Who Will Benefit Under the Medicare Part D Out-of-Pocket Spending Cap?

Starting in 2024, Medicare Part D enrollees could benefit from a cap placed on out-of-pocket drug spending, thanks to a provision in the Inflation Reduction Act of 2022 (IRA). How many will experience actual relief? According to a recent Kaiser Family Foundation (KFF) Health analysis, the number in any given year will be low but grow over time.¹ The IRA aims to phase in the out-of-pocket cap. In 2024, out-of-pocket drug spending for Part D enrollees will cap at roughly $3300. In 2025, the cap will be lowered to $2000. KFF looked at historical Medicare drug spending to generate estimates. Analyzing 2007-2021 Part D claims, KFF found that about 500,000 enrollees spent $3000 or more out-of-pocket on prescription medications in 2021. Had the IRA provision been in effect, most would have benefitted in year 1.

In year 2 and beyond, millions benefit. In 2021, more than 1.5 million enrollees spent $2,000 or more out-of-pocket on prescription medications. All of them would have benefitted under the $2000 cap. Moreover, for the years leading up to and including 2021, KFF found that millions experienced at least 1 year in which out-of-pocket drug spending exceeded $2000:

• 2017-2021: 3.3 million enrollees
• 2012-2021: 5 million enrollees
• 2007-2021: 6.8 million enrollees¹

An article in The Wall Street Journal illustrated how enrollees with consistently high drug costs over multiple years and those who experience an increase in a single year will benefit.² For a patient with multiple chronic conditions whose drugs cost $40,000 annually:

• In 2023, the patient’s deductible, initial 25% coinsurance, and 5% coinsurance once she entered the threshold would have totaled nearly $4600
• In 2024, when the 5% coinsurance is eliminated once the threshold is reached, she would pay $3300
• In 2025, she would pay no more than the $2000 IRA-mandated cap

For a patient who receives a blood cancer drug for a year, in 2023, his out-of-pocket costs would have been nearly $13,000. In 2024 and 2025, the patient would pay $3300 and $2000, respectively.

A KFF poll revealed that only 25% of older adults know the Part D provision.³ This does not surprise Alison Falb, health policy director, Applied Policy, Washington, DC. “Older adults are likely less aware of this provision because of [its] complexity. Details about the rollout, which looks different in 2024 than in 2025, and explaining how cap can lead to savings makes messaging more complicated.” Edmund J Pezalla, MD, founder and CEO, Enlightenment Bioconsult, Wethersfield, CT, concurred. “The cap seems straightforward but [will be] difficult for people to understand until it happens.”

The savings come with a tradeoff, according to KFF. “While a cap on out-of-pocket costs will help millions of Part D enrollees over time, higher plan costs to provide the benefit could lead to higher premiums.”¹ IRA’s premium stabilization provision stipulates that the base beneficiary premium across Part D will be limited to 6% over the previous year. But that does not mean all Part D premiums will be at or below 6%. The health care consultant Avalere reported that standalone Part D plans are increasing by an average of 21% in 2024.⁴ “While the premium stabilization program aims to protect beneficiaries against substantial premium increases…the impact on individual plans’ premiums will vary,” it noted.

It may seem unfair for all covered individuals to help fund high-cost drug users, but Dr Pezalla reminded us that this is the way insurance works. Life insurance illustrates how cost can be spread affordably over a lifetime if purchased early. “But this does not work as well in the Medicare setting, which starts at age 65 when incomes are fixed or reduced, and health care costs are going up.”

Avalere’s report explained that the stabilization program may lead to a decrease in Part D standalone plans over time, driving more enrollees to Medicare Advantage.⁴ Ms Falb said that “standalone PDPs have less flexibility than Medicare Advantage Part D plans to adjust to these changes.” Dr Pezalla pointed out that the decline in standalone plans started before the IRA became law. “Insuring just the drug benefit is difficult and is artificially disconnected from other benefits. Medicare Advantage Part D programs allow for a better spread of premium across a larger pool.”

References

1. Cubanski J, Neuman T, Damic A. Millions of people with Medicare will benefit from the new out-of-pocket drug spending cap over time. KFF Health. Published February 8, 2024. Accessed February 13, 2024. https://www.kff.org/medicare/issue-brief/millions-of-people-with-medicare-will-benefit-from-the-new-out-of-pocket-drug-spending-cap-over-time
2. Medicare patients on pricey drugs are saving big this year. The Wall Street Journal. Published January 15, 2024. Accessed February 13, 2024. https://www.wsj.com/health/pharma/medicare-part-d-plan-drug-cost-savings-69c3db3c
3. Cubanski J, Neuman T. The new help for Medicare beneficiaries with high drug costs that few seem to know about. KFF Health. Published December 12, 2023. Accessed February 13, 2024. https://www.kff.org/policy-watch/the-new-help-for-medicare-beneficiaries-with-high-drug-costs-that-few-seem-to-know-about/
4. Part D premiums increasing despite stabilization program. Avalere. Published Oct 27, 2023. Accessed February 13, 2024. https://avalere.com/insights/part-d-premiums-increasing-despite-stabilization-program