information about the current Part D benefit structure and describes the IRA changes to the Part D standard benefit that are to be phased in through 2025. For a more detailed description of the IRA, including information about provisions (1) requiring the Secretary of the Department of Health and Human Services to negotiate prices for certain Part D drugs and (2) requiring that manufacturers pay mandatory rebates to CMS if they increase Part D drug prices faster than consumer inflation, see CRS Report R47396, Health Care Provisions of the Budget Reconciliation Measure P.L. 117-169.⁷

Eligibility for Medicare Part D

In general, anyone who is entitled to Medicare Part A and/or enrolled in Part B is eligible to enroll in a Medicare Part D drug plan. In addition, an individual must be a U.S. citizen or qualified alien and must permanently reside within one of the 34 designated PDP regions in the United States; anyone who is living abroad or is incarcerated is not eligible.⁸

For most people, joining Part D is voluntary, although Medicare-Medicaid dual-eligible beneficiaries are automatically enrolled. Medicare beneficiaries cannot be turned down for Part D coverage due to preexisting health conditions or high utilization of prescription drugs.

Of the 65 million Medicare beneficiaries who were eligible for Part D, in 2022, 49.8 million (about 77%) were enrolled in a Part D plan and another 1.3 million (about 2%) had prescription drug coverage through a former employer that received a Part D subsidy for a portion of the coverage. Of the remaining roughly 21% of Medicare beneficiaries, nearly 10% of total beneficiaries had drug coverage as generous as Part D through another source, such as the Federal Employees Health Benefits program (FEHB), TRICARE coverage for the military, or private coverage; about 12% of beneficiaries had either less generous coverage than Part D or no drug coverage at all.⁹ (See Table 1.)

Eligibility for Low-Income Assistance

Beneficiaries with limited incomes and resources may qualify for assistance with Part D premiums, cost sharing, and other out-of-pocket expenses. In 2023, a forecast estimated that 14.2 million Medicare beneficiaries are expected to receive LISs. (See Table 2 below.) In addition to financial assistance, LIS beneficiaries have other added benefits, such as the right to change plans more frequently than other Part D enrollees.

For 2023, there are two categories of LIS beneficiaries: (1) those with the lowest income and assets who are eligible for the full LIS and (2) those with slightly higher income and assets who qualify for a partial LIS. Individuals may be automatically deemed eligible for the full LIS if they are dually eligible for Medicaid.

The IRA requires that the two LIS categories be merged into one LIS classification starting in 2024. The new LIS program will provide the more generous benefits of the previous full LIS and will allow individuals to qualify based on the higher income and resource allowances previously used to determine the partial LIS. (See "Low-Income Subsidies.")

Full-Subsidy-Eligible Individuals

Certain groups of Medicare beneficiaries automatically qualify and are deemed eligible for the full LIS. The full-benefit dual eligibles who qualify for Medicaid benefits based on income and assets are automatically eligible for the full Part D LIS. Additionally, those who receive Medicare premium and/or cost-sharing assistance from Medicaid through the Medicare Savings Program (MSP),¹⁰ plus those eligible for Supplemental Security Income (SSI) cash assistance,¹¹ are automatically deemed eligible for full LIS. These three categories include all eligible persons who (1) have incomes below 135% of the FPL, or $19,683 for an individual and $26,622 for a couple in 2023;¹² and (2) have resources below $9,090 for an individual and $16,630 for a couple in 2023.¹³ The limits are increased annually by the percentage increase in the Consumer Price Index for urban consumers (CPI-U) as of September of the previous year.¹⁴ (See Figure 1.)

CMS deems individuals automatically eligible for the LIS effective as of the first day of the month that they attain qualifying status (e.g., become eligible for Medicaid or SSI). The end date is, at a minimum, through the end of the calendar year within which the individual becomes eligible. Beneficiaries who are deemed LIS-eligible for any month during the period of July through December of one year are deemed eligible through the end of the following calendar year. CMS changes an individual's deemed status in mid-year only when such a change qualifies the beneficiary for lower cost sharing.

Eligibility for the LIS is not always continuous from year to year. For example, LIS beneficiaries who lose eligibility for Medicaid or SSI during a year are not automatically qualified to receive the LIS the next year. Each September, CMS notifies such individuals that their LIS-deemed status will end on December 31 of that year. Such individuals may reapply for the LIS and might qualify for the LIS through the application process. (See "LIS Enrollment.")

At the end of each plan year, CMS reassigns LIS beneficiaries to a new Part D plan if their Part D plan has terminated. CMS also reassigns full LIS beneficiaries who are enrolled in PDPs if their plan raises its monthly premiums to a level above a set LIS benchmark premium for the plan region.¹⁵ (See "Reassignment of Certain LIS Beneficiaries.")

Figure 1. Overview of 2023 Low-Income Subsidy (LIS)

Source: CRS table based on Social Security Administration (SSA) and CMS data. Note: Beginning in 2024 there will be one LIS category. The new LIS program will provide the more generous benefits of the previous full LIS and will allow individuals to qualify based on the higher income and resource allowances previously used to determine the partial LIS.

Partial-Subsidy-Eligible Individuals

Individuals with limited incomes and resources who do not automatically qualify for the LIS may apply and have their eligibility determined by either the Social Security Administration (SSA) or their state Medicaid agency. This group includes all other persons who (1) are enrolled in a PDP or MA-PD plan; (2) have incomes below 150% of the FPL, which is $21,870 for an individual and $29,580 for a couple in 2023;¹⁶ and (3) have assets below $15,160 for an individual and $30,240 for a couple in 2023 (increased in future years by the percentage increase in the CPI-U).¹⁷

An individual who applies, and is determined eligible for the LIS, can begin receiving benefits on the first day of the month in which the application was submitted. In most cases, this means that LIS status is applied retroactively. For example, if an LIS beneficiary was enrolled in a Part D plan prior to a determination of LIS eligibility, the Part D plan sponsor must ensure that the beneficiary is reimbursed for any premiums or cost sharing that should have been covered by the subsidy. If a person was not already eligible for Medicare, the LIS takes effect on the first day of the month when his or her Medicare eligibility begins.¹⁸

Initial LIS eligibility determinations are for no longer than 12 months. If the SSA or a state Medicaid agency later decides that an individual is no longer eligible for the LIS, that same entity also decides when the LIS benefits end. The end date is always the last day of a calendar month, though it may occur in any month of the year.

Changes in LIS Status

Throughout each plan year, CMS uses SSA data and state files of individuals dually eligible for Medicare and Medicaid to initiate the LIS eligibility process for new recipients and to look for changes in LIS eligibility status for current LIS beneficiaries.¹⁹ Part D law allows forbearance in some instances. For example, in the case of a death, the surviving spouse of an LIS-eligible couple receives a grace period for a redetermination of benefits.²⁰

Medicare Part D Enrollment Periods

A Medicare beneficiary who is signing up for Part D for the first time may do so in one of three specified enrollment periods,²¹ depending on the individual's circumstances:

• Initial Enrollment Period for Part D;
• Annual Open Enrollment Period (or Annual Coordinated Election Period, AEP); or
• Special Enrollment Period (SEP).

Individuals who qualify for the LIS may enroll at any time.

Initial Enrollment Period

The initial enrollment period is the time during which an individual is first eligible to enroll in a Part D plan.²² Beneficiaries not yet enrolled in Medicare may join a drug plan at any time during their seven-month initial Medicare enrollment period. The Part D initial enrollment period is the same as the initial enrollment period for Medicare Part B.²³ Coverage for new enrollees begins on the first day of the month following the month of enrollment, but no earlier than the first month they are entitled to Medicare.

Individuals who become eligible for Medicare but have creditable coverage, which is prescription drug coverage that CMS estimates will provide at least the same level of benefits as the Part D standard prescription drug benefit, may choose not to sign up for Part D during their initial enrollment period. Sources of possible creditable coverage include some employer-based prescription drug coverage, including FEHB; qualified State Pharmaceutical Assistance programs (SPAPs); and military-related coverage (e.g., VA, TRICARE). However, these individuals could face a late enrollment penalty if they let their creditable coverage lapse before enrolling in Part D. (See "Late Enrollment Penalty.")

Annual Open Enrollment Period

In general, an individual who does not sign up for Part D during his or her initial enrollment period may enroll only during the annual open enrollment period, held from October 15 to December 7 each year. Coverage then begins the following January 1. Beneficiaries already enrolled in Part D may change plans during the annual open enrollment period.

Beneficiaries may want to change plans for a variety of reasons, including changes in their health status and prescription drug needs or in response to plan modifications. Generally, sponsors make changes to plan benefits effective at the start of each calendar year. After the open enrollment period closes, most beneficiaries are locked into their Part D plans for the upcoming benefit year.

Special Enrollment Periods

There are limited occasions outside the annual open enrollment period when an individual may enroll in, or disenroll from, a Part D plan or switch from one Part D plan to another. In general, special enrollment periods (SEPs) are open to individuals who (1) move to a new geographic area,²⁴ (2) involuntarily lose creditable coverage, (3) receive inadequate information about their creditable coverage status, (4) are subject to a federal error, or (5) are enrolled in a PDP that has failed or has been terminated.²⁵

Late Enrollment Penalty

A Part D late enrollment penalty is assessed on persons who go without creditable drug coverage for 63 continuous days or more after the close of their initial enrollment period, and then sign up for Part D. The penalty is intended to encourage wider enrollment and prevent adverse selection, which can occur when healthy people put off buying insurance while those with a real or perceived need immediately enroll. If Part D enrollees are mainly those who are ill or have higher prescription drug spending, per capita program costs can rise. Higher premiums and/or cost sharing, in turn, may cause other enrollees (presumably healthier, less costly ones) to end coverage. Over time, if more persons drop out, program costs could become prohibitive.

The Part D late enrollment penalty is based on the number of months an individual does not have creditable coverage and is applied to premiums on a monthly basis thereafter.²⁶ The penalty is calculated by multiplying 1% of the national base premium ($32.74 per month for 2023)²⁷ by the number of full months an individual has been eligible but has gone without coverage. The final amount is rounded to the nearest $0.10. For example, if a beneficiary was eligible for Part D in June 2020 but did not sign up until the 2023 open enrollment period, (with coverage effective January 2023), and did not have creditable coverage during the 30-month interim period, the individual would pay an additional $9.80 per month.²⁸

The late enrollment penalty is applied permanently to Part D premiums. Because the national base premium is recalculated annually, and the penalty is based on the base premium, the penalty amount would increase in subsequent years if the base premium rises. Generally, LIS beneficiaries are not subject to the late enrollment penalty.

Plan Selection

Sponsors may alter a plan benefit package at the beginning of a new program year, including changing the mix of drugs in a formulary and/or modifying required cost sharing for certain drugs. Sponsors must mail an Annual Notice of Change (ANOC) to plan enrollees, to be delivered by September 30. The document describes any modifications to the plan's premiums, drug coverage, cost sharing, and other features for the coming benefit year. The delivery deadline is designed to ensure that beneficiaries have at least two weeks to review the information prior to October 15, the first day of the annual enrollment period.

Sponsors are required to send plan enrollees other enrollment-related materials and information such as the Summary of Benefits and Evidence of Coverage documents.²⁹ These documents offer information about a plan's formulary, general utilization management and pricing policies, information on beneficiary rights, and other information.

Each year, Medicare beneficiaries have an opportunity to review the cost of their current drug and health plans, (if in MA) including premiums, co-payments, and deductibles, and compare the cost and coverage to other plans in their area. Additionally, beneficiaries can examine whether plans have price tiers that increase or decrease cost sharing for the drugs they use, whether the plans offer preferred pharmacy options, and what utilization management requirements the plans impose for drugs, such as prior authorization. (See "Drug Utilization Management Programs.")

CMS posts information on Medicare.gov to help beneficiaries compare Part D plan information. Beneficiaries, and persons assisting them, can also use the Medicare drug plan finder to search for information on individual drugs.³⁰ After a beneficiary enters information into the plan finder regarding prescribed medications, the dosages, and specific pharmacy to be used, the plan finder displays applicable Part D plans in the area. The plan finder also provides information on quality ratings to make it easier to compare plans based on cost, quality, and performance ratings.³¹ CMS sends annual notices to beneficiaries in low-quality plans encouraging them to look at other, higher rated plans. (See "Low-Quality Plans.")

Information on plan availability and characteristics can be obtained from a number of additional sources, including the Medicare toll-free information number (1-800-MEDICARE), State Health Insurance Assistance Programs (SHIPs),³² and other local organizations.

Low-Quality Plans

CMS uses a star-rating system to assess the quality of Part D plans. MA-PD plan sponsors are rated on up to 40 quality and performance measures, while PDP sponsors are assessed on up to 12 measures.³³ Plans are ranked on a scale of one to five stars, with five stars considered excellent. Part D sponsors must provide star rating information to beneficiaries through a standard document distributed with enrollment information and prominently posted on plan websites.

