Medicare Part D Changes May Impact Creditable Coverage Status of Employer Plans

The Inflation Reduction Act of 2022 (IRA) includes several cost-reduction provisions affecting Medicare Part D plans, which may impact the creditable coverage status of employer-sponsored prescription drug coverage beginning in 2025. Creditable coverage means that the employer’s prescription drug coverage is at least as good as Medicare Part D coverage.

Employers are not required to offer coverage that is creditable – yet employers that provide prescription drug coverage to individuals who are eligible for Medicare Part D must inform these individuals and the Centers for Medicare and Medicaid Services (CMS) whether or not their prescription drug coverage is creditable.

Creditable Coverage Determination

A group health plan’s prescription drug coverage is considered creditable if its actuarial value equals or exceeds the actuarial value of standard Medicare Part D prescription drug coverage, as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS guidelines. In general, 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. For plans that have multiple benefit options (for example, PPOs, HDHPs and HMOs), the creditable coverage test must be applied separately for each benefit option.

Under existing CMS guidance, there are a few different ways for an employer to determine whether its prescription drug coverage is creditable:

• As a first step, employers with insured prescription drug plans should ask their carriers whether they have determined whether the plan’s coverage is creditable.
• For self-insured plans, or where the carrier for an insured plan has not made a determination about whether the plan is creditable, employers may use a simplified determination—as long as the coverage meets certain design requirements. If it doesn’t, the employer must use an actuarial determination method.

Previously, CMS stated in its Draft Part D Redesign Program Instructions that the “simplified determination” method would no longer be valid as of calendar year 2025, given the significant changes made to Medicare Part D by the IRA. However, according to the Final Part D Redesign Program Instructions, CMS will continue to permit the use of the simplified determination methodology, without modification, for calendar year 2025 for group health plan sponsors who are not applying for the retiree drug subsidy. In future guidance, CMS will reevaluate the continued use of the existing simplified determination methodology or establish a revised one for calendar year 2026.

As a practical matter, most plans are not eligible to use the simplified determination method. One of the requirements to use the simplified determination method is to have a prescription drug deductible (or a combined medical and prescription drug deductible) that is no greater than $250. Because most plans have a deductible amount that is higher than this, most plans will need to use the actuarial determination method if their insurance carrier doesn’t make the determination.

Impact of the Medicare Part D Changes

Because the IRA is making improvements to Medicare Part D coverage, the actuarial value of Medicare Part D coverage will increase—meaning the benchmark that employer group health plans will be compared to is changing. Therefore, some employer plans that were creditable in the past will no longer be considered creditable, as measured against the improved Medicare Part D coverage.

More information and resources on the IRA’s changes to Medicare Part D are available on CMS’ Part D Improvements webpage.

Disclosure to Individuals

While employers are not required to offer coverage that is creditable, plan sponsors must provide creditable coverage disclosure notices to individuals each year before Oct. 15—the start date of the annual enrollment period for Medicare Part D. The disclosure notice alerts individuals as to whether their plan’s prescription drug coverage is creditable or non-creditable.

If the coverage is non-creditable and Medicare-eligible individuals fail to enroll in Part D during their initial enrollment period, they can be subject to a higher Part D premium if they enroll in Part D at a later date.

Model notices are available for employers to use to notify individuals whether the coverage is creditable or non-creditable.

Disclosure to CMS

The disclosure to CMS is due within 60 days after the start of each plan year. For calendar year plans, this deadline is March 1 of each year (Feb. 29 for leap years). Plan sponsors are required to use CMS’ online disclosure form.

Enforcement

There is no penalty or fee for the employer for offering prescription drug coverage that is non-creditable. Non-creditable prescription drug coverage can still be a valuable benefit for employees.

There are also no specific penalties for employers that fail to comply with the Medicare Part D disclosure requirements, except for employers that are claiming the Retiree Drug Subsidy. However, by not providing creditable coverage disclosure notices, employers may trigger adverse employee relations issues. In addition, noncompliant employers may indirectly face consequences under other federal laws (such as the Employee Retirement Income Security Act’s fiduciary duty provisions).

Employer Action Items

Employers should begin looking at their current plan design to determine how likely it is to be considered creditable in 2025. Based on that assessment, employers may consider whether plan design changes should be evaluated.

As stated above, employers are not required to offer coverage that is creditable – yet some employers may want to offer creditable coverage regardless.

Once it has been determined whether their health plans’ prescription drug coverage for 2025 will be creditable or non-creditable, employers should prepare to send the appropriate Medicare Part D disclosure notices. Employers with plans that will go from creditable to non-creditable status may wish to provide further education to employees. In doing so, employers should be mindful to not appear as steering employees toward taking Medicare, as this would run afoul of the Medicare Secondary Payer Rules.

The above information does not constitute advice. Always contact your employee benefits broker or trusted adviser for insurance-related questions.