Qualifying for creditable coverage requires plan sponsors (e.g., employers, health plans, unions, or multiemployer plans) to offer a prescription drug benefit with richer coverage than a beneficiary would otherwise receive under a reference plan based on the defined standard benefit.2 Benefits with this richer coverage thereby pass the “gross test” and are deemed creditable. In 2025, the IRA will significantly increase the richness of the defined standard benefit, raising the minimum standard for being creditable. Based on our analysis and interpretation of current regulations, we conclude:
- The actuarial value of the reference plan will increase by 5% to 14% (additive increase of 3% to 8%) from 2024 to 2025.
- Benefit designs that are not creditable or were borderline creditable for the 2024 plan year are likely to be non-creditable for the 2025 plan year without some benefit enhancement.
- The Centers for Medicare and Medicaid Services (CMS) evaluated the use of the simplified method for determining creditable coverage. While this method will still be allowed in 2025, CMS will reevaluate the continued use of this methodology in 2026 and may sunset it or establish a revised one. Eliminating this approach would require an actuarial valuation of each benefit for determining creditable coverage.3
Key changes from the IRA affecting creditable coverage testing
In August 2022, the IRA was enacted by Congress, bringing significant modifications to the Medicare Part D program. The implementation of these changes began in 2023, with a cap on insulin copays at $35 and the elimination of beneficiary cost sharing for vaccines. In 2024, cost sharing for beneficiaries is eliminated above the TrOOP limit. The changes in 2023 and 2024 increased the actuarial value of the reference plan by shifting liability from the beneficiary to the plan sponsors.
Looking forward to 2025, the changes from the IRA will further increase the actuarial value of the reference plan, and to a greater extent than in prior years. The key changes in 2025 that will affect the actuarial value of the reference plan (along with the directional impacts to the pharmacy actuarial value relative to the 2024 plan year in brackets) include:
- Introduction of the maximum out-of-pocket (MOOP) amount of $2,000 in 2025. In 2024, a beneficiary’s out-of-pocket cost was capped at $8,000 under the defined standard benefit. [increase to actuarial value]
- Increase in the plan sponsor liability in the catastrophic phase. The federal government covered 80% of prescription drug costs in 2024 but will only cover 20% and 40% of applicable (i.e., primarily brand) and non-applicable (i.e., primarily generic) costs, respectively, in 2025. This plan sponsor liability in the catastrophic phase will shift from 20% in 2024 to 60% for applicable drugs and non-applicable drugs, thereby increasing the actuarial value of the reference plan. The plan sponsor liability will also increase due to the Manufacturer Discount Program (MDP) phase-in described below. The balance of the applicable allowed cost in the catastrophic phase, less the amount from the MDP phase-in, is borne by pharmaceutical manufacturers for Medicare Part D plan sponsors and is excluded from the reference plan liability for creditable coverage testing. [increase to actuarial value]
- Elimination of the coverage gap phase and the Coverage Gap Discount Program (CGDP) in 2025 for non-low-income beneficiaries. Additionally, the MDP will be introduced in 2025, setting manufacturer liability at 10% and 20% of applicable expenses in the initial coverage phase (ICP) and the catastrophic phase, respectively, for all beneficiaries. Elimination of beneficiary cost sharing in the coverage gap significantly reduced the actuarial value of the reference plan for creditable coverage testing, lowering the threshold for passing the gross test. [increase or decrease to actuarial value]
- MDP phase-in. The manufacturer liability under the MDP will be phased in for "specified” and “specified small” manufacturers as outlined by CMS.4 In 2025, specified manufacturers will only pay 1% of applicable expenses for low-income beneficiaries in both the ICP and catastrophic phase. Furthermore, specified small manufacturers will only pay 1% of applicable costs in both phases for all beneficiaries. The 1% will increase annually until 2029 when these manufacturers will pay the full liability consistent with other manufacturers. The difference between the full MDP manufacturer liability and the 1% will be covered by plan sponsors and is considered part of the reference plan liability. It must be considered when performing creditable coverage testing.5 [increase to actuarial value]
The changes to the Medicare Part D program will require some plans to enrich pharmacy benefits to provide creditable coverage in 2025. We show a range for the estimated change in the actuarial value of the reference plan over time in Figure 1.
Figure 1: Reference plan actuarial value by year
Note: Figure 1 shows the range of actuarial values for the reference plan under different sets of varying assumptions that plan sponsors may encounter. This figure should not be used for determining creditable coverage status.
The actuarial value of the reference plan can vary, as shown in Figure 1. This variation is attributable to several factors, such as the underlying drug spend, the distribution of cost within each benefit phase, and the type of drug utilization (generic/brand/specialty), among others. In 2024, the estimated actuarial value ranges from approximately 56% to 65%. In 2025 this range increases to approximately 63% to 69%. A reference plan with actuarial value at the low (high) end of the range in 2024 may not necessarily correlate to the low (high) end of the range in 2025, leading to smaller or larger changes than the difference of the corresponding endpoints of each range. The actuarial value in 2025 may be closer to the upper end of the range due to the varying stakeholder liabilities by benefit phase. Plan sponsors will need to evaluate the actuarial values of their pharmacy benefit designs and the reference plan (using similar underlying data and assumptions) to determine the testing status of their pharmacy benefits.