CMS has determined that three stars is the lowest acceptable quality rating for a plan. Plans must display a special icon if they have an aggregate star rating of 2.5 or lower for three years of data. Plans with star ratings of less than three stars for three consecutive years may be terminated by CMS. In addition, CMS may disable the online enrollment function for plans with a low-rating icon, and beneficiaries would have to contact the plan directly if they want to enroll.³⁴ Plans that receive five-star ratings may display a special icon recognizing them as high-performing plans. All Part D enrollees qualify for a special enrollment period during which they can switch from their current plan to a five-star plan, provided they meet other enrollment requirements.³⁵

Plan Marketing

Plan sponsors must provide timely and accurate information in their marketing materials. For example, a plan that has received a four-star rating for one of the categories on which it is assessed but has an aggregate three-star quality rating across all the CMS measures cannot create promotional material stating that the plan is a four-star plan.³⁶ Plans are not allowed to market via unsolicited contacts, such as door-to-door sales, and also face limits on marketing and sales events. All plan sponsors must have interpreters in their call centers.³⁷

Plans must provide certain documents upon request or enrollment, such as a summary of benefits, the plan formulary, and a directory of contracting pharmacies. Plan sponsors may offer nominal gifts (worth $15 or less per item or $75 in the aggregate per person, per year) to potential enrollees, though they may not take the form of cash or rebates.³⁸

In 2022, CMS issued new rules increasing federal oversight of third-party marketing organizations, which are outside firms hired to drum up enrollees for Part D plan sponsors. CMS issued the rule to protect Medicare beneficiaries from what it termed "confusing and potentially misleading activities" by the marketing organizations.³⁹

Enrollment Process

Beneficiaries can join a Part D plan in a variety of ways,⁴⁰ including (1) filling out a paper application; (2) visiting a plan's website and enrolling online; (3) using the Medicare online information site and enrollment center at http://www.medicare.gov;⁴¹ (4) calling the company offering the drug plan; or (5) calling 1-800-MEDICARE. In general, a plan sponsor may not deny a valid enrollment request from any Part D-eligible individual residing in its service area.

An individual (or his/her legal representative) must complete an enrollment request, and include all information required to process the enrollment. Upon receiving an enrollment request, a plan sponsor must provide, within 10 calendar days, (1) a notice of acknowledgement of receipt of the beneficiary's application, (2) a request for more information in cases of incomplete applications, or (3) a notice that the application has been denied, along with an explanation as to why.

Prior to the effective date of enrollment, a plan sponsor must provide necessary information about being a member of the plan. In addition, the sponsor must provide: a copy of the completed enrollment form, if needed; a notice acknowledging receipt of the enrollment request providing the expected effective date of enrollment; and proof of health insurance coverage so that a beneficiary may begin using plan services as of the effective date. For all enrollment requests, the plan sponsor must submit the information necessary for CMS to add a beneficiary to its records as an enrollee within seven calendar days of receipt of the completed enrollment request.

LIS Enrollment

Special enrollment rules apply to LIS individuals. Generally, there is a two-step process for low-income persons to gain Part D coverage. First, a determination must be made that they qualify for the LIS; second, they must enroll, or be enrolled, in a specific Part D plan.⁴²

LIS enrollees were once allowed to change plans at any time during the plan year, unlike other Part D enrollees who generally may switch plans only during the annual enrollment period. Since 2019, LIS enrollees have been allowed a SEP once per calendar quarter during the first nine months of the year and also are eligible for SEPs (1) within three months after the start of coverage or notification that they have been enrolled by CMS or a state in a Part D plan and (2) within three months after a change to their LIS or Medicaid status.⁴³ Federal regulations place limits on SEPs for LIS enrollees who are identified by CMS as at risk of opioid abuse. (See "Part D Opioid Overutilization Monitoring.")

Auto-Enrollment

Full-benefit, dual-eligible individuals who have not elected a Part D plan are automatically enrolled into a PDP by CMS.⁴⁴ CMS first uses data provided by state Medicaid agencies to identify full-benefit, dual-eligible individuals. CMS then identifies plan sponsors that offer at least one Part D plan in the region offering basic prescription drug coverage with a premium at or below the low-income premium subsidy amount. If more than one sponsor in a region meets the criteria, CMS auto-enrolls beneficiaries on a random basis among available PDP sponsors. CMS next identifies individual plans offered by the sponsor that include basic drug coverage with premiums at or below the low-income premium subsidy amount. The beneficiary is then randomly assigned among the sponsor's plans meeting the criteria.

Some dual-eligible beneficiaries may be auto-enrolled in a plan that does not meet their needs. For this reason, they are provided with opportunities to change enrollment, with the new coverage effective the following month. (See "LIS Enrollment.") If an enrollee selects a new plan with a premium above the low-income benchmark, however, he or she must pay the difference.⁴⁵

Facilitated Enrollment

CMS established a process labeled "facilitated enrollment" for enrollees in MSPs, SSI enrollees, and persons who applied for and were approved for the LIS. The basic features applicable to auto-enrollment for dual eligibles (i.e., identification of eligibility through SSA and/or Medicaid data, random assignment to plans with premiums below the low-income benchmark, and assignment of MA enrollees to the lowest-cost MA-PD plan offered by the MA organization) are the same for facilitated enrollment.

Reassignment of Certain LIS Beneficiaries

Drug plans may increase premiums at the beginning of a plan year, in some cases raising them above the benchmark for LIS beneficiaries. When that is the case, CMS is to reassign full LIS recipients to different plans so they can continue to receive benefits without paying Part D premiums (or continue paying only a minimal amount). CMS may also automatically reassign LIS recipients if their current plan terminates operations. LIS beneficiaries who have voluntarily changed plans in previous years are not automatically reassigned by CMS, even if their plans charge premiums above the benchmark. LIS beneficiaries in MA-PD plans are automatically reassigned to PDPs if their current plan ceases operations or they are affected by a reduction in the plan's service area.

About 463,000 LIS beneficiaries were enrolled in benchmark PDPs in 2022 that did not qualify as benchmark plans in 2023. CMS randomly reassigned 457,932 beneficiaries to different PDPs, and 4,460 were assigned to the same plan despite a premium increase. Another 517,183 LIS beneficiaries were not reassigned because they had previously switched plans voluntarily.⁴⁶

Part D Benefit Structure

The 2003 MMA set out a minimum drug benefit structure, known as the standard Part D benefit. Plan sponsors may, and usually do, offer different benefit designs and cost-sharing requirements, so long as they meet or exceed the standard benefit specifications.

Under the standard benefit, with some exceptions, over the course of a year a beneficiary is responsible for paying (1) a monthly premium, (2) a capped, annual deductible, and (3) co-payments or coinsurance for drug purchases. There MMA did not set an annual cap on enrollee out-of-pocket spending in the standard benefit, except for certain LIS enrollees. Additionally, under the MMA, for a certain portion in the annual benefit called the coverage gap (also known as the doughnut hole), non-LIS beneficiaries initially faced 100% out-of-pocket costs.

The Part D benefit has been reconfigured by Congress several times since the MMA was enacted. For example, the Patient Protection and Affordable Care Act of 2010 (ACA; P.L. 111-148, as amended) "closed" the coverage gap, in the sense that enrollees in 2023 pay 25% rather than 100% of drug costs in this portion of the benefit. The ACA also required drug manufacturers that participate in Part D to provide a discount on certain drugs purchased in the coverage gap. (See "The Coverage Gap.")

The 2022 IRA makes significant changes to the Medicare Part D standard benefit, including capping annual enrollee out-of-pocket spending. The new provisions are to be implemented gradually through 2025. The following sections of the report first discuss the 2023 Part D standard benefit, including several IRA changes that took effect in 2023, followed by a detailed discussion of additional changes to the standard benefit to be implemented in 2024 and in 2025.⁴⁷ For information on the drug price negotiation provisions of the IRA, see Appendix B.

Qualified Drug Coverage

Part D plan designs may vary, but all PDPs and MA-PD plans must offer at least a minimum package of benefits. This minimum benefit, referred to as qualified prescription drug coverage, may include either a standard package of prescription drug coverage established under law (the standard benefit) or an alternative package that is actuarially equivalent.⁴⁸ Plans may also offer enhanced coverage that exceeds the value of standard coverage. Premiums for these enhanced plans are generally higher than for standard plans. Actual costs to Part D beneficiaries vary from plan to plan depending on the benefit structure and coverage offered, the costs and amount of drugs they use, and the level of any additional assistance, such as through the LIS.

Standard Prescription Drug Coverage

For 2023, under the standard Part D benefit, a beneficiary first pays a deductible ($505). After the deductible has been met, the beneficiary is responsible for 25% of the cost of prescription drugs (with the plan covering the remaining 75%) up to the initial coverage limit ($4,660).⁴⁹ (See Figure 2.)

To reach the $4,660 initial coverage limit in a 2023 standard plan, a beneficiary would pay the $505 deductible plus $1,038.75 in prescription costs, for total true out-of-pocket spending (TrOOP) of $1,543.75. The plan would pay the remaining $3,116.

After the initial coverage threshold has been reached, a beneficiary enters the coverage gap or "doughnut hole" where he or she remains until accumulating $7,400 in total TrOOP in 2023 (for those not receiving the LIS) and reaches the catastrophic threshold.⁵⁰ Total drug spending needed by a non-LIS beneficiary to move through the deductible, the initial coverage limit, and the coverage gap to the catastrophic threshold is about $11,206.28,⁵¹ with a portion paid by the beneficiary, a portion covered by the plan, and a portion offset by manufacturer discounts in the coverage gap. (See "The Coverage Gap.")

Figure 2. 2023 Standard Medicare Prescription Drug Benefit

Source: Figure created by CRS based on data from CMS, "Announcement of Calendar Year (CY) 2023 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies and Final Call Letter," Attachments IV and V. Notes: Beneficiaries above the catastrophic threshold pay the greater of a $4.15 co-payment for generic drugs and a $10.35 co-payment for brand-name drugs or 5% cost sharing in 2023. LIS beneficiaries pay less out of pocket than other beneficiaries. For example, full-benefit dual eligibles pay no deductible, minimal cost sharing in the coverage gap, and no cost sharing above the catastrophic threshold. (See Table 5.)

Actual spending per beneficiary will vary depending on plan design and use of brand-name vs. generic drugs. After the catastrophic threshold has been reached, under the standard benefit an enrollee pays the greater of a nominal set co-payment for drugs or 5% coinsurance.⁵² Medicare subsidizes 80% of each plan's costs for catastrophic coverage, known as Part D reinsurance, and plan sponsors are liable for 15% of costs.

CMS uses a set formula to update annual Part D coverage parameters, including the standard deductible, initial coverage limit, and amount of beneficiary TrOOP required to reach the catastrophic threshold.⁵³ Annual percentage increases are based on average per capita spending for covered outpatient drugs for Medicare beneficiaries during the 12-month period ending in July of the previous year.

Actuarially Equivalent and Enhanced Plans

Plan sponsors have a number of options when designing pricing and benefits. Insurers may offer basic plans that provide the same level of coverage as the Part D standard plan, but may modify certain parameters such as reducing the maximum $505 deductible, while also imposing cost-sharing requirements that are higher than 25%. For example, nearly all plans use a tiered cost-sharing structure, where beneficiaries have a lower co-payment for generic drugs, and higher cost sharing for more expensive brand-name drugs. (See "Tiered Formularies.")

Insurers may also offer enhanced coverage that exceeds the value of defined standard coverage. Enhanced coverage includes basic coverage and supplemental benefits such as reductions in cost sharing. A PDP sponsor may not offer an enhanced plan unless it also offers a standard or actuarially equivalent plan in the same region. The requirement is designed to ensure that Medicare beneficiaries have options for lower-cost plans. MA-PDs are more likely to offer enhanced benefits than PDPs, because MA-PD sponsors are allowed to use some of their Medicare payments to enrich Part D benefits.

In 2022, 54% of Part D enrollees in PDPs were in plans offering enhanced benefits and 46% were in plans that were actuarially equivalent to the standard benefit.⁵⁴ Some 1% of enrollees in MA-PD plans were in plans that offered basic benefits; the other 99% were in enhanced plans.

The Coverage Gap

One unique feature of the Medicare Part D drug benefit is the coverage gap (also referred to as the doughnut hole)—the period in which Part D enrollees initially were required to pay 100% of total drug costs until they reached the catastrophic threshold. Congress included the coverage gap in the benefit structure when the MMA was enacted in 2003 because the cost of continuous coverage would have exceeded budget limitations regarding total spending on the new program.

As originally enacted, Part D provided a basic level of coverage for all beneficiaries, and extra protection for those with the highest drug costs (above the catastrophic limit). Part D enrollees who did not receive an LIS generally paid the full cost of drugs while in the coverage gap. The ACA, as amended,⁵⁵ gradually phased out the coverage gap between 2011 and 2020, meaning that by 2020 enrollees in standard plans had a 25% cost share from the time they meet a standard plan deductible until they reached the catastrophic threshold, after which cost sharing was a maximum of 5%. (Congress included provisions in the Bipartisan Budget Act of 2018, BBA 2018; P.L. 115-123, that closed the Part D coverage gap for brand-name drugs in 2019, a year earlier than required by the ACA.⁵⁶)

The ACA closed the coverage gap two ways.

• For brand-name and biologic drugs, the ACA required manufacturers participating in Part D to pay a mandatory discount on drugs purchased in the coverage gap, while phasing in a 25% Medicare/Part D plan subsidy. (The ACA's original manufacturer discount of 50% was increased to 70% in the BBA 2018 and expanded to cover biosimilars.) Medicare/Part D plans now provide a 5% subsidy in the coverage gap, and enrollees pay 25% coinsurance.
• For generic drugs, the ACA gradually increased the Medicare subsidy to 75% and set enrollee cost sharing at 25%. There is no generic manufacturer discount.

