Mintz IRA Update — The IRA in 2025: The Future of Medicare Part D

Last year was a pivotal year for the pharmaceutical industry. Under the IRA’s Medicare Drug Price Negotiation Program (the Negotiation Program), the US government negotiated the prices of 10 selected high-expenditure, single-source Medicare Part D Drugs (the Selected Drugs) for the first time in Medicare’s history. As we discuss in our article summarizing the litigation challenging the Negotiation Program, manufacturers and stakeholders who filed lawsuits seeking to halt the program’s implementation saw a number of losses in federal courts, and the negotiation process proceeded as scheduled in 2024. On August 15, 2024, the Biden administration announced the final negotiated maximum fair prices (MFPs) for the Selected Drugs, which will go into effect on January 1, 2026. We continue our discussion of the uncertain future of the Negotiation Program in light of the transition to the Trump administration and pending lawsuits following the end of Chevron deference in a separate article. But as our team looks ahead to 2025, we are paying close attention to the next area of significant reform under the IRA: the major overhaul of Medicare Part D’s benefit structure.

Medicare Part D Benefit Redesign

In our last issue, we provided an in-depth overview of the various changes to the Part D benefit design and other program features that went into effect on January 1, 2025. The liability for drug costs paid by Part D beneficiaries and the costs and risks borne by Part D plan sponsors (PDPs), drug manufacturers, and CMS have changed significantly. As a quick recap, the coverage gap in Part D has been eliminated, and the cost-sharing amounts for each Part D benefit phase are now as follows:

• Annual Deductible Phase: Part D beneficiaries remain responsible for 100% of drug costs during the annual deductible phase.
• Initial Coverage Phase: Part D beneficiaries continue to be responsible for 25% of drug costs in the initial coverage phase. However, their annual out-of-pocket costs are capped at $2,000 (including what they have paid in the deductible phase). PDPs will be responsible for 65% of the cost of Applicable Drugs, (as defined by 42 CFR § 423.100) and for 75% of the cost of Non-Applicable Drugs (any Part D drug that is not an Applicable Drug and is not a Selected Drug). Manufacturer discounts of 10% are applied to the cost of Applicable Drugs, but manufacturers do not share any responsibility for Non-Applicable Drugs.
• Catastrophic Phase: In the updated catastrophic phase, PDPs will be responsible for 60% of the cost of both Non-Applicable and Applicable Drugs. CMS, through reinsurance, will cover 40% of the cost of Non-Applicable Drugs and 20% of the cost of Applicable Drugs. The remaining 20% of the cost for Applicable Drugs will be covered by the manufacturer discount.

Impact of Medicare Part D Redesign

Although the changes only went into effect a few weeks ago, we are already seeing the impact of the shift in stakeholder liability based on data gathered from the CY 2025 PDP bid submission cycle. As a result of the reduction in CMS’s liability in the catastrophic phase (from 80% in 2024 to 40% for Applicable Drugs and 20% for Non-Applicable Drugs in 2025), CMS’s aggregate reinsurance payments to Part D plans are projected to account for only 17% of total Part D spending in 2025, a substantial reduction from 46% of total Part D spending in 2024. As PDPs take on additional responsibility for drug costs in the catastrophic phase, they also take on an increased amount of risk of losses, especially for beneficiaries who utilize more expensive drugs. However, because the IRA caps year-to-year increases in the base beneficiary premium, such premium for 2025 increased to $36.78, which represents the 6% increase allowed by the IRA. The national average monthly bid amount which impacts the payments that CMS must make to PDPs increased from $64.28 to $179.45 because of the redesign and shifting of final risk away from the government and to the PDPs. As we discuss further below, in 2024, CMS also implemented a voluntary demonstration program to provide additional premium stabilization and risk corridor protection for PDPs.

New Incentives in Formulary Design

As we predicted, the changes to the benefit structure have also shifted priorities for formulary placement between stakeholders. Prior to the IRA’s Part D benefit redesign, the structure of the Part D benefit incentivized PDPs to prioritize high–list price brand drugs and biologics with high rebates on their formularies. Under the new benefit structure, with PDPs’ increased liability and risk of loss in the catastrophic phase, PDPs are incentivized to cover lower-cost generics and biosimilars. Additionally, the Manufacturer Discount Program’s (which replaces the former Coverage Gap Discount Program) mandatory manufacturer discounts applied in the initial and catastrophic coverage phases will likely prompt manufacturers to reduce the rebate amounts manufacturers are willing to offer on their drug products, further incentivizing PDP coverage of generics and biosimilars. Data analyzing the changes between 2024 and 2025 formularies confirms the accuracy of our predictions for a number of drug classes. For example, approximately 50% of Part D beneficiaries lost access to the brand name Humira biologic but gained access to adalimumab biosimilars. Manufacturers decreased the list price of brand-name insulin and inhaler products, thereby decreasing rebate amounts; hence, there are fewer 2025 formularies covering these brand-name products and a corresponding increase in formulary coverage of their generic alternatives.

