New prescription-payment plan and benefit changes are coming in the new year

With Medicare prescription-drug benefits on the brink of a shake-up, enrollees who hope to minimize their costs at the pharmacy counter next year need to stay vigilant in the coming months.

The changes coming with the new year - including a lower cap on out-of-pocket prescription-drug costs and a new program designed to help enrollees spread out their medication costs over the course of the calendar year - may look straightforward on the surface. But they come with some wrinkles that may trip up people who don't familiarize themselves with the fine print and carefully weigh their drug-coverage options during this fall's Medicare open-enrollment period, which runs from Oct. 15 through Dec. 7.

"This is absolutely the most important open enrollment" that current Medicare beneficiaries have ever faced, given the shifting benefit design and its potential ripple effects on premiums and other factors, said Diane Omdahl, president of 65 Incorporated, which offers Medicare consulting services.

The twists and turns in Medicare drug coverage spring from the 2022 Inflation Reduction Act, which included a slew of provisions designed to cut prescription-drug costs for Medicare beneficiaries and rein in the federal government's drug spending. The law's requirement that the government negotiate prices for some drugs covered by Medicare has garnered headlines, but the first negotiated prices won't take effect until 2026 - whereas changes that could affect a broader swath of retirees are coming at the start of 2025.

Many retirees remain unaware of the changes headed their way. Just over one-third of voters age 65 and older, for example, know that there's a federal law that caps annual out-of-pocket drug costs for people with Medicare coverage, according to a poll conducted in recent weeks by health-policy research nonprofit KFF, and only 38% are aware that the federal government is now required to negotiate the prices of some Medicare-covered drugs.

In other words, many of the more than 50 million people with Medicare Part D prescription-drug coverage are tuning out changes that could save them a bundle of money. The IRA's redesign of Part D will cut out-of-pocket spending by about $7.4 billion for the 18.7 million enrollees who are expected to see savings in 2025, translating into savings of nearly $400 per person, according to a report from the U.S. Department of Health and Human Services.

With open enrollment approaching, "the opportunity and burden is on consumers to compare coverage options to try to get the best deal," said Tricia Neuman, senior vice president and executive director of KFF's Program on Medicare Policy.

Here's what you need to know now to make the most of Medicare's drug-coverage changes in 2025.

1. A new out-of-pocket cap may save you money - with some caveats

In 2025, everyone enrolled in Part D will have their annual out-of-pocket drug costs capped at $2,000. In future years, that cap will rise in step with the rate of change in Part D costs.

For enrollees, that cap is the most visible part of a broader Part D redesign that simplifies the benefits and will help make beneficiaries' drug spending more predictable. They'll no longer meander through various coverage phases as they rack up drug costs. (Remember the "coverage gap" phase of drug coverage? You can forget it now.) After they've met their deductible, if their plan has one, they'll pay 25% of drug costs until they hit the $2,000 out-of-pocket cap.

That out-of-pocket limit does not apply to Part B drugs - typically those administered at a doctor's office or a hospital outpatient department - and it doesn't apply to medications that are not covered by your prescription-drug plan. Part D plans generally must cover at least two medications in each drug category, but they have leeway to pick and choose which drugs they'll offer. The plans are also required to cover all drugs in certain protected classes, which include categories of drugs that treat cancer, depression and HIV/AIDS.

During open enrollment, take a hard look at your drug-plan options and the lists of medications they'll cover next year. As the Part D redesign shifts some additional costs onto plans, those plans may look to protect their bottom line, Omdahl said, by backing away from coverage of some more expensive drugs or ramping up restrictions such as prior-authorization requirements - meaning you must get the plan's approval before it will cover a certain drug. For people who take higher-cost medications, she said, "those are significant concerns."

Set up an account or log in at Medicare.gov to compare plan costs based on your prescriptions and pharmacies.

2. There's a new way to spread out Medicare drug costs throughout the year, but it won't make sense for everyone

Starting in 2025, anyone with Medicare drug coverage will have a new payment option that may help even out prescription costs throughout the calendar year.