Even though the coverage gap has been closed (in the sense that the Part D standard benefit has 25% cost sharing from the deductible to the catastrophic threshold), for 2023 and 2024 the coverage gap is still an important part of the benefit structure for purposes of (1) calculating mandatory manufacturer discounts for certain drugs and (2) determining the required level of enrollee cost sharing and out-of-pocket spending in that portion of the benefit.⁵⁷ Some enrollees may actually pay higher cost sharing in the coverage gap than in some other phases of the benefit due to rules governing cost sharing by Part D plans. (See textbox below.)

True Out-of-Pocket Costs

Before catastrophic protection begins, Part D enrollees must incur a certain level of out-of-pocket spending. TrOOP are costs that are incurred by a beneficiary or are counted by CMS as incurred by a beneficiary, including a plan deductible, cost sharing up to the initial coverage limit, and the cost sharing for drugs while in the coverage gap.

Enrollee spending for Part D covered drugs is treated as TrOOP⁵⁸ if paid by an enrollee (including through a Medical Savings Account, Health Savings Account or Flexible Spending Account); paid by family members or friends; paid by a Qualified State Pharmacy Assistance Program; covered by the LIS; paid by most charities; covered by a drug manufacturer discount under the Medicare Coverage Gap Discount Program; covered by the Indian Health Service;⁵⁹ or paid by an AIDS Drug Assistance Program.⁶⁰

Incurred costs do not include Part D premiums; costs for drugs not on a plan formulary; coverage by other insurance, including group health plans, workers' compensation, Part D plans' supplemental or enhanced benefits, or other third parties; or Patient Assistance Programs operating outside of Part D. Additionally, while manufacturer discounts count toward TrOOP, federal subsidies for brand-name or generic drugs in the coverage gap do not count.⁶¹

In 2021, 4.1 million Part D enrollees exceeded the out-of-pocket threshold and reached the catastrophic phase of the benefit.⁶² Medicare picks up a larger share of spending (80% reinsurance) for enrollees who reach the catastrophic threshold, and reinsurance accounted for 55% of 2021 Part D spending. Non-LIS enrollees were 36% of those reaching the catastrophic threshold in 2021, while LIS enrollees made up 64%. Although LIS enrollees were more likely to reach the catastrophic phase of the benefit, the LIS share of enrollees reaching the catastrophic threshold has declined from more than 80% in 2010 and earlier years. The change reflects more rapid growth in Part D enrollment by non-LIS individuals, as well as an increase in the average price of drugs used by the non-LIS population.⁶³

IRA Changes to the Medicare Part D Benefit in 2023

The IRA made several changes to the Part D standard benefit, effective in the 2023 plan year. Starting in 2023

• Part D plans may no longer apply a deductible, coinsurance, or other cost-sharing requirement for adult vaccinations recommended by the Centers for Disease Control and Prevention's (CDC's) Advisory Committee on Immunization Practices (ACIP) that are covered Part D drugs (e.g., shingles vaccine).
• Part D deductibles no longer apply to covered insulin products,⁶⁴ and there is a $35 monthly cap on insulin cost sharing.⁶⁵

Part D Standard Benefit For 2024

In 2024, under the IRA, the defined standard benefit thresholds, the drug-inflation formula for updating the thresholds, and the manufacturer coverage gap discount program are unchanged. However, for 2024 and following plan years, enrollee out-of-pocket spending is capped at the catastrophic threshold, meaning enrollees have no cost sharing for prescriptions once they reach the annual threshold.⁶⁶

Figure 3. 2024 Medicare Part D Standard Benefit

Source: CRS and CMS 2024 Call Letter.

In 2024 under the standard Part D benefit, a beneficiary pays a deductible ($545). (See Figure 2.) After the deductible is met, the beneficiary is responsible for 25% of the cost of prescription drugs (with the plan covering the remaining 75%) up to the initial coverage limit ($5,030).⁶⁷

To reach the $5,030 initial coverage limit in a 2024 standard plan, a beneficiary would pay the $545 deductible plus $1,121.25 in prescription costs, for total out-of-pocket costs of $1,666.25. The plan would pay the remaining $3,363.75. After reaching the initial coverage threshold, a beneficiary enters the coverage gap, where he or she remains until accumulating $8,000 in TrOOP and reaching the catastrophic threshold.⁶⁸ Total estimated drug spending needed by a non-LIS beneficiary to move through the deductible, initial coverage limit, and coverage gap to the catastrophic threshold in 2024 is estimated at $12,447.11.⁶⁹ Once a beneficiary reaches the catastrophic threshold, he or she pays $0 cost sharing.

The IRA makes a series of changes to the Part D standard benefit, effective in 2024, including the following:

• For 2024, Medicare reinsurance continues to subsidize 80% of each plan's costs for drugs dispensed to enrollees who exceed the catastrophic threshold. Part D plan sponsors are liable for 15% of costs, as in 2023, plus another 5% of costs that will no longer be borne by enrollees due to the new out-of-pocket spending cap.⁷⁰ In total, plan sponsors will be liable for 20% of catastrophic drug costs.
• Starting in 2024, the two separate categories of LIS (full and partial) are to be merged into one new LIS category.⁷¹ (See "Low-Income Subsidies.")
• Beginning in 2024 and running through 2029, annual increases in the Part D base beneficiary premium are to be capped at a maximum of 6%. Currently, there is no annual cap on the base premium. (See "Premiums.")

In addition to the IRA changes, a 2022 CMS regulation takes effect in 2024 that is forecasted to reduce enrollee cost sharing. Starting in 2024, Part D plans that impose fees on pharmacies as penalties for failing to meet contractual quality or other targets, or for the right to participate in certain programs, must apply the fees as a reduction to the price of a drug at the point of sale. According to the 2023 Medicare Trustees Report, the change will reduce the point-of-sale drug cost by 7% during the next decade.⁷² (For more details, see "Payments to Pharmacies.")

Medicare Part D Standard Benefit in 2025

In 2025, the IRA requires a number of broad changes to the Part D standard benefit, including reducing the catastrophic threshold to $2,000; eliminating the coverage gap and existing manufacturer discount program; and implementing a new manufacturer discount program. (See Figure 4.) CMS has not released the specific dollar amounts of the benefit thresholds for 2025, but Figure 4 shows the outlines of the redesigned standard benefit.

Figure 4. 2025 Medicare Part D Standard Benefit

Source: CRS analysis of P.L. 117-169. The dollar threshold for the deductible had not been set by CMS when this report was prepared. Notes: Phase-in for small manufacturers: For sales of drugs by specified manufacturers to LIS beneficiaries, or in cases where one Part D drug accounts for a significant share of a specified manufacturer's revenues, the 2025 manufacturer discounts would be 1% both below and above the catastrophic threshold.

Under the IRA

• Starting in 2025, there is no initial coverage limit or coverage gap. Under the redesigned standard benefit, enrollees pay average 25% cost sharing from the deductible to the catastrophic threshold and no cost sharing above the catastrophic threshold.
• For the 2025 plan year, the amount of annual TrOOP required to reach the catastrophic threshold is reduced to $2,000 (by comparison, in 2024 an enrollee must have $8,000 in TrOOP to reach the catastrophic threshold). The $2,000 catastrophic threshold and plan deductible will be adjusted in subsequent years using the current law formula, which is based on Part D drug price inflation.
• Total enrollee drug spending needed to generate $2,000 in TrOOP under the reconfigured benefit will depend on factors including (1) the dollar amount of the deductible in each plan, (2) the specific drugs used by an enrollee, and (3) whether an enrollee has other sources of coverage that, beginning in 2024, are to count as TrOOP.
• For 2025 and subsequent years, Part D enrollees may count as TrOOP reimbursement through other insurance, a group health plan, or certain other third-party payment arrangements. The IRA does not define certain other third- party arrangements, except to say they do not include Part D coverage. (Under the current law through 2024, the LIS, the manufacturer discount and other selected assistance, such as Ryan White AIDS Act, the Indian Health Service, and charitable assistance count as TrOOP. Most of those provisions continue,⁷³ but the manufacturer discount will no longer count as TrOOP [see next bullet point].)
• Starting in 2025, the current Part D manufacturer discount program ends and a new Part D manufacturer discount program takes effect. The new program provides a 10% discount on applicable drugs (brand-name drugs, biologics, and biosimilars) between the deductible and the catastrophic threshold and a 20% discount on applicable drugs above the catastrophic threshold. LIS beneficiaries, who were not covered under the previous manufacturer discount program, are eligible for the new manufacturer discount.
• Starting in 2025, Medicare reinsurance to Part D plan sponsors for drug costs above the catastrophic threshold is reduced to 20% from 80% for brand-name drugs, biologics, and biosimilars and to 40% from 80% for generics. The new manufacturer discount program is to be phased in gradually for drugs produced by specified manufacturers when (1) the drugs are dispensed to LIS beneficiaries or (2) one drug covered by a Part D manufacturer discount agreement makes up more than 80% of total spending for all of a specified manufacturer's drugs under such agreements.⁷⁴ In such cases
• For applicable drugs dispensed to enrollees who have exceeded the deductible but have not reached the catastrophic threshold, the 10% manufacturer discount is to be phased in as follows: for 2025, 1%; for 2026, 2%; for 2027, 5%; for 2028, 8%; and for 2029 and each subsequent year, 10%.
• For applicable drugs dispensed to enrollees who have incurred costs equal to or above the annual catastrophic threshold, the 20% manufacturer discount is to be phased in at for 2025, 1%; for 2026, 2%; for 2027, 5%; for 2028, 8%; for 2029, 10%; for 2030, 15%; and for 2031 and each subsequent year, 20%.

Beginning in 2025, Part D enrollees may choose to spread out their prescription cost sharing by paying required coinsurance or co-payments in capped, monthly installments.

Part D Premiums

The majority of beneficiaries enrolled in Part D pay monthly premiums for Part D coverage. On average, beneficiary premiums represent about 25.5% of the cost of a standard Part D plan, as determined through annual bids submitted by insurers. (See "Standard Prescription Drug Coverage.")⁷⁵ The actual dollar amounts of Part D premiums vary by plan.

Figure 5. Annual Part D Base Beneficiary Monthly Premium (in current dollars)

Source: CMS, "Annual Release of Part D National Average Bid Amount and other Part C & D Bid Information." Note: Amounts reflect 25.5% of the annual average of participating drug plan bids to provide basic Part D benefits.

Beneficiary premiums are based on the weighted average of annual bids submitted by participating sponsors for standard benefits (the base beneficiary premium) and are adjusted to reflect the difference between the standardized bid amount of the plan the beneficiary enrolls in and the nationwide average bid. For 2023, the base beneficiary monthly premium, 25.5% of the average adjusted bid amount, is $32.74.⁷⁶ Historic base premiums are shown in Figure 5.

Beneficiaries in plans with higher costs for standard coverage face higher-than-average premiums, while enrollees in lower-cost plans pay lower-than-average premiums for such coverage. (Plans that offer supplemental benefits may set higher premiums but do not receive Medicare subsidies for the supplemental benefits.) Additionally, enrollees in MA-PD plans may have lower premiums if their sponsors choose to buy down, or reduce, the Part D premium.⁷⁷ The monthly premium is applied evenly to all persons enrolled in a specific plan, except those who are receiving the LIS or are subject to a late enrollment penalty (LIS beneficiaries have lower or zero premiums, and late enrollees pay a monthly penalty in addition to their plan premium). There are special rules for employer-sponsored Part D plans. Beneficiaries may pay plans directly or have premiums deducted from their Social Security benefits.⁷⁸

Premium Surcharge for Higher-Income Enrollees

Since 2011, as required by the ACA, Part D enrollees with higher incomes have been required to pay higher premiums. (The Part D high-income requirements are similar to the income-based premium structure under Medicare Part B.)⁷⁹ Part D beneficiaries with modified adjusted gross income (MAGI) above set thresholds are assessed a surcharge,⁸⁰ referred to as an income-related monthly adjustment amount (IRMAA), in addition to their regular plan premiums.

The higher-income surcharge is calculated as the difference between the Part D base beneficiary premium (which in 2023 represents 25.5% of the average national bid amount) and 35%, 50%, 65%, 80%, or 85% of the national average cost for providing Part D benefits,⁸¹ excluding federal reinsurance or subsidies. The surcharge is based on beneficiary income, with higher-income beneficiaries facing a larger surcharge. Because individual plan premiums vary, the law specifies that CMS calculate the Part D surcharge using the base premium, rather than each beneficiary's individual plan premium amount.⁸² (See Table 2.)

There is a separate IRMAA calculation for beneficiaries who are married and lived with their spouses at any time during a year, but filed separate tax returns. In such cases for 2023

• Individuals with MAGI between $97,000 and $403,000 pay $70.00 per month, plus a plan premium.
• Individuals with MAGI greater than or equal to $403,000 pay $76.40 per month, plus a plan premium.

