Subsidy changes

Beginning in 2025, the largest source of federal subsidies to Part D plans – catastrophic reinsurance subsidies – will be dramatically reduced.

Since 2006, catastrophic reinsurance subsidies have been covering 80 percent of the costs (net of average percentage manufacturer rebates and other price concessions) paid for Part D drugs that are dispensed in the catastrophic phase, which enrollees enter after reaching an “incurred cost” threshold of the benefit design. Beginning in plan year 2025, this subsidy will be reduced to:

• 20 percent of such costs for “applicable drugs” (branded drugs, biologics and biosimilars); and
• 40 percent of such costs for non-applicable drugs (generic drugs).

In 2022, catastrophic reinsurance subsidies totaled $56.8 billion. The Medicare trustees estimate that this change, together with other changes made by the IRA, will bring catastrophic reinsurance subsidies for 2025 down to $21.9 billion.

Plan sponsors will likely increase their bid amounts to make up for some of that reduction in funding. While the IRA capped the annual increase in average Part D enrollee premiums due to higher bids to 6 percent per year (under a formula that results in higher “direct subsidies” to make up the difference), individual plan premiums can increase by more or less than that 6 percent amount, depending upon the level of the plan’s bid compared to the national average monthly bid amount.

Since enrollees are highly sensitive to plan premiums and premiums affect the eligibility of plans to receive auto-enrollment of Medicare/Medicaid dual-eligibles, the bids that sponsors submit in 2024 could have big impacts on plan enrollment – positive or negative. Moreover, sponsors will have to make judgments about the impact of various Part D changes and the levels at which their competitors are likely to bid – all of which create greater uncertainty than the Part D marketplace has seen in years.

New manufacturer discount program

The impact of that subsidy change will be mitigated somewhat by concurrent changes being made to the mandatory discounts that manufacturers of applicable drugs must pay to Part D plans for their products to be eligible for Part D coverage.

Currently, manufacturers of applicable drugs must pay “coverage gap discounts” equal to 70 percent of the negotiated price of drugs (i.e., the price paid by or on behalf of the plan to the pharmacy, excluding dispensing fees) dispensed to non-Low-Income Subsidy (LIS) beneficiaries in the Part D “coverage gap.” However, beginning in 2025, the coverage gap phase is being eliminated, and the coverage gap discount program is being replaced with a new “Manufacturer Discount Program.”

Under that program, beginning in 2025, manufacturers of applicable drugs generally must pay mandatory discounts to plans in both the initial coverage and catastrophic phases of the benefit, on prescriptions dispensed to both LIS and non-LIS beneficiaries, after the beneficiary has incurred costs equal to the defined standard deductible for the year, as follows:

• 10 percent of the negotiated price (including dispensing fees) for applicable drugs dispensed in the initial coverage phase.
• 20 percent of such negotiated price for applicable drugs dispensed in the catastrophic phase.

There are exceptions to these requirements. Most significantly, in 2025, a manufacturer that qualifies as a “specified manufacturer” or “specified small manufacturer” may pay only 1 percent of the negotiated price on utilization of its applicable drugs (by LIS enrollees in the first case and by all enrollees in the second) during both the initial coverage and catastrophic phases. (The discount percentage increases in later years.)

Manufacturers qualify for these “phase-in” discounts based primarily upon expenditures for their drugs under Part D and Part B during 2021, and they must submit certain ownership information to CMS by March 1, 2024 to enable it to make the relevant determinations. After that, CMS will publish guidance to enable Part D plan sponsors to determine which drugs are subject to the lower discount percentages.

Presumably, plans will consider the combined mandatory manufacturer discount and any rebates the manufacturer makes available voluntarily in determining what drugs to cover and prefer on their formularies. Consequently, some specified manufacturers or specified small manufacturers could decide to pay higher voluntary rebates to make up for all or a portion of the reduced mandatory discounts they will pay due to such status.