Illustrative example
We provide an illustrative example in Figure 2, comparing the richness of two hypothetical plan designs (a lean plan and a rich plan) to the reference plan between 2023 and 2025. In 2023 and 2024, both plan designs are richer than the reference plan, thus these plans would provide creditable coverage. In 2025, the reference plan’s richness increases, driving the lean plan design to fail, while the rich plan design still passes by a wide margin.
Figure 2: Illustrative example - Potential change in plan sponsor's creditable coverage status*
* Example is not to be used for the purpose of determining a plan sponsor’s creditable coverage.
Considerations for maintaining actuarial equivalence
The increase in richness of the reference plan design in 2025 may require some plan sponsors to make significant changes to their pharmacy benefit designs relative to prior years to continue providing creditable coverage. Plan sponsors should evaluate their plans’ benefit richness relative to the 2024 reference plan to better understand the magnitude of benefit changes required to maintain creditable coverage. For plans that passed creditable coverage testing by a wide margin in 2024, the same benefit design may continue to provide creditable coverage in 2025. However, if plans passed by a small margin, they will likely need to enrich pharmacy benefits in 2025 to maintain creditable coverage.
In evaluating these potential changes, plan sponsors may also consider alternative retiree solutions outside terminating coverage. These options include:
- Employer Group Waiver Plan (EGWP): Plan sponsors can contract with an existing Medicare Part D carrier to provide prescription drug coverage for Medicare-eligible beneficiaries. The EGWP may be a self-funded product (with the plan sponsor taking the risk) or a fully insured product. EGWPs provide creditable coverage.
- Defined contribution (DC) plan: Plan sponsors could use a private Medicare exchange to group-enroll their Medicare-eligible employees in an individual Prescription Drug Plan (PDP) and optionally contribute toward premiums.
- Retiree Drug Subsidy (RDS) plan: This subsidy is paid by CMS to offset the cost of providing creditable coverage. To be eligible for the RDS, plans must pass the gross test (same as for creditable coverage) and limit retiree contributions (i.e., net test).
Methodology
We used Milliman’s Health Cost Guidelines (HCGs) and other internal Milliman research to estimate the impact of the IRA on the reference plan. The range in estimated actuarial value displayed in Figure 1 was developed by varying the underlying claims experience to which the reference plan design is adjudicated. We tested a range of average allowed cost per member per month (PMPM) values and different drug mixes by varying the concentration of higher-cost brand and specialty medications.
Additionally, we used this research to perform a creditable coverage test for two illustrative benefit designs, described in Figure 3. These illustrative benefit designs were compared to the reference plan in Figure 2 using the same underlying drug mix across all plan designs and all years to isolate the impact of the changes in the reference plan benefit design.
Figure 3: Prescription drug benefit designs used for illustrative plan
| Illustrative Plan | Rich | Lean |
|---|---|---|
| Deductible | $500 | $1,000 |
| MOOP | $2,000 | $5,000 |
| Generic Cost Share | $10 | 30% |
| Brand Cost Share | $20 | 30% |
| Specialty Cost Share | $50 | 30% |
Closing remarks
The IRA’s changes to the Medicare Part D program will create headwinds for plan sponsors offering retiree prescription drug plans and seeking to meet the standard for creditable coverage. Those plan sponsors offering very rich pharmacy coverage may not need to make any changes in 2025, while those plan sponsors that passed the standard by a very narrow margin (or did not pass) in 2024 will likely not pass in 2025. Plan sponsors should begin the testing process earlier and anticipate enriching benefits for substantially more of their plans than in prior years to provide creditable coverage in 2025.
Plan sponsors can also provide creditable coverage through alternative benefit options, which may still require offering richer benefits in 2025 than in prior years but potentially at a lower cost. Such options include offering Medicare-eligible retirees an EGWP, group-enrolling beneficiaries into individual Medicare Advantage plans, and seeking the RDS.
While benefit changes may not have been needed historically for offering creditable coverage, plans sponsors should plan for change in 2025.
1 The full text of the bill is available at https://www.congress.gov/117/bills/hr5376/BILLS-117hr5376enr.pdf.
2 42 CFR §423.56 of the MMA, available at https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-B/part-423/subpart-B/section-423.56.
3 CMS. Final CY 2025 Part D Redesign Program Instructions. Retrieved April 4, 2024, from https://www.cms.gov/files/document/final-cy-2025-part-d-redesign-program-instructions.pdf.
4 See https://www.congress.gov/117/bills/hr5376/BILLS-117hr5376enr.pdf.
5 CMS. Final CY 2025 Part D Redesign Program Instructions, op cit.