Under the original ACA provisions, high-income Part D enrollees were placed into one of four IRMAA categories, depending on their income. The BBA 2018 added a fifth high-income category beginning in 2019 for individuals with annual income of $500,000 or more or couples filing jointly with income of $750,000 or more. Enrollees with income equal to or exceeding these thresholds pay premiums that cover 85% of the average per capita cost of the Part D benefits (instead of 80%, as they would have prior to this change). The threshold for couples filing jointly in this new income tier is calculated as 150% of the individual income level rather than 200%, as in the other income tiers. The bottom four high-income categories are adjusted annually for inflation based on the CPI-U; however, the new top high-income threshold is frozen through 2027 and then adjusted annually for inflation starting in 2028.⁸³

Beneficiaries pay the surcharge directly to the federal government, rather than to Part D plans. When applicable, IRMAA is withheld from an enrollee's monthly Social Security check, Railroad Retirement benefit, or federal pension payment, unless the benefit is not sufficient.⁸⁴

IRA Premium Stabilization Program

The IRA created a Part D premium stabilization program, effective in 2024. Under the IRA, for 2024-2029, the annual base premium is to be equal to the lesser of (1) the base premium for the previous year (e.g., 2023 for the applicable year 2024) increased by 6%, or (2) the base premium for the applicable year (in this case, 2024) as computed under the underlying Part D statutory formula of 25.5% of weighted plan bids.⁸⁵

For 2024, the base premium is required to be the lesser of (1) the 2023 base premium of $32.74 increased by 6%, or $34.70, or (2) the base premium derived from the underlying Part D formula. CMS announced in July 2023 that the 2024 base premium would be a 6% increase to $34.70. According to CMS, absent the IRA premium stabilization 6% cap, the 2024 base premium (as calculated through the underlying Part D statutory formula of 25.5% of weighted plan bids) would have been $39.35.⁸⁶ That would have been a 20% increase, which would have been the largest annual rise in the base premium since Part D was implemented. (See Figure 5).

For 2030 and subsequent years, the base premium is to be calculated as the percentage of average plan bids necessary to ensure that the base premium in 2030 is equal to the lesser of (1) the base premium for 2029 increased by 6% or (2) the base premium that would have been computed for 2030 using the underlying Part D formula of 25.5% of the average adjusted bid amount. However, the base premium for 2030 and subsequent years may not be set at less than 20% of the weighted average of all plan bids.

In addition, under the IRA premium stabilization program, Medicare's direct subsidies to Part D plan sponsors increase in any year from 2024 to 2029 in which the base premium would have risen by more than 6% from the previous year, absent the cap. After 2030, the direct subsidy level to plan sponsors could be adjusted, if the IRA formula for setting the base beneficiary premium from 2030 on produced a different percentage than 25.5% of weighted bids.⁸⁷

Low-Income Subsidies

Medicare Part D provides subsidies to assist low-income beneficiaries with premiums and cost sharing.⁸⁸ For 2023, LIS cost sharing varies according to a beneficiary's assets and income and, also, whether a beneficiary is institutionalized, or is receiving community-based care. (See "Eligibility for Low-Income Assistance.")

Premium Assistance

Full-Subsidy-Eligible Individuals in 2023

Low-income beneficiaries who qualify for a full subsidy do not pay monthly plan premiums if they enroll in certain, lower-cost Part D plans. A PDP qualifies as a lower-cost or "benchmark" plan if it offers basic Part D coverage and charges premiums equal to, or below, a regional low-income premium subsidy amount calculated by CMS each year. (See "Availability of Low-Income Plans.") If a LIS beneficiary selects a plan with a premium that is higher than the regional benchmark, he or she must pay the extra cost.

Partial-Subsidy-Eligible Individuals

For plan year 2023, partial-subsidy-eligible individuals receive premium assistance based on an income sliding scale, as specified in Table 4.

Cost-Sharing Subsidies

Cost-sharing subsidies for LIS enrollees are linked to the standard prescription drug benefit but represent the maximum cost sharing that can be applied to LIS enrollees in any type of Part D plan. Full-subsidy dual eligibles have no deductible, minimal cost sharing during the initial coverage period and coverage gap, and no cost sharing above the catastrophic threshold. Partial-subsidy individuals have higher cost sharing. (See Table 5.)

Other specific policies related to cost sharing during the initial coverage period and coverage gap for dual eligibles include the following:⁸⁹

• Full-benefit, dual eligibles who are residents of medical institutions or nursing facilities have no cost sharing, with some exceptions. Enrollees with home and community-based services in lieu of institutional care also have no cost sharing.
• Other full-benefit, dual-eligible individuals with incomes up to or at 100% of FPL pay $1.45 for a generic drug prescription or preferred multiple-source drug prescription and $4.30 for any other drug prescription up to the catastrophic threshold in 2023.
• Full-subsidy-eligible individuals with incomes between 100% and 135% of FPL have cost sharing, up to the catastrophic limit, of $4.15 for a generic drug or preferred multiple-source drug and $10.35 for any other drug in 2023.

Partial-subsidy-eligible individuals have a $104 deductible in 2023, 15% coinsurance for all costs up to the catastrophic limit, and cost sharing above that level of $4.15 for a generic prescription or preferred multiple source drug prescription and $10.35 for any other prescription.

Each year, cost-sharing amounts for full-benefit, dual eligibles up to or at 100% of FPL are updated by the annual percentage increase in the CPI-U. Cost sharing for all other beneficiaries, and the deductible for other full- and partial-subsidy-eligible individuals, are increased by the annual percentage increase in per capita beneficiary expenditures for Part D-covered drugs.

LIS Changes Starting in 2024

Starting in 2024, the IRA merges the two categories of LIS (full and partial) into one new LIS category that provides the more generous benefits of the full LIS. Also, starting in 2024, out-of-pocket spending for all Part D enrollees is capped at the catastrophic threshold. See Table 5 for the 2024 cost-sharing subsidies for LIS and non-LIS enrollees.

Employer Subsidies for Retiree Drug Coverage

The MMA included provisions to encourage employers to continue to offer prescription drug benefits to their Medicare-eligible retirees. Employers have several options for such coverage.

Retiree Drug Subsidy

Employers and union groups that provide prescription drug insurance to Medicare-eligible, retired workers may apply for federal retiree drug subsidies (RDS).⁹⁰ To qualify, an employer or union must offer drug benefits that are actuarially equivalent to, or more generous than, standard Part D coverage. Sponsors must submit applications for CMS approval at least 90 days prior to the beginning of a plan year.

Medicare provides payments for eligible retirees, defined as individuals entitled to Medicare Part A and/or are enrolled in Part B, and who live in the service area of a Part D plan. An individual must be a retired participant in an employer- or union-qualified group health plan or the Medicare-enrolled spouse or dependent of a retired participant. (An employer or union may sponsor its own Part D plan [see "Employer Group Waiver Plans" section, below].)

For each retiree enrolled in a qualified plan in 2023, sponsors receive a federal subsidy equal to 28% of gross prescription drug costs between a threshold of $505 and a cost limit of $10,350.⁹¹ The retiree subsidies have generally been less expensive for Medicare than enrolling these beneficiaries in a Part D plan. In 2023, the average annual RDS was forecast to be about $619 per beneficiary compared to average Medicare per beneficiary costs of $2,352 for Part D enrollees.⁹²

Prior to enactment of the ACA, group health plans offering qualified drug coverage were eligible to receive the Medicare RDS and, in addition, claim a federal tax deduction for the subsidy, along with the rest of the plan's spending on retiree health benefits. The ACA prohibited companies, beginning in 2013, from claiming a tax deduction for the Medicare RDS.⁹³ In addition, retiree health plans are not eligible for the Part D manufacturer discount program. Partly as a result, many employers have moved away from the RDS program, and toward EGWPs. The Medicare Trustees predict that the share of beneficiaries covered through the RDS will decline from about 20% of Part D enrollment in 2010 to about 1.5% by 2032.⁹⁴

Employer Group Waiver Plans

EGWPs are Part D group plans sponsored by large employers, state and local governments, and other entities.⁹⁵ EGWPs qualify for waivers of Medicare regulations in areas including enrollment, marketing, premiums, and benefit design. The waivers allow plan sponsors (employers or unions) to tailor Medicare EGWPs to their distinct retiree populations.⁹⁶

In general, CMS may waive or modify Medicare requirements that "hinder the design of, the offering of, or the enrollment in" employer-sponsored group Medicare plans.⁹⁷ More specifically, CMS may provide waivers of Medicare regulations to allow employers and unions to⁹⁸

• restrict enrollment in an EGWP to the employer's own retirees and eligible spouses and dependents of the retirees;
• subsidize EGWP premiums and set different premiums in different geographic areas of the country;
• offer national plans rather than plans in specific geographic regions;
• provide smaller networks of contracted pharmacies than are required for other Part D plans, so long as the networks are adequate to meet enrollee needs;
• offer a different benefit structure than Part D plans, so long as the EGWP meets requirements for the gross value of the overall benefit; and
• hold annual open enrollment periods at different times than the national Medicare open enrollment period for MA and Part D (October 15 through December 15).

Employers and unions may offer EGWPs under direct contract with CMS or through third parties that design and administer the benefit. EGWPs must comply with Part D requirements to offer an adequate formulary, provide lower cost sharing for LIS enrollees, and other enrollee protections. EGWP sponsors are not required to submit annual bids to CMS on the grounds that the process of putting together a bid could "hinder the design, offering, or enrollment in employer-sponsors coverage given the additional complexity and level of effort that would be required."⁹⁹ EGWPs instead are paid by CMS based on the average national average bid of other Part D plans.

In addition, the coverage gap manufacturer discount is calculated differently for EGWPs than for regular Part D plans. In 2012, CMS issued rules that changed the definition of Part D supplemental benefits to exclude supplemental benefits offered through EGWPs.¹⁰⁰ Under the rule, supplemental benefits offered by an EGWP sponsor are considered non-Medicare benefits and treated instead as other health insurance that pays in a secondary position to Medicare. That means, in part, that manufacturer discounts in the coverage gap for EGWP plans are calculated based on the standard Part D benefit without taking into account any supplemental benefits.¹⁰¹ This allows EGWP sponsors to reduce cost sharing for enrollees in the coverage gap but still collect the maximum manufacturer discount. A Medicare Payment Advisory Commission (MedPAC) analysis found EGWPs made up about 16% of Part D enrollment in 2018 but accounted for 45% of manufacturer discounts.¹⁰² Starting in 2025, under the IRA, there will no longer be a coverage gap for all plans, including EGWPs, and the manufacturer discount program will be reconfigured.

Formulary Requirements

For a drug to be paid by Medicare's prescription drug benefit, it must be a drug that is covered under Part D and included in the formulary of an individual's Part D plan. (See "Formularies.")

The MMA defines covered Part D drugs as (1) outpatient prescription drugs approved by the Food and Drug Administration (FDA), and used for a medically accepted indication; (2) biological products that may be dispensed only upon a prescription and that are licensed under the Public Health Service (PHS) Act and produced at a licensed establishment; (3) insulin (including medical supplies associated with the injection of insulin); and (4) vaccines licensed under the PHS Act. Drugs can also be treated as part of a plan's formulary as the result of a beneficiary coverage determination or appeal.

Certain drugs are excluded from Part D coverage by law, including drugs specifically excluded from coverage under Medicaid. The exclusion applies to (1) drugs used for anorexia, weight loss, or weight gain; (2) fertility drugs; (3) drugs used for cosmetic purposes or hair growth; (4) drugs for symptomatic relief for coughs and colds; (5) prescription vitamins and minerals; and (6) covered drugs when the manufacturer requires, as a condition of sale, that associated tests be purchased exclusively from the manufacturer. Drugs used for the treatment of sexual or erectile dysfunction are excluded from coverage unless they are used to treat another condition for which the drug has been approved by the FDA.¹⁰³

If a state covers excluded drugs for Medicaid beneficiaries, it must also cover them for dual eligibles in cases where the drugs are determined to be medically necessary. Dual eligibles may therefore receive coverage from Medicaid for some drugs that are excluded from Medicare. Additionally, a Part D sponsor may elect to include one or more of these drugs in an enhanced Part D plan; however, no federal subsidy is available for the associated costs.

Drugs Covered by Other Parts of Medicare

Part D drug plans are prohibited from covering drugs covered by other parts of Medicare. This includes prescriptions provided during a stay in a hospital or skilled nursing facility that are paid for by the Part A program, and the limited circumstances when Part B covers outpatient prescription drugs. Part B-covered drugs include drugs that are not usually self-administered and are provided incident to a physician's professional services or drugs necessary for the proper functioning of Part B durable medical equipment. These include such things as immunosuppressive drugs for persons who have had a Medicare-covered transplant; erythropoietin (an anti-anemia drug) for persons with end-stage renal disease; oral anticancer drugs; drugs requiring administration via a nebulizer or infusion pump in the home; and certain vaccines (influenza, pneumococcal, and hepatitis B for intermediate- or high-risk persons).¹⁰⁴

Formularies

Part D plans operate formularies, which are lists of drugs that a plan covers and the terms under which they are covered. A Part D sponsor's formulary must be developed and reviewed by a CMS-approved Pharmacy and Therapeutics (P&T) Committee.¹⁰⁵ A majority of the committee members must be practicing physicians or practicing pharmacists, and the committees must each include one physician and one pharmacist who are experts in caring for elderly or disabled individuals. CMS requires that P&T committees "must review for clinical appropriateness the practices and policies for formulary management activities, such as prior authorizations, step therapies, quantity limitations, generic substitutions, and other drug utilization activities that affect enrollee access." However, P&T committee recommendations regarding these activities are advisory only and not binding on the Part D sponsors.¹⁰⁶ (See "Drug Utilization.")