However, PDPs may still be incentivized to prefer high–list drug products that come with high rebates, as the PDP will be able to apply a higher share of the manufacturer’s rebate to the PDP’s drug cost obligations in the catastrophic coverage phase. The Manufacturer Discount Program also incentivizes PDPs to shift utilization away from drugs produced by specified manufacturers and specified small manufacturers (i.e., manufacturers of drugs that constitute a negligible amount of Medicare drug expenditures); the Manufacturer Discount Program offers these manufacturers a reduced discount obligation, but the PDP is required to make CMS whole for the difference between the reduced payment amount and the full discount obligation. The effect is evident in formulary changes between 2024 and 2025; drugs manufactured by specified small manufacturers saw a decrease in Part D coverage of their products from 74% to 56%. The IRA’s reallocation of liability for drug costs between Part D stakeholders creates nascent tension between each player’s preferred formulary design, and we will continue to monitor formulary trends in the wake of the benefit restructure.

What to Watch For in 2025

Voluntary Part D Premium Stabilization Demonstration

As mentioned above, in 2024 the Biden administration implemented a voluntary premium stabilization program to provide additional premium stabilization and revised risk corridors for stand-alone PDPs (including Employer Group Waiver Plans or EGWPs) as they adjust to the increased liability for drug costs under the benefit redesign. The Part D Premium Stabilization Program has three components:

• Reduces the base beneficiary premium for all PDPs by $15 (or less in the event a $15 reduction would result in a plan premium of less than $0, such that the plan premium remains $0).
• Limits the year-to-year total increase in a PDP’s total premium to $35 between CY 2024 and CY 2025 (applied after taking into account the $15 reduction in the base beneficiary premium).
• Narrows the upper thresholds of the risk corridors to increase the government’s risk sharing for a portion of plan losses from 80% to 90% and reduce the range of spending where PDPs bear full risk for actual costs higher than their bids.

CMS will pay PDPs additional direct subsidy amounts to compensate plans for reduced premium revenue. Despite GOP criticism of the Part D Premium Stabilization Program and its budgetary impact, it is unclear whether the Trump administration will rescind the demonstration program or leave it in place. We will monitor any further development around this program but we note that in 2025, CMS anticipates 99% of PDP enrollees will be covered by a PDP that is participating in the demonstration. So any such rescission will certainly have a sizable impact.

Medicare Advantage and Part D Proposed Rule

On November 26, 2024, CMS released the CY 2026 Medicare Advantage and Part D Proposed Rule (the Proposed Rule). The Proposed Rule sets forth several policies that seek to implement various provisions of the IRA within the Medicare Advantage and Part D programs, including:

• Codifying the requirement that all adult vaccines recommended by ACIP be covered under Part D with $0 cost-sharing requirements for CY 2026.
• Codifying the requirement that Part D cost-sharing amounts for covered insulin products be capped at the lesser of (1) $35, (2) an amount equal to 25% of the MFP, or (3) an amount equal to 25% of the negotiated price under the PDP or Medicare Advantage Part D (MA-PD) plan.
• Require PDPs’ network contracts with pharmacies to include a provision requiring such pharmacies to be enrolled in the Negotiation Program’s Medicare Transaction Facilitator Data Module to facilitate continued beneficiary access to Selected Drugs, promote access to MFPs, and ensure accurate Part D claims payment.
• Require PDPs to shorten the Prescription Drug Event (PDE) submission timeliness requirement specifically for Selected Drugs; instead of the 30-calendar-day timeframe PDPs have for submission of general initial PDE records, PDPs must submit initial PDE records for Selected Drugs within 7 calendar days to help ensure prompt payments by drug manufacturers to dispensing entities to provide access to the MFP.

The Proposed Rule also includes several policy proposals relating to the Medicare Prescription Payment Program (MPPP), which we discuss further in our article covering the operationalization of the MPPP. While the Biden administration developed and drafted the policies set forth in the Proposed Rule, the Trump administration