All Medicare drug plans will offer enrollees the choice to sign up for the new Medicare Prescription Payment Plan. People who participate won't pay for their prescriptions at the pharmacy counter - instead, they'll get a bill each month from their plan. That bill will be based on the amount they would have paid for any prescriptions filled, plus any balance from the previous month, divided by the number of months remaining in the year.

The people most likely to benefit are those who rack up high drug costs earlier in the calendar year, according to the Centers for Medicare and Medicaid Services. Consider a retiree taking several medications with a total monthly out-of-pocket cost of $500. If they don't join the payment plan, they'll pay $500 for their medications in each of the first four months of the year, then they'll hit the $2,000 out-of-pocket cap and pay nothing for the rest of the year. Under the payment plan, they could distribute those monthly costs more evenly. The retiree would pay $166.67 in January - the $2,000 out-of-pocket maximum divided by the 12 months remaining in the year. They'd owe about $76 in February and $126 in March, and then $181 in April and in every subsequent month until the end of the year, according to CMS.

For some people with lower monthly out-of-pocket drug costs, however, the program may make monthly payments seem more confusing, said Jennifer Snow, a health-policy consultant at Apteka LLC. In another example from CMS, a beneficiary with total monthly out-of-pocket costs of $80 who opts to participate in the plan would see their monthly costs jump around from $80 in January to about $7 in February and $15 in March. Their costs would increase each month thereafter, hitting $242 in December. If that beneficiary does not participate in the payment plan, they'll simply pay $80 every month of the year.

While the payment plan is a great option for some patients, others "may find that their costs will increase at the end of the year, and perhaps it will not be a good option for them," Amy Niles, chief mission officer at the PAN Foundation, a healthcare advocacy organization, said during a webinar Tuesday.

Participation in the plan isn't a now-or-never deal. If you get midway through the year and suddenly realize you're going to be taking some expensive medications, you can contact your plan and sign up at any point, Snow said. The later in the year you opt in, however, the fewer months you have remaining to spread out your costs. Participants can also leave the payment plan at any time and go back to paying for their prescriptions at the pharmacy counter.

3. The changes are putting upward pressure on premiums, but there are also new efforts to tame cost increases

The Part D redesign ramps up the financial pressures on plans that provide Medicare drug coverage. In 2025, for example, plans will pay 60% of Part D drug costs in the catastrophic-coverage phase, which starts when enrollees hit the $2,000 out-of-pocket cap, whereas in 2024 the plans covered 20% of drug costs in the catastrophic phase, which kicked in when beneficiary out-of-pocket spending and manufacturer price discounts crossed an $8,000 threshold.

While the increased costs will hit both Medicare Advantage prescription-drug plans and stand-alone drug plans, the stand-alone plans are under particular pressure, experts say. Medicare Advantage plans get rebate dollars from Medicare that can help reduce premiums and cost-sharing and provide extra benefits, and "they have much more flexibility than stand-alone drug plans to reduce or eliminate their premiums," Neuman said.

The IRA aimed to keep premium growth in check by capping increases in the "base" beneficiary premium at 6% - but that doesn't directly apply to the premiums enrollees actually pay. While that cap will help hold down premium increases, retirees could still see premium growth above that level.

To help address the issue, CMS is testing a new program to help stabilize premiums in stand-alone Part D plans. The program, which is voluntary for the plans, limits year-over-year premium increases to $35 but also increases the government's share of risk for a portion of plan losses. It's not yet clear how many plans will participate, but since the program does help offset plans' costs, plan sponsors that want to stay in the market and increase their number of enrollees will likely take part, Neuman said.

4. Comparison shopping is key, and you don't have to do it alone

In years past, many people with Medicare drug coverage haven't bothered to compare their plan options during open enrollment. Fewer than one in five Medicare Advantage prescription-drug plan enrollees and three in 10 stand-alone drug plan enrollees compared their coverage options during the 2020 open enrollment period, according to KFF.