Formulary Categories and Classes

Formulary drugs are grouped into categories and classes of products that work in a similar way or are used to treat the same condition. The MMA required CMS to ask the United States Pharmacopeial Convention (USP)¹⁰⁷ to develop a list of categories and classes for plans and to periodically revise such classifications. A plan formulary must include at least two drugs in each category or class used to treat the same medical condition (unless only one drug is available in the category or class, or two drugs are available but one drug is clinically superior). The two-drug requirement must be met by providing two chemically distinct drugs. (Plans cannot meet the requirement by including two dosage forms or strengths of the same drug or a brand-name drug and its generic equivalent.)

Six Classes of Clinical Concern

In general, Part D drug plans are required to operate formularies that cover at least two drugs in each drug class and category. However, Part D plans are required to cover substantially all available drugs in the following six categories or classes: immunosuppressant, antidepressant, antipsychotic, anticonvulsant, antiretroviral, and antineoplastic.¹⁰⁸ Plan sponsors are not allowed to steer beneficiaries who are already using these drugs toward alternative therapies via policies such as requiring prior authorization or step-therapy mandates (see "Drug Utilization"). The protected classes requirement, which started as CMS guidance, is designed to mitigate the risk that drug therapy could be interrupted for vulnerable populations.

The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA; P.L. 110-275) and the ACA codified the six protected classes requirement, while directing the HHS Secretary to spell out more specific criteria for identifying drug categories or classes of clinical concern.¹⁰⁹ As part of this process, the statutes allow HHS to revamp the current protected classes and categories, including permitting Part D sponsors to exclude certain drugs from their formularies (or limit access to such drugs through utilization management or prior authorization restrictions).¹¹⁰ In November 2018, CMS published a proposed rule that would have given Part D plan sponsors more authority to use step therapy and prior authorization to control enrollee utilization in the protected classes.¹¹¹ In May 2019, CMS announced it would not implement most of the proposed changes but instead would put into regulatory form existing guidance regarding protected class drugs. Under the final rules, plans may use step therapy and prior authorization for enrollees beginning a course of therapy with drugs in the six protected classes to confirm a drug's intended use is for a protected class indication; to ensure clinically appropriate use; and to promote utilization of preferred formulary alternatives, or a combination thereof. Step therapy and prior authorization are not allowed for antiretroviral (HIV/AIDs) medications.¹¹² CMS decided against a broader expansion of step therapy because the risks of inappropriately interrupting therapy outweighed the potential clinical benefits and cost savings.¹¹³

Vaccines

The ACIP provides guidance to HHS and the CDC on the use of vaccines, including recommending immunization schedules for the U.S. population, with certain vaccine dosages based on age.

The Tax Relief and Health Care Act of 2006 (P.L. 109-432) required that Part D plans, beginning in 2008, include all commercially available vaccines in their drug formularies, with the exception of vaccines covered under Medicare Part B. Medicare Part B generally covers vaccinations for influenza, pneumonia, and the Hepatitis B vaccine for intermediate to high-risk cases. Part B will cover immunizations for patients exposed to an injury or disease, such as tetanus shots.¹¹⁴ Part B also covers COVID-19 vaccines.¹¹⁵

Medicare Part D covers all commercially available vaccines, except for vaccines covered under Part B, or in cases where a vaccine manufacturer has chosen not to participate in the Part D manufacturer discount program. The shingles vaccine (protecting against herpes zoster), which the ACIP recommends for adults aged 50 and older, is an example of a Part D vaccine.

Starting in 2023, under the IRA, Part D plans may no longer apply a deductible, coinsurance, or other cost-sharing requirement for adult vaccines covered by Part D that are recommended by ACIP.¹¹⁶ An enrollee may have to pay a vaccine administration fee for an ACIP-recommended vaccine at the point of service, but can receive full reimbursement from their Part D plan. Part D plans may apply cost sharing to other, non-ACIP recommended vaccines.

Plan-Year Formulary Changes

Part D plans may alter their formularies from year to year and are allowed to make limited changes to their formularies within a plan year.¹¹⁷ Plans generally may not change therapeutic categories and classes of drugs within a plan year, except to account for new therapeutic uses or add newly approved Part D drugs. If Part D plans remove drugs from their formularies during a plan year (or change cost-sharing or access requirements), they must provide timely notice to CMS, affected enrollees, physicians, pharmacies, and pharmacists.

Part D sponsors may immediately remove brand-name drugs from a formulary (or change the cost-sharing tier) during a plan year if they replace the brand-name product with a therapeutically equivalent generic that is placed on the same or lower cost-sharing tier and is subject to the same or less restrictive utilization criteria than the brand-name drug. To qualify for substitution, the new generic must have been released to the market after the initial formulary was submitted.¹¹⁸

Other formulary changes may be made in the following circumstances:

• Plans may immediately remove drugs that are deemed unsafe by the FDA or are pulled from the market by their manufacturers. Plans do not have to provide prior notice of such actions, but must provide retrospective notice to CMS and other affected parties.
• After March 1 each year, Part D sponsors may make maintenance changes to their formularies, such as replacing brand-name with new generic drugs or modifying formularies due to new information on drug safety or effectiveness.
• Plans, with CMS approval, may remove drugs from a formulary, move covered drugs to a less-preferred tier status, or add utilization management requirements in accordance with approved procedures after 30 days' advance notice.¹¹⁹

Transition Policies

CMS established Part D formulary transition policies to ensure that enrollees who move to a new plan do not abruptly lose coverage for drugs used in ongoing therapy—for example, in a case where a new plan does not cover a drug a beneficiary has been using. Transition policies also cover cases where enrollees are affected by formulary changes in their current plan from one year to the next.¹²⁰ In such cases, a beneficiary may request that their physician check to see if a prescription can be switched to a similar drug on the new formulary. If the physician determines that a specific drug is medically necessary, the doctor may request a plan exception.

Plans must continue a beneficiary's previous prescription during the first 90 days of a calendar year. Any refill must be for an approved month's supply (unless the prescription is written for a shorter period) for any drug not on the plan's formulary.¹²¹ The requirement also applies to drugs that are on a plan's formulary, but which require prior authorization or step therapy. Transition policies also cover situations where enrollees undergo changes in the level of care, such as moving from a hospital to home care.

Drug Utilization Management Programs

CMS regulations require that each Part D plan have an appropriate drug utilization management program that (1) includes incentives to reduce costs when medically appropriate, and (2) maintains policies and systems to assist in preventing over-utilization and under-utilization of prescribed medications.¹²² In general, over the years plans have imposed more stringent cost-sharing and utilization management. Congress and CMS have also imposed utilization requirements on plans in an effort to identify possible program fraud and abuse involving certain prescription drugs, particularly opioids. (See "Part D Opioid Overutilization Monitoring.")

Tiered Formularies

Plan D plan sponsors may assign formulary drugs to tiers that correspond to different levels of cost sharing. In general, this structured pricing encourages use of generic medications by placing these medicines on the plan tier with the lowest out-of-pocket costs, and discourages the use of more expensive or less effective drugs by putting them on tiers that require higher out-of-pocket spending. Plans have some flexibility in structuring the tiers, so long as the overall plan is at least actuarially equivalent to a standard Part D plan. In 2023, a Part D formulary design could include a mix of the following tiers: preferred generics, generics, preferred brands, non-preferred brands, non-preferred drugs, and two specialty drug tiers.¹²³ Specialty drug tier designation in Part D is based on cost ($830 per month in 2023), not on special handling requirements.¹²⁴ (For 2024, a drug will qualify for specialty tier placement if it is at least $950 for a month.¹²⁵)

Part D plans may institute two specialty tiers for expensive products (e.g., unique drugs or biologics). Beneficiaries cannot appeal cost-sharing amounts for drugs placed on a specialty tier, except to request that a specialty drug on a higher cost-sharing tier be placed on a lower cost-sharing specialty tier.¹²⁶ Plans typically charge a percentage of the cost of a drug on the specialty tier (coinsurance), rather than a flat co-payment. To ensure beneficiaries dependent on specialty drugs are not unduly discouraged from enrolling in tiered plans, CMS sets the maximum allowable cost sharing for a single specialty tier—or, in the case of a plan with two specialty tiers, the higher cost-sharing specialty tier—at 25% coinsurance if the plan requires a standard deductible and up to 33% cost sharing if no deductible is required, or some percentage in between if a plan offers a reduced (but not zero) deductible. Therefore, according to CMS, for plans that offer two specialty tiers, the cost sharing for the lower cost-sharing, preferred specialty tier must be anything less than that of the higher cost-sharing specialty tier.¹²⁷

The specialty tier is not necessarily the tier with the highest coinsurance. Part D plans may charge coinsurance of up to 50% for drugs on a non-preferred brand-name formulary tier. According to CMS, best practices for developing formularies dictate that drugs are placed in a non-preferred tier only when drugs that are therapeutically similar (i.e., drugs that provide similar treatment outcomes) are in more preferable positions on the formulary.¹²⁸ CMS reviews plan sponsors' drug tier placement to ensure their formulary does not substantially discourage enrollment of certain beneficiaries, such as those with potentially high drug costs.

Other Drug Utilization Controls

Other utilization restrictions include (1) prior authorization, in which a beneficiary, with assistance of a prescribing physician, must obtain a plan's approval before it will cover a particular drug; (2) step therapy, where a beneficiary must first try a generic or less expensive drug, or a drug that a plan has deemed to be therapeutically equivalent to a prescribed drug, rather than the drug that was originally prescribed; and (3) quantity limits, where the supply of drugs is initially limited to reduce the likelihood of waste (e.g., if a drug was not effective for a beneficiary or had intolerable side effects). A beneficiary who wants his or her plan to waive a utilization control must provide a physician statement indicating that a prescribed drug and dosage is medically necessary and providing a rationale as to why restrictions are not appropriate.

Part D Opioid Overutilization Monitoring

Since 2013, CMS has operated a system to combat inappropriate utilization of opioids in Part D. First, CMS has encouraged Part D plans to enhance their formulary and drug utilization review programs to provide opioid safety controls at the point of sale, retrospectively review drug claims to identify beneficiaries at risk of overutilization, and perform case management for beneficiaries deemed at risk of opioid abuse.¹²⁹ Second, CMS developed a program-wide Overutilization Monitoring System (OMS) to verify that Part D sponsors have established effective and appropriate opioid management programs. Under the OMS, CMS performs retrospective reviews of Part D prescription data to identify enrollees at risk of opioid overutilization. CMS defines at-risk beneficiaries as those using high dosages of opioids (over a specified period of time) provided by multiple prescribers or pharmacies.¹³⁰

The Comprehensive Addiction and Recovery Act of 2016 (CARA; P.L. 114-198) provided Part D sponsors with authority to limit the number of pharmacies and prescribers that can be used by enrollees identified as at risk of overutilization of frequently abused drugs, beginning in 2019. This "lock-in" provision is designed to reduce fraud and abuse by making it easier to control enrollee opioid use.¹³¹ Starting in 2022, the Substance Use-Disorder Prevention That Promotes Opioid Recovery and Treatment for Patients and Communities Act (SUPPORT Act; P.L. 115-271) required Part D plan sponsors to implement lock-in programs.¹³²

OMS and lock-in policies do not apply to Part D beneficiaries who are being treated for active cancer-related pain, receiving palliative or end-of-life care, or are residents of certain long-term care facilities, including those that dispense frequently abused drugs through a contract with a single pharmacy.¹³³

Medication Therapy Management

Part D plans (with some exceptions) must include a Medication Therapy Management (MTM) program, which is a system of coordinated pharmacy care for patients with multiple medical conditions who may be seeing a series of practitioners. A MTM program includes medication reviews, patient consultation and education and other services. Each plan's program must be reviewed and approved annually by CMS, and is one of several, required elements considered when CMS evaluates a sponsor's bid to participate in the Part D program.

Part D sponsors must automatically enroll beneficiaries in a MTM program if they meet the following criteria: (1) they have multiple chronic diseases, with three being the maximum that can be required; (2) they are taking at least two to eight Part D drugs; and (3) they are likely to have annual covered drug costs that exceed $4,935 in 2023.¹³⁴ (The 2024 MTM program annual cost threshold is $5,330.¹³⁵)

In addition, the SUPPORT Act added Part D enrollees identified as at risk for prescription drug abuse to the list of targeted MTM program enrollees. The provision took effect in 2022.¹³⁶

Part D Plans: Payment and Participation

Medicare Part D enrollees must obtain coverage through a private insurer, or other entity, that contracts with Medicare (a plan sponsor). As previously described, beneficiaries may select either a stand-alone PDP or a MA plan that includes prescription drug coverage.¹³⁷

PDPs are required to be available region-wide within each of the 34 designated PDP regions. MA-PD plans are generally local, operating on a countywide basis; however, region-wide MA-PD plans are available in many of the 26 MA regions in the United States. A PDP sponsor may offer a PDP in more than one region, including all PDP regions; however, the sponsor must submit separate coverage bids for each region it serves.¹³⁸ Medicare payments to plans are determined through a competitive bidding process, and enrollee premiums are tied to plan bids. (See "Approval of PDPs.")

