Summary: As we previously reported last year here, the Inflation Reduction Act of 2022 (IRA), enacted by Congress in August 2022, includes several cost-reduction provisions affecting Medicare Part D plans.
The most significant provision for employer-sponsored group health plans is that the annual out-of-pocket (OOP) costs are capped at $2,000 (for 2025) and $2,100 (for 2026) for individuals with Medicare Part D, impacting the creditable coverage status of employer-sponsored prescription drug coverage.
The Centers for Medicare and Medicaid Services (CMS), the federal agency governing Medicare, released Draft CY 2026 Part D Redesign Program Instructions for calendar year 2026 (“Draft Instructions”) on January 10, 2025. These Draft Instructions:
- Clarify that group health plans may not use the current simplified determination method for the 2026 calendar year to determine whether their prescription drug is creditable, and
- Propose a revised simplified determination method for the 2026 calendar year.
Read on for more information and employer plan sponsor considerations.
Creditable Coverage
Prescription drug coverage is considered “creditable” when its actuarial value equals or exceeds the actuarial value of standard Medicare Part D prescription drug coverage. Generally, this actuarial determination measures whether the expected amount of paid claims under the group health plan’s prescription drug coverage is at least as much as the expected amount of paid claims under the Medicare Part D prescription drug benefit. It is considered “non-creditable” when it does not provide, on average, as much coverage as Medicare's standard Part D plan.
Employer plan sponsors are not required to offer prescription drug coverage to their employees. However, they are required to annually notify Medicare Part D-eligible plan participants of their prescription drug plans’ creditable coverage status (typically referred to as the “Notice of Creditable Coverage”). Individuals eligible for Medicare Part D who fail to maintain creditable coverage for a period of 63 continuous days or more will face a late enrollment penalty when they eventually enroll in Part D. As a result, this Notice of Creditable Coverage serves an important purpose for these individuals to prove they maintained creditable coverage and avoid late enrollment penalties when they ultimately enroll in Part D. Click here for a Risk Strategies article with more details.
Determination of Creditable Coverage
There are currently two sanctioned methods to determine whether coverage is creditable for purposes of Medicare Part D — a simplified determination method and an actuarial method. Many employer plan sponsors use the simplified determination method to determine creditable coverage status for their prescription drug coverage.
Details from CMS regarding the current simplified determination method can be found on the CMS website by clicking here.
Below is a summary of the current simplified determination method to deem a prescription drug coverage benefit creditable:
- The plan provides coverage for brand and generic prescriptions;
- The plan provides reasonable access to retail providers;
- The plan is designed to pay on average at least 60% of participants’ prescription drug expenses; and
- The plan satisfies at least one of the following:
- The coverage has no annual benefit maximum or maximum annual benefit payable by the plan of at least $25,000;
- The coverage has an actuarial expectation that the amount payable by the plan will be at least $2,000 annually per Medicare-eligible individual; or
- For employer plan sponsors that have integrated prescription drug and health coverage, the integrated plan has no more than a $250 deductible per year, has no annual benefit maximum or a maximum annual benefit of at least $25,000, and has no less than a $1,000,000 lifetime combined benefit maximum.
An integrated plan is a plan where the prescription drug benefit is combined with other coverage offered by the employer plan sponsor, such as medical, and the plan contains all of the following plan provisions:
- A combined plan year deductible for all benefits under the plan;
- A combined annual benefit maximum for all benefits under the plan; and
- A combined lifetime benefit maximum for all benefits under the plan.
Employer plan sponsors who have historically relied on the simplified determination method to determine their plan’s creditable coverage status are able to continue to use this method for 2025, as confirmed by CMS in its Final CY 2025 Part D Redesign Program Instructions.
Employer plan sponsors participating in the Retiree Drug Subsidy (RDS) program cannot use the simplified determination method and must use the actuarial method, using generally accepted actuarial principles in accordance with CMS actuarial guidelines.
Draft CY 2026 Part D Redesign Program Instructions for 2026
CMS released Draft CY 2026 Part D Redesign Program Instructions for calendar year 2026 on January 10, 2025. These Draft Instructions and accompanying CMS Fact Sheet (here) confirm that the current simplified determination methodology no longer reflects actuarial equivalence with defined standard Medicare Part D coverage due to enhancements to the Part D benefit under the IRA. As such, CMS will permit the use of a revised simplified determination methodology that “better reflects actuarial equivalence with the richer Part D defined standard benefit under the IRA” for the 2026 calendar year.
The Draft Instructions:
- Clarify that non-RDS group health plans may not use the current simplified determination method for the 2026 calendar year to determine whether their prescription drug is creditable, and
- Propose a revised simplified determination method for the 2026 calendar year.
Revised Simplified Determination Methodology (proposed in the Draft Instructions):
Below is the revised simplified determination method proposed in the Draft Instructions to deem a prescription drug coverage benefit creditable as long as it meets all of the following standards:
- Provides reasonable coverage for brand name and generic prescription drugs and biological products;
- Provides reasonable access to retail pharmacies; and
- Is designed to pay on average at least 72% of participants’ prescription drug expenses.
The Draft Instructions provide CMS’ commentary and insight in connection with the proposed changes to this revised simplified determination method, summarized below:
- Addition of biological products: due to changes in the prescription drug and pharmaceutical technology landscape since the current simplified methodology determination was first developed and released in 2009.
- Removal of annual and lifetime benefit maximums: due to changes under the Affordable Care Act, which have generally eliminated such annual and lifetime benefit maximums in group health plans.
- Removal of an annual deductible: CMS explains here that it is currently uncommon for group health plan and prescription plan drug coverage to be separate benefits.
-
Change to 72% payment threshold (from 60%): due to benefit changes required by the IRA[1], which significantly enhanced the Part D benefit.
CMS determined that the 60% value is no longer an accurate representation of the value of the Part D benefit and that group health plan coverage must be designed to pay on average at least 72% of participants’ prescription drug expenses in order for its actuarial value to equal or exceed the actuarial value of standard Medicare Part D prescription drug coverage.
High-Deductible Health Plans (HDHP) & 72% Payment Threshold
Although high-deductible health plans (HDHPs) might facially appear less likely to satisfy the higher 72% payment threshold for prescription drug expenses under the revised simplified determination method, the Draft Instructions include several recommendations detailed below to mitigate this risk:
- not applying a deductible to preventive (i.e., maintenance) medications,
- a reasonable and supportable allocation of the deductible attributable to prescription drug expenses, or
- offering lower cost-sharing than standard Part D coverage once the deductible is met.
Employer Plan Sponsor Considerations
CMS is accepting comments on these Draft Instructions through February 10, 2025 and is expected to publish the Final CY 2026 Part D Redesign Program Instructions no later than April 7, 2025.
In the meantime, employer plan sponsors should review these Draft Instructions as a helpful preview to understand where the Final Instructions will likely land as they begin to think about their group health plan design, including prescription drug coverage, for the 2026 calendar year.
Contact your Risk Strategies account team with any questions or contact us directly here.
[1] Including $35 cost-sharing cap on a month’s supply of each covered insulin product, access to recommended adult vaccines without cost-sharing, the implementation of an annual OOP threshold ($2,100 for 2026), and the elimination of the coverage gap phase of the benefit.
