Higher education and Medicare Part D plans

What is changing?

The Inflation Reduction Act of 2022 (IRA) is making major changes to Medicare Part D in the coming years, with far-reaching implications to Medicare recipients as well as employers that sponsor group Part D plans (Employer Group Waiver Plans – EGWPs).

EGWPs are still common at many higher education institutions and retiree medical benefits often serve as a valuable attraction and retention tool for faculty and staff. The two most consequential changes are mandated benefit enhancements and a shift of financial risk from CMS to EGWP sponsors. These changes begin in 2025 and may increase costs for both plan sponsors and retirees.

Mandated benefit enhancements

• What’s Changing: A new $2,000 cap on out-of-pocket retiree costs will replace the current “true out-of-pocket” limit, substantially reducing retiree out-of-pocket payments.
• EGWP Sponsor Implication: The new enhancements will increase costs for many plans.

Shift in financial risk

• What’s Changing: Beginning in 2025, there will be significant changes in Part D financing as CMS shifts much of its responsibility away from paying claims toward a fixed payment to EGWP sponsors. Further, formulas determining pharmaceutical Manufacturer Discount Payments are changing.
• EGWP Sponsor Implication: EGWP sponsors will face an increase in net plan costs if third party funding from CMS and the manufacturers is insufficient to fully offset the shift in financial cost sponsors will now bear.

What affected institutions should do

1. 01

   Review plan design and cost sharing

   Colleges and universities that sponsor EGWPs should review their plans for required design changes under the new law. Some institutions that already offer generous benefits may find that no plan enhancements are needed. However, retiree out-of-pocket costs may still decrease since the value of plan benefits beyond the standard Part D design counts toward the new $2,000 out of pocket cap.

   Plan sponsors should also determine how cost increases due to potential cuts in third party funding will apply (i.e., EGWP reimbursement). Some plan sponsors may decide to absorb the potential cost and others may decide to pass some or all of the cost on to retirees through contribution increases or benefit cuts. In either case, plan sponsors should review their plans to confirm their current cost sharing arrangement.

2. 02

   Quantify financial impact

   We recommend that plan sponsors model the potential financial impact of the new law, including the incremental cost of mandated benefit enhancements and potential changes in claim related third-party funding. The financial analysis should be viewed through different lenses: retiree contributions, employer cash funding and the impact on the Institution’s balance sheet and annual FAS cost. The resulting change may also have cost implications for universities that receive federal funding.

   We would also suggest that institutions model a range of outcomes to help planning and avoid surprises. Based on modeling we have done for several EGWPs, we are seeing a material increase in 2025 premium rates due to mandated benefit enhancements and losses in third party funding. And while changes won’t apply until 2025, auditors will likely require that employers estimate the potential impact on plan obligations for 2024 fiscal year end.

3. 03

   Review long term strategy

   Many colleges and universities are reassessing their long-term retiree medical strategy in response to the IRA, including how benefits are delivered. Specifically, some institutions are weighing the advantages of delivering benefits through the individual health insurance market versus continuing to sponsor a group plan design.

   While historically slower than other sectors in this shift to the individual market, higher education has begun to change course for several reasons. Recent legislation has diminished the incremental value that can be offered through group plans. An employer sponsored group plan may be less cost efficient than individual market options. Additionally, retiree medical exchanges provide participants with advice to select insurance that best suits their individual needs among a variety of available choices within a competitive market. In any event, we suggest that plan sponsors conduct an analysis to assess the financial impact on retirees when considering this alternative.

The Inflation Reduction Act of 2022 brings significant changes and particularly affects higher education institutions that sponsor Medicare Part D plans. To navigate these changes effectively, affected institutions should review their plans, quantify the financial impact, and reaffirm their long-term retiree medical strategy.