Approval of PDPs

Each year, CMS issues guidance through an annual call letter, and publishes updated program regulations and bidding instructions to sponsors planning to offer PDP and/or MA plans in the following year. Potential PDP and MA sponsors must submit bids by the first Monday in June of the year prior to the plan benefit year. The following information must be included in the bid: (1) coverage to be provided; (2) actuarial value of qualified prescription drug coverage in the region of a beneficiary with a national average risk profile; (3) information on the bid, including the basis for the actuarial value, the portion of the bid attributable to basic coverage and, if applicable, the portion attributable to enhanced coverage, and assumptions regarding the reinsurance subsidy; and (4) service area. The bid also includes costs (including administrative costs and return on investment/profit) for which the plan is responsible. The bid must exclude costs paid by enrollees, payments expected to be made by CMS for reinsurance (although plans provide a separate estimate of reinsurance costs), and any other costs for which the sponsor is not responsible.¹³⁹

CMS may approve a drug plan only if certain requirements are met. For example, the plan must meet requirements relating to actuarial determinations and beneficiary protections. The plan cannot be designed in a way (including any formulary or tiered formulary structure) that would likely discourage enrollment by certain beneficiaries. If their bids are approved, plan sponsors enter into 12-month contracts with CMS. CMS imposes a two-year Part D application ban on sponsors that were approved to offer PDPs for a coming plan year, but withdrew their bids after CMS announced the annual LIS premium benchmark amounts.¹⁴⁰

Noninterference Provision

To bolster market competition and limit the federal role, the MMA included a noninterference provision (SSA §1860D-11(i)), stating that in carrying out the requirements of the Part D program, "the Secretary: (1) may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors; and (2) may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs."¹⁴¹

In the nearly two decades since the MMA was enacted, Congress has debated proposals to repeal or modify the noninterference provision in order to give the HHS Secretary authority to negotiate drug prices. Supporters of secretarial negotiation maintain that by leveraging the combined purchasing power of tens of millions of Part D enrollees, the Secretary could secure larger price reductions from manufacturers than can be obtained by plan sponsors. The Congressional Budget Office (CBO) in analyses of such legislation generally held that the Secretary was not likely to have sufficient negotiating leverage unless given authority to create a central formulary, set prices administratively, and/or take other actions if manufacturers failed to cut prices.

In 2022, as part of the IRA, Congress amended the noninterference provision to give the HHS Secretary authority to negotiate prices for a set number of high spending Part D drugs each year, with the first negotiated prices taking effect in 2026.¹⁴² The CBO scored the drug price negotiation provision as having a cost savings, because the IRA imposes a steep excise tax on manufacturers of Part D drugs that refuse to negotiate.¹⁴³

Plan Availability

According to MedPAC, for 2023, Part D plan sponsors offered 3,539 MA−PDs and 1,254 MA–PDs that are special needs plans aimed at specific populations, an increase of 5% and 11%, respectively, from the previous year. In 2023, plan sponsors offered 804 PDPs, 5% above 2022.¹⁴⁴

Availability of Low-Income Plans

A Part D plan qualifies as a LIS benchmark plan if it offers basic Part D coverage and charges premiums that are equal to, or lower than, the average, regional low-income benchmark premium. Regional LIS benchmark premiums are recalculated annually, based on the weighted average of all premiums in each of the 34 PDP regions. LIS beneficiaries are eligible for a full or reduced premium, up to the benchmark amount.¹⁴⁵

The formula for determining the benchmark is based on premiums for basic prescription drug coverage, or the actuarial value of basic prescription drug coverage for plans that offer enhanced coverage. For MA-PD plans, the formula uses the portion of the premium attributable to basic prescription drug benefits.

In 2023, there are 191 benchmark plans available, down 4% from 2022. All regions have at least three benchmark Part D plans available.¹⁴⁶ LIS beneficiaries enrolled in a plan that loses its benchmark status for a coming plan year either are enrolled automatically in a new plan by CMS or must select a new plan to avoid paying premiums and other cost-sharing requirements. (See "LIS Enrollment.")

Plan Payments

Medicare provides a subsidy for each non-LIS Medicare enrollee in a Part D plan that is equal to 74.5% of average, standard coverage. The average subsidy takes two forms: direct subsidy payments and reinsurance payments. Medicare also establishes risk corridors to limit a plan's overall losses or profits. In addition, Medicare pays most of the cost sharing and premiums for LIS beneficiaries enrolled in PDP or MA-PD plans.

Direct Subsidies

Medicare makes monthly prospective payments (direct subsidies) to plans for each Part D enrollee. The per-enrollee subsidy is based on the nationwide average of plan bids for providing basic drug coverage,¹⁴⁷ weighted by the plans' shares of total enrollment. (The national average monthly bid is $34.71 for plan year 2023.)¹⁴⁸ A plan's total subsidy amount across all plan enrollees is risk-adjusted to account for the health status of the beneficiaries expected to enroll; plans with sicker enrollees receive a higher subsidy based on Medicare data on the health history of those enrollees. The subsidy is further adjusted to cover expected, additional costs associated with LIS enrollees in that plan. Lastly, the payment is reduced by the base beneficiary premium for the plan times the number of enrollees.

Reinsurance Subsidies

Medicare subsidizes 80% of each plan's costs for catastrophic coverage—the reinsurance subsidy. For 2023, plan sponsors are liable for 15% of costs and enrollees have maximum 5% coinsurance. (See "Part D Benefit Structure.") Prospective reinsurance payments to plans are made on a monthly basis during the year, with final reconciliation made after the close of the year when plans have data on their actual costs. Medicare subsidies for reinsurance are now the largest component of Part D and also are the fastest-growing portion of the program.

As explained in "Standard Prescription Drug Coverage," beginning in 2025, the IRA reduces to 20% from 80% the federal reinsurance subsidy to Part D sponsors for catastrophic coverage for applicable drugs (brand-name, biologic, and biosimilar drugs) and to 40% from 80% for non-applicable drugs (generics).¹⁴⁹

Beneficiary Cost Sharing/Direct and Indirect Remuneration

Beneficiary cost sharing for Part D drugs dispensed by network pharmacies is based on each sponsor's negotiated price for a drug.¹⁵⁰ Negotiated prices, as defined by CMS for 2023, are the total amount network pharmacies receive from Part D plans for dispensing a covered drug, inclusive of all pharmacy price concessions except those that cannot reasonably be determined at the point of sale.¹⁵¹ Starting in 2024, CMS will define negotiated prices as the lowest possible price paid by a plan to a pharmacy at the point of sale. Negotiated prices must not be rebated back to a plan sponsor in full or in part.¹⁵²

When a beneficiary fills a prescription at a network pharmacy, the plan sponsor compiles a summary record called a Prescription Drug Event (PDE). The PDE includes a range of information, such as the amount paid to the pharmacy for the drug, quantity dispensed, out-of-pocket spending by the beneficiary, and coverage by qualified third parties, such as other insurers. CMS and plan sponsors use PDE data to track out-of-pocket and total drug spending (plan plus beneficiary spending) as enrollees move through stages of the Part D benefit.¹⁵³

Prescription drug price concessions that are not passed on to enrollees at the point of sale are not included in PDE records but instead are reported to CMS as direct and indirect remuneration (DIR). DIR includes such things as discounts, manufacturer rebates, free or reduced-price services, grants, or other benefits from manufacturers, pharmacies, or similar entities.¹⁵⁴ Plans must submit detailed DIR reports to CMS within six months after the close of a plan year.

During each plan year, CMS makes monthly prospective payments to Part D sponsors based on estimated costs in their annual plan bids. After the close of each plan year, CMS uses PDE and DIR data along with other information during the reconciliation process, to determine whether sponsors have been overpaid or whether Medicare owes them money. (See "Reconciliation.")

Risk Corridor Payments

The MMA established risk corridors for Part D plans. Under the risk corridors, Medicare limits plan sponsors' potential losses, or gains, by financing some higher-than-expected costs, or recouping some excessive profits, relative to the amount the plan originally bid to offer Part D. Risk corridors are based on a plan's allowable costs (spending) relative to a percentage of its target amount (revenues), as defined below:

• Allowable costs are defined as costs (excluding administrative costs, but including costs directly related to drug dispensing) incurred by a plan sponsor or organization that are actually paid (net of discounts, chargebacks, and average percentage rebates from drug manufacturers) by the sponsor or organization. Plans may not include costs for benefits beyond the Part D basic benefit amount. The costs are reduced by the sum of reinsurance payments and LIS payments.¹⁵⁵
• The target amount is defined as total payments to a plan (including amounts paid by both Medicare and enrollees) based on a plan's standardized bid for offering the Part D drug benefit,¹⁵⁶ as risk adjusted. The target amount does not include administrative expenses assumed in the plan's standardized bid.¹⁵⁷

At the end of each year, CMS compares a Part D plan's allowable costs to its target amount and shares in any gains or losses within a predetermined range, or corridor. For 2023, a plan that has higher-than-expected costs must cover all benefit spending up to 105% of its standardized bid. A plan with costs above 105% and up to 110% of its bid must cover 50% of the costs within this range and CMS will pay the other 50%. A plan with costs above 110% of the bid must pay 20% of this additional amount, with CMS covering the other 80%.

Likewise, a plan that spends less than its standardized bid may keep all savings between 100% and 95% of the bid. A plan that has spending below 95% to 90% of its bid may keep 50% of the savings within this range, while rebating 50% to CMS. A plan with savings below 90% of the bid may keep 20% of the savings within this range and must rebate 80% to CMS. CMS has the authority to leave the risk corridors unchanged or to widen them. CMS has elected to keep the corridors at 2011 levels through the 2024 program year.¹⁵⁸ CMS does not have authority to narrow the risk corridors.

Reconciliation

Following the close of a calendar year, CMS makes retroactive adjustments to sponsors' direct subsidy payments. The direct subsidy payments are adjusted based on updated data about actual beneficiary health status and enrollment. Additionally, prospective payments for reinsurance and LIS payments are compared to actual incurred costs, net of any DIR (including discounts, chargebacks, or rebates from drug manufacturers), and other related data, and adjustments are made to the plan payments. Finally, any necessary adjustments are made to reflect risk sharing under the risk corridor provisions. (See Table 8.)

Reduction of Part D Plan Payments Under Sequestration

Under the Budget Control Act of 2011 (BCA; P.L. 112-25), most Medicare benefit-related payments have a 2% sequestration reduction.¹⁵⁹ The BCA mandatory spending sequester is scheduled to continue each year through FY2031. Under Part D, Medicare payments to plans for direct subsidies and retiree drug subsidies are reduced by this amount. Payments for reinsurance, risk-sharing, and the LIS are exempt from these reductions. Part D plans are not permitted to increase premiums or cost sharing or to reduce benefits to make up for their lower payments.¹⁶⁰

Expected Shifts in Part D Sponsor Reimbursement Due to the IRA

The 2022 IRA requires changes to the Part D standard benefit that are projected to result in large shifts in subsidy payments to Part D sponsors. For example, effective in 2025, the IRA reduces reinsurance payments to Part D plans; caps enrollee out-of-pocket spending at $2,000; and reconfigures the manufacturer discount program to, among other things, apply to drugs purchased by LIS enrollees. The IRA also imposes mandatory price negotiation for certain Part D drugs, as well as mandatory rebates for drugs with price increases above consumer inflation. The 2023 Medicare Trustees Report projects that, in part due to the IRA, Part D reinsurance spending will decline from $1,153 per enrollee in 2024 to $628 per enrollee by 2032. At the same time, the direct subsidy will rise from a forecast $383 per enrollee in 2024 to $1,618 in 2032. Medicare per capita LIS will decline from $2,588 in 2024 to $1,434 in 2032. The Medicare Trustees also project that Medicare will make larger risk-sharing payments to plans under the Part D risk corridors through 2032.¹⁶¹

Pharmacy Access and Payment

Part D sponsors are required to establish pharmacy networks sufficient to ensure access to covered Part D drugs for all enrollees. Sponsors must provide (1) convenient access to retail pharmacies, (2) adequate access to home infusion pharmacies, (3) convenient access to long-term care (LTC) pharmacies for residents of LTC facilities, and (4) access to Indian Health Service, Tribes, or Urban Indian Programs pharmacies operating in a sponsor's service area.

Any Willing Pharmacy

Part D sponsors must permit any pharmacy that is willing to accept the sponsor's standard contracting terms and conditions to participate in the plan's network, including mail-order pharmacies.¹⁶² A sponsor's standard terms and conditions, particularly reimbursement terms, may vary to accommodate geographic areas or types of pharmacies, so long as all similarly situated pharmacies are offered the same standard terms and conditions. Part D plans are required to (1) make standard pharmacy contract terms and conditions available by September 15 of each year for contracts effective on January 1 of the following year, and (2) provide a copy of a standard contract to a requesting pharmacy within seven business days after receiving such a request.¹⁶³

Preferred Pharmacy

While any qualified pharmacy can participate in a plan network, Part D plans, with the exception of plans offering defined, standard coverage,¹⁶⁴ may contract with a smaller subset of pharmacies, or pharmacy chains, to serve as preferred pharmacies.¹⁶⁵ Preferred pharmacies generally are marketed as having lower beneficiary cost sharing than other pharmacies in the plan network. Enrollees who sign up for a preferred pharmacy plan may still use other network pharmacies in their plan region, but may pay more to fill a prescription at a non-preferred pharmacy.

The creation of a preferred pharmacy network must not increase overall CMS payments to a Part D plan.¹⁶⁶ In addition, the cost differential between preferred and non-preferred pharmacies cannot be set at a level that discourages enrollees in certain locations, such as inner cities or rural areas, from enrolling in a Part D plan.

Retail Pharmacy Access

To ensure that enrollees have convenient access to covered drugs, Part D networks must include a sufficient number of pharmacies that dispense drugs directly to patients (other than mail order).

