The Inflation Reduction Act (IRA) introduced major policy changes to the healthcare industry, raising important questions about launch prices, pipeline strategy, and evidence requirements. In the IRA Question of the Week series, Avalere answers pressing questions shaping healthcare stakeholders’ strategic decision-making as the law is implemented.

In previous installments, Avalere experts outlined manufacturer considerations for IRA implementation and the importance of long-term strategic planning. In this Insight, Avalere experts discuss IRA dynamics for Medicare Part D plans and how the upcoming changes may affect their strategy for Plan Year 2025.

Part D Redesign Impact on Costs and Premiums

Part D redesign will increase financial liability for Part D plans in the catastrophic phase and for enrollees eligible for the low-income subsidy throughout the benefit. This change in liability will likely increase plan bids. To remain competitive, plans may take actions to limit any increase in bids, such as increased use of utilization management or changes to formularies. To limit overall premium growth, the IRA included the premium stabilization program, which limits the growth of the Part D base beneficiary premium to no more than 6% over the previous year. Because this limit is tied to the base beneficiary premium, it is still possible for individual plan premiums to increase by more than 6%.

Differential Effects on MA-PDs and PDPs

Plans submitted bids for 2024 in June and will begin planning for 2025, when the IRA’s redesign provisions are fully in effect. To prepare for the upcoming policy changes, plan sponsors should understand that the IRA’s impact on Medicare Advantage Prescription Drug plans (MA-PDs) will differ from the effects on Prescription Drug Plans (PDPs). Today, almost every Medicare beneficiary has access to an MA-PD plan with a $0 premium. This is in part because MA-PDs can direct government rebates toward supplemental benefits, which include reducing Part D premiums. PDPs do not have the same ability. Because MA-PDs have this additional lever to address year-to-year cost fluctuations, they may be better able than PDPs to absorb IRA-related cost increases. Plan sponsors can use this understanding of the differences between MA-PDs and PDPs to predict potential changes to plan premiums, supplemental benefits, and enrollment patterns.

Importance of Part D Risk Adjustment

Finally, plans will need to consider how the Centers for Medicare & Medicaid Services (CMS) will update the Part D risk-adjustment model for 2025. Risk adjustment is a mechanism that uses enrollee information (e.g., demographics, medical diagnoses) to predict expected plan costs for each enrollee. Plan payments are adjusted to account for these predicted costs (i.e., plans with more enrollees with higher risk scores receive higher payments, and plans with more enrollees with lower risk scores receive lower payments). With the substantial changes to the Part D benefit in 2025, a larger percentage of plan payments will be subject to risk adjustment, and CMS will update the risk-adjustment model. To prepare for 2025, plans should understand what potential changes CMS may make and how they will affect plan-specific payments.

What Comes Next?

CMS has solicited comments via Health Plan Management System on Part D redesign and will continue to issue guidance surrounding Part D provisions over the coming years. CMS will also pay particular attention to out-of-pocket smoothing and manufacturer fair price effectuation guidance and release guidance on its operationalization and detailing key stakeholders’ duties. The current and upcoming CMS guidance will bring about many complicated questions and stakeholder engagement is critical.

Avalere experts in policy, market access, and evidence and strategy can help you understand what IRA policy changes and CMS guidance mean for your organization and to weigh in on key implementation decisions. To better prepare for and shape the changing healthcare landscape in 2023 and beyond, connect with us.