CMS defines convenient access as follows:

• In urban areas, at least 90% of Medicare beneficiaries in a Part D sponsor's service area, on average, live within 2 miles of a retail pharmacy participating in the sponsor's network.
• In suburban areas, at least 90% of Medicare beneficiaries in the sponsor's service area, on average, live within 5 miles of a retail pharmacy participating in the sponsor's network.
• In rural areas, at least 70% of Medicare beneficiaries in the sponsor's service area, on average, live within 15 miles of a retail pharmacy participating in the sponsor's network.¹⁶⁷

Mail-Order Pharmacy Access

Part D plans have the option of including mail-order pharmacies in their networks, although they may not count such pharmacies in meeting retail pharmacy access requirements.¹⁶⁸ Plan sponsors may offer a subset of formulary drugs (such as a particular tier of drugs or maintenance drugs) through mail-order pharmacies. If a Part D plan offers a mail-order pharmacy benefit (such as a 90-day supply of a maintenance drug) it must ensure that enrollees have reasonable access to the same benefit at retail network pharmacies. Part D sponsors may charge enrollees more for filling certain prescriptions at a retail pharmacy, rather than a mail-order pharmacy, within set limits.¹⁶⁹

Specialty Pharmacy Access

Part D plans may designate certain pharmacies as specialty pharmacies for the distribution of drugs where the FDA has restricted distribution of the drug to certain facilities or physicians or appropriate dispensing requires extraordinary special handling, provider coordination, or patient education that cannot be met by a network pharmacy. Part D plans may not require enrollees to use a specialty pharmacy to fill a prescription solely because a drug has been placed on a Part D plan specialty drug tier. Plans may set their own definition and fee structure for specialty pharmacies and specialty networks, including preferred specialty networks. However, such contracting conditions must be reasonable and relevant and must be applied consistently.

Long-Term Care Pharmacy Access

Part D sponsors must offer convenient LTC pharmacy access to beneficiaries in LTC facilities.¹⁷⁰ In meeting this access requirement, plan sponsors must offer standard LTC pharmacy network contracts to all LTC pharmacies operating in their service area that request such contracts. The pharmacies must be able to meet performance and service criteria specified by CMS, as well as any standard terms and conditions established by the Part D sponsor. Part D sponsors may not rely on out-of-network pharmacies to meet the LTC convenient access standards.

Home Infusion Pharmacy Access

Part D covers certain home-infusion drugs, which are prescription drugs given intravenously in a home setting. Administration of such drugs may require supplies and equipment such as tubing and catheters or special pumps. Part D plan sponsors must be able to deliver home-infusion drugs to enrollees within 24 hours after the enrollees are released from an acute care setting, unless the next dose of the medication is not due to be taken for more than 24 hours. (An acute care setting is a hospital, ambulatory care unit, or similar facility where a patient receives treatment for a serious but brief illness.)

Out-of-Network Access

In general, a beneficiary must go to a pharmacy in his or her Part D network. However, in cases where enrollees cannot reasonably be expected to obtain covered drugs at a network pharmacy, and when such cases are not routine, a Part D plan must ensure that enrollees have adequate access to out-of-network pharmacies.¹⁷¹ One example would be if a Part D enrollee were traveling in the United States, came down with an illness, and needed to have a prescription filled. Another possible scenario would be a federal disaster declaration in the case of major storm or other event, where a beneficiary was not able to use an in-network provider. In 2020, CMS and Congress made special provision for Part D early refills and out-of-network pharmacy access during the COVID-19 public health emergency (PHE).¹⁷²

Part D plans must craft reasonable guidelines for out-of-network usage, including limits on out-of-network access such as limiting the quantity of drugs dispensed or the purchase of maintenance medications via mail order for extended out-of-area travel. In general, plans may not routinely allow more than a month's worth of medication to be dispensed at an out-of-network pharmacy. Enrollees likely will be required to pay more for a covered Part D drug purchased out of the plan network than one purchased at a network pharmacy.

Payments to Pharmacies

Part D sponsors often own or hire pharmacy benefit managers (PBMs) that design and/or administer many aspects of their Part D plans. PBMs are the middlemen in the prescription drug pricing system. Among other things, PBMs contract with pharmacies to participate in Part D networks, design plan formularies, and operate electronic systems for processing Part D claims. (See Appendix A for more information.) PBMs, acting on behalf of plan sponsors, generally reimburse pharmacies at a contractually set rate for the cost of a drug (ingredient cost) plus a dispensing fee.¹⁷³ Sponsors separately reimburse the PBMs for the drugs. PBM pharmacy reimbursement for generic drugs generally is based on a maximum allowable cost (MAC) list, where a PBM sets a ceiling price based on a survey of market prices for the product. Part D MAC lists must be updated on a regular basis.¹⁷⁴ For brand-name drugs, PBMs often reimburse pharmacies based on a list price (such as the Average Wholesale Price, or AWP, which is the estimated price paid by a retailer to a wholesaler), minus a set percentage.

Pharmacies negotiate separately with wholesalers or manufacturers for the drugs they dispense. PBM pharmacy contracts and accompanying guidance may impose various conditions, including pricing; audit terms; and quality requirements, such as set targets for accuracy in dispensing drugs. Contracts are confidential.

Part D sponsors are required to make payment for "clean claims," within 14 calendar days of the date an electronic claim is received, and within 30 calendar days of the date that non-electronically submitted claims are received.¹⁷⁵ A clean claim is a claim that does not require further development or investigation (e.g., has all required documentation) or other special treatment that would prevent the claim from being paid in a timely manner. If payment is not issued, mailed, or otherwise transmitted within the applicable number of calendar days, the PDP sponsor or MA-PD plan must pay interest to the pharmacy that submitted the claim.

In recent years, Part D sponsors have imposed fees on pharmacies for not meeting contractually specified quality metrics (such as accuracy in filling prescriptions or goals for generic dispensing) or as a condition of participating in a preferred pharmacy network. PBM contracts also may provide incentive payments to pharmacies that exceed set standards. Because plan sponsors and their PBMs often calculate pharmacy fees based on performance over a period of time, the fees are reported to CMS as DIR. According to CMS, DIR pharmacy price concessions, net of all plan incentive payments to pharmacies, grew more than 45,000% from 2010 to 2017.¹⁷⁶

CMS considers pharmacy fees to be price concessions in the sense that they lower a Part D plan's cost for dispensing a drug. In May 2022 CMS issued a final rule, effective in 2024, that changes the definition of a Part D negotiated price to the lowest possible reimbursement a network pharmacy is to receive for a particular drug, taking into account pharmacy price concessions such as fees.¹⁷⁷ The change is expected to reduce average prices at the pharmacy, benefiting enrollees.

Coverage Determinations, Appeals, and Grievances

Part D enrollees have the right to request or appeal coverage determinations, file grievances against plan sponsors, and file complaints regarding quality of care.¹⁷⁸ Part D plans must provide enrollees with written information about their rights, and institute both standard and expedited procedures for addressing coverage issues.¹⁷⁹ If a Part D sponsor operates a drug management program, the sponsor must comply with special appeal procedures for issues involving beneficiaries deemed at risk of prescription drug abuse. (See "Part D Opioid Overutilization Monitoring.")¹⁸⁰

An enrollee may appoint a representative to act on his or her behalf during the Part D grievance and appeals process such as a friend, relative, attorney, physician, or an employee of a pharmacy or a charity. To appoint a representative, an enrollee must submit a written statement to the drug plan sponsor.¹⁸¹ Alternatively, a surrogate or representative may be appointed by a court or authorized under a state or other applicable law to act on behalf of an enrollee. A prescribing physician or other prescriber may request a standard or expedited coverage determination, redetermination, or independent review entity (IRE) reconsideration on behalf of an enrollee without being named a representative.¹⁸² (Physicians or prescribers do not have all the rights of a designated representative unless they have gone through the formal appointment process.)

Coverage Determination

A coverage determination is any decision (whether an approval or denial) made by a plan sponsor with regard to covered benefits. Examples of coverage determinations include (1) a decision about whether to provide or pay for a Part D drug that an enrollee believes may be covered;¹⁸³ (2) a decision concerning a request about a specific drug payment tier;¹⁸⁴ (3) a decision concerning a request to cover a drug that is not included on a plan formulary; (4) a decision regarding cost-sharing levels; or (5) a decision regarding whether an enrollee has satisfied a prior authorization or other utilization management requirement. An enrollee, an enrollee's appointed representative, or his or her physician may file a request for a coverage determination.¹⁸⁵

An enrollee may also request an expedited decision regarding a drug that has not already been furnished. The plan is to make a decision within 24 hours in cases where using the standard timeframe may seriously jeopardize the life or health of the enrollee or the enrollee's ability to regain maximum function. A Part D sponsor that approves a request for expedited determination must make its determination and notification, whether adverse or favorable, as expeditiously as the enrollee's health condition requires, but no later than within 24 hours.¹⁸⁶ If a Part D plan sponsor denies a request for an expedited determination, it must

• make the determination within the 72-hour timeframe established for a standard determination and
• give the enrollee and prescribing physician or other prescriber prompt oral notice of the denial.

If a sponsor fails to notify the beneficiary of its decision within the established time frames, the decision is deemed an automatic denial, at which point the sponsor must forward the case to the independent review entity, the second level of appeal.¹⁸⁷

Appeals

If a plan sponsor's coverage determination is unfavorable, it must provide the affected enrollee with a written denial notice that includes information on appeals rights. An appeal is a request for a further review of a coverage determination.¹⁸⁸ There are five levels of appeals.

Redetermination

The first level of appeal is a redetermination by the plan. An enrollee, enrollee's representative, or enrollee's prescribing physician or other prescriber may request a standard or expedited redetermination by filing a written request with the plan sponsor. The request generally must be filed within 60 calendar days from the date printed or written on the written coverage determination denial notice. If a physician asks for, or supports, an expedited appeal on the grounds that waiting seven days could seriously harm an enrollee's health, the appeal is to automatically be expedited.¹⁸⁹

Plan sponsors must provide immediate access to the redetermination process through their websites. CMS strongly encourages plans to establish interactive, web-based systems to meet this requirement.

A plan sponsor must also provide an enrollee or prescribing physician with a reasonable opportunity to present evidence, and the redetermination must be made by a person not involved in the original coverage decision.¹⁹⁰ Enrollees are to be notified of the results within 7 days in the case of standard redetermination or within 72 hours for an expedited request. Part D sponsors must authorize payment for a benefit within 14 calendar days and must mail the payment no later than 30 calendar days after receiving the request.¹⁹¹

Reconsideration by an Independent Review Entity

At the second level of appeal, an enrollee dissatisfied with a redetermination has a right to reconsideration by an independent review entity (IRE) working under contract with CMS. An enrollee or an enrollee's appointed representative may request a standard or expedited reconsideration. The request must be made within 60 days of a redetermination. The IRE is required to make a decision within 7 days for a standard reconsideration and 72 hours for an expedited reconsideration. Plans must make payment in 14 days for a standard reconsideration.¹⁹²

Additional Levels of Appeal

If the above appeals result in decisions unfavorable to the enrollee, several additional levels of review may be pursued.

At the third level of appeal, an enrollee or the appointed representative may request a hearing with an administrative law judge (ALJ). A request must be made within 60 days of the IRE decision letter. To qualify for an ALJ hearing, the projected value of denied coverage must meet a minimum dollar amount ($180 for 2023).¹⁹³ An enrollee cannot request an expedited hearing if the only issue at question involves a request for payment of Part D drugs that have already been furnished.¹⁹⁴ There is a 90-day limit for a regular decision and a 10-day limit for an expedited decision.

The fourth level of appeal is the Medicare Appeals Council (MAC). A beneficiary or the appointed representative may request a review by the MAC within 60 days of the ALJ decision. The MAC may grant or deny the request for review. If it grants the request, it may issue a final decision or dismissal, or remand the case to the ALJ with instructions on how to proceed with the case. The review is to be completed within 90 days for a regular review and 10 days for an expedited review.

Standard Hearing

The final appeal level is a federal district court. A beneficiary or the appointed representative may request a review by a federal court within 60 days of the MAC decision notice. To receive a review by the court, the projected value of denied coverage must be greater than or equal to a minimum dollar amount ($1,850 for 2023).

Grievances

Grievances are complaints or disputes other than those involving coverage determinations. Grievances may include such things as complaints about a plan's customer service hours of operation, the time it takes to get a prescription filled, or a plan's benefit design. A grievance may also include a complaint that a Part D plan refused to expedite a coverage determination or redetermination. A beneficiary with a grievance may file a complaint within 60 days of the event. Although CMS regulations do not require a Part D plan sponsor to consider a grievance that is filed after the 60-day deadline, the regulations do not prevent a plan sponsor from doing so on a case-by-case basis.¹⁹⁵

Plan sponsors are to respond in a timely manner. A Part D plan sponsor must respond to an enrollee grievance within 24 hours if it involves a refusal by the Part D plan to grant an enrollee's request for an expedited coverage determination or an expedited redetermination and the enrollee has not yet purchased or received the drug in dispute.¹⁹⁶ (Sometimes a complaint may involve both a grievance and a coverage determination.)

Quality of Care Complaints

Complaints regarding quality of care received by Part D enrollees may be resolved by the plan sponsor, but also may be handled through a separate process: the Quality Improvement Organization (QIO) process.¹⁹⁷ The QIO program is implemented by a network of contractors throughout the United States that work with providers and beneficiaries to improve the quality of health care delivered to Medicare beneficiaries. When a Part D plan responds to an enrollee's grievance in writing, it must include a description of the enrollee's right to file a QIO grievance.¹⁹⁸ Quality of care grievances filed with a QIO may be filed and investigated beyond the 60-day time frame.

Program Spending and Financing

Medicare's financial operations are accounted for through two trust funds maintained by the Department of the Treasury—the Hospital Insurance (HI) trust fund for Part A and the Supplementary Medical Insurance (SMI) trust fund, which contains separate accounts for Parts B and Part D.¹⁹⁹ Unlike the HI program, SMI was not intended to be fully supported through dedicated sources of income. Instead, it relies primarily on general tax revenues and beneficiary premiums as revenue sources.

Expenditures

According to the 2023 Medicare Trustees Report, during 2022, total Part D expenditures were approximately $125.7 billion.²⁰⁰ (See Table 9.) This amount included the combined costs of prescription drugs provided by Part D plans to enrollees, Medicare payments to employer-sponsored retiree health plans, and federal administrative expenses including expenses incurred by HHS, SSA, and the Department of the Treasury in administering Part D. Such duties include making payments to Part D plans and implementing fraud and abuse control activities.

Revenues

The major sources of revenue for the Part D account include general revenues, beneficiary premiums, and state contributions. In 2022, of the $124.3 billion in total Part D income, general revenues accounted for $92.4 billion, premiums accounted for $17.6 billion, and transfers from states for $13.7 billion.

The appropriation language adopted for the Part D account provides resources for benefit payments without the need for congressional approval. This allows substantial flexibility in the amount of general revenues available to the account, and eliminates the need for a contingency reserve. As a result, assets in the Part D account are generally low and only need to be held for a short time until they are used to meet immediate expenditures. As premium and general revenue income for Part D is reset each year to match expected costs, the Medicare Trustees consider the Part D account to be in satisfactory financial condition under current law.

Beneficiary Premiums

Premiums made up 14.2% of total Part D program revenues in 2022. See "Part D Premiums." The base premium is set at 25.5% of the expected per capita plan costs for basic coverage, although beneficiaries pay different premiums depending on the plan they select.²⁰¹ (The IRA premium stabilization formula caps base premium increases at 6% a year through 2029 and resets the formula for determining the base premium as a percentage of expected per capita plan costs in 2030.) LIS beneficiaries may have minimal or no premiums, depending on the plan in which they are enrolled. Beneficiaries with higher incomes pay income-related monthly premium adjustments in addition to the premiums charged by the plans in which they have enrolled. (See "Premium Surcharge for Higher-Income Enrollees.") These extra amounts are credited to the Part D trust fund account and reduce the amount of general revenue funding needed.

General Revenues

General revenues are transferred from the Treasury to the Part D Account on an as-needed basis to cover the portion of program expenditures funded by federal subsidies. These transfers are based on expected costs of the direct subsidy, reinsurance payments, employer subsidies, LISs, net risk-sharing payments, administrative expenses, and advanced discount payments.²⁰² In 2022, contributions received from the general fund of the Treasury amounted to $92.4 billion, or about 74.3% of total Part D revenue.

State Contributions

Subsequent to the availability of Part D drug coverage and LISs beginning in 2006, Medicaid is no longer the primary payer of drug costs for full-benefit dual-eligible beneficiaries. However, MMA contained a provision (labeled by some as the "clawback provision") that requires states to pay the Part D account in the SMI trust fund a portion of the costs that they would have incurred for this population if they were still the primary payer. These amounts are based on the product of the estimated annual per capita full dual-eligible drug payment amount and the monthly State enrollment of full dual eligibles.

Starting in 2006, states paid 90% of these estimated costs. This percentage phased down over a 10-year period to 75% starting in 2015. In 2022, state payments amounted to $13.7 billion, or about 11.3% of Part D revenues.

Estimated Future Part D Expenditures

Over the 10-year period from 2022 to 2032, the Medicare Trustees project that aggregate benefits are to increase 5.1% annually, on average, and the average per capita rate of growth is projected to be 2.6%. That is a slower rate of growth than the Medicare Trustees projected in 2022. The projections reflect the impact of the IRA provisions governing Part D redesign, as well as regulatory changes. See Table 10 for information on historical and projected growth in Part D benefits.

Appendix A. Drug Rebates and PBMs in Medicare Part D

Part D plan sponsors typically contract with or own pharmacy benefit managers (PBMs), which are intermediates that perform services for health insurers such as developing plan formularies and negotiating price concessions from drug manufacturers. PBMs also develop networks of contracted retail pharmacies that dispense prescriptions for Part D plans for set reimbursement. PBMs generally do not take delivery of drugs, with the exception of in-house mail-order or specialty pharmacies.²⁰³

Part D price concessions primarily take the form of rebates—price reductions provided after the point of sale—from a list price for a brand-name drug.²⁰⁴ Plan sponsors and PBMs can secure rebates for including a brand-name drug on a plan formulary or for placing the drug on a favorable cost-sharing tier. The final value of a rebate can be tied to sales volume of a drug and may be aggregated and paid to the PBM in installments.

PBMs have the most leverage to negotiate rebates when there are competing drugs on the market for treating a condition. They have less ability to negotiate rebates for sole-source drugs or drugs in the six protected classes, where all drugs must be covered.

When Part D plan sponsors contract with PBMs under a pass-through pricing arrangement, the sponsor reimburses the PBM the same amount that the PBM paid the pharmacy for a given drug. If the sponsor uses a PBM lock-in contract, the PBM may negotiate to compensate pharmacies at a lower price for a drug than the price the PBM has guaranteed to the plan—a practice that is known as spread pricing.²⁰⁵ However, under Part D regulations, any difference between the PBM and pharmacy reimbursement must be reported to CMS as an administrative cost and enrollee cost sharing must be based on the lower pharmacy price. The Part D rules act as a disincentive to use spread pricing in the Part D program.

A 2019 Government Accountability Office (GAO) study found that PBMs performed 74% of drug benefit management services for Part D plans. PBM compensation primarily consisted of fees from plan sponsors, with PBMs retaining less than 1% of rebates they negotiated for Part D plans as compensation.²⁰⁶ According to the GAO, PBMs earned Part D revenue from a volume-based fee on PBM-processed claims; a per member, per month fee on plan sponsors; or a combination of the two.

Part D plans also may impose fees on network pharmacies for not meeting quality and other plan requirements. Over time, the volume of such pharmacy fees has increased dramatically. According to CMS, Part D pharmacy price concessions, net of all pharmacy incentive payments, grew more than 107,400% between 2010 and 2020.²⁰⁷

Under the CMS interpretation of Part D negotiated price, plan sponsors have some latitude to include price concessions at the point of sale or to report them to CMS later as DIR.

In a 2005 Federal Register notice of final rules to implement the Part D program, CMS said it expected plan sponsors would pass through a high percentage of any drug price concessions in negotiated prices at the point of sale.²⁰⁸ However, in a 2018 Federal Register notice, CMS said that less than 1% of sponsors had passed through price concessions at retail pharmacies.²⁰⁹ The vast majority of price concessions, including manufacturer rebates and pharmacy fees are collected after the point of sale and reported to CMS as DIR.²¹⁰ In addition, plan sponsors generally have not included the value of pharmacy fees, which reduces plans' costs for dispensing drugs, in the Part D negotiated price.

Overall, DIR, which consists mainly of rebates, has risen from the equivalent of 12.9% of total Part D drug costs in 2013 to an estimated 33.6% of drug costs in 2023.²¹¹

The way in which plan sponsors apply and report price concessions—in negotiated prices or as DIR—has an impact on beneficiary out-of-pocket spending, plan premiums, and Medicare spending. Specifically,

• When plan sponsors do not apply rebates and other price concessions to negotiated prices at the point of sale, enrollees prescribed more expensive brand-name drugs may pay cost sharing, such as coinsurance, based on a plan's higher pharmacy price, rather than the lower net price that includes rebates and other price concessions that plan sponsors receive after the point of sale. Higher cost sharing means a greater burden on beneficiaries, and it also means more beneficiaries accumulate out-of-pocket spending sufficient to reach the catastrophic portion of the Part D benefit, where Medicare subsidizes a higher share of drug costs and sponsors' financial risk is reduced.
• When plan sponsors submit bids to CMS each June to provide Part D benefits for the following plan year, they must provide CMS with an estimate of expected DIR. The DIR reduces sponsors' projected costs for offering the Part D benefit. That, in turn, reduces plan premiums, which are based on the average of plan bids. Sponsors have a financial incentive to keep premiums low, because they are a key factor considered by beneficiaries when selecting Part D plans. Because Medicare subsidizes about 75% of premiums, lower premiums also reduce Medicare spending in this area of the benefit.

During the past several years, CMS has put forth proposals to alter the Part D bidding and payment system to address concerns about rising drug prices, greater use of DIR, rising reinsurance costs, and enrollee out-of-pocket costs. For example, in a 2018 Federal Register notice, CMS asked for comment on whether to alter the definition of negotiated prices to (1) include all pharmacy price concessions received by a plan sponsor for a covered Part D drug and (2) reflect the lowest possible reimbursement a network pharmacy would receive, in total, for a particular drug. ²¹² No rule was published at that time.²¹³ In May 2022, CMS issued a final rule, effective in plan year 2024, that changes the definition of a Part D negotiated price to the lowest possible reimbursement a network pharmacy is to receive for a particular drug, taking into account pharmacy price concessions such as fees.²¹⁴

On November 20, 2020, HHS issued a final rule to bar most drug rebates in Medicare Part D, effective in plan year 2022.²¹⁵ Implementation of the rule was delayed until 2026 as part of the Infrastructure Investment and Jobs Act (P.L. 117-158), subsequently was delayed until 2027 as part of the Bipartisan Safer Communities Act (P.L. 117-159), and was further delayed until 2032 as part of the 2022 IRA.

The IRA includes provisions that will affect drug prices and plan payment, including negotiation of certain Part D-covered drugs, mandatory rebates from manufacturers that raise prices above the rate of consumer inflation, and changes in Part D cost sharing. These changes are expected to have a large effect on drug pricing, including possible rebates and discounts. The 2023 Medicare Trustees Report projects that DIR will fall substantially as a share of Part D spending in coming years, largely due to the CMS regulations on negotiated prices and pharmacy payment, and the IRA provisions. The Medicare Trustees expect DIR to decline from the equivalent of 35% of Part D drug costs in 2023 to 14% by 2032.²¹⁶

Appendix B. IRA Drug Price Negotiation in Part D

The 2022 law known as the Inflation Reduction Act (IRA; P.L. 117-169) requires the Secretary of the Department of Health and Human Services (HHS) to negotiate prices for certain single-source chemical drugs and biologics covered under Medicare Parts D and B.²¹⁷ To be selected for negotiation, a chemical drug cannot have a marketed generic substitute and must have been approved by the Food and Drug Administration (FDA) for at least seven years, while a biologic cannot have a marketed biosimilar substitute and must have been licensed by FDA for at least 11 years. In addition, the product must be among the 50 qualifying single-source drugs with the highest gross spending in Part B or Part D.

The Secretary must negotiate maximum fair prices (MFPs) for 10 drugs that come into effect in 2026, 15 additional drugs for each of 2027 and 2028, and 20 additional drugs for 2029 and each following year. For the first two years (2026 and 2027), the program applies only to Part D drugs.

The IRA excludes the following drugs from negotiation:

• low-spend drugs (i.e., drugs with Medicare spending of less than $200 million; indexed for inflation in subsequent years);
• plasma-derived products;
• orphan drugs designated for only one rare disease and for which the only FDA-approved indication is for such disease;²¹⁸ and
• certain products made by small biotech firms (through 2028).²¹⁹

The Secretary may delay negotiation of qualifying biologic products for up to two years when the Secretary determines there is a high likelihood that a biosimilar will soon enter the market.²²⁰

In August 2023, HHS announced the first 10 drugs selected for negotiation under the Program, with negotiated prices to become effective in 2026.²²¹ In October 2023, the Secretary announced that all nine manufacturers of the selected drugs had agreed to participate in negotiations. ²²²

The Secretary and manufacturers are to engage in negotiations on MFPs for the selected drugs from October 1, 2023 to August 1, 2024. During the negotiation period, the Secretary is to consider factors including each manufacturer's research and development costs for the drug, production cost, any federal financial support for development of the drug, data on patents and on existing and pending exclusivities. The Secretary is to publish the negotiated MFPs for 2026 no later than September 1, 2024. Each subsequent year under the program, MFPs are to take effect two years after new drugs are selected for negotiation.

The IRA sets a ceiling on the MFP, based on the lesser of

• the weighted average net price of the drug or biologic under Part D (and starting in 2028, average Part B prices)²²³ or
• a percentage of the non-federal average manufacturer price (non-FAMP). The non-FAMP is a wholesaler price, minus certain discounts, that is used in calculating a maximum price for drugs by the "big four" federal purchasers: the Department of Veterans Affairs, the Department of Defense, the Public Health Service, and the Coast Guard. The MFP ceiling is 75% of the non-FAMP for a drug that has been approved for less than 16 years or 40% of the non-FAMP for a drug that has been approved for at least 16 years.²²⁴

An MFP is calculated across all dosage forms and strengths of a drug and is in effect until the first year beginning at least nine months after a generic or biologic substitute for a drug is marketed. Part D plans must carry all drugs with an MFP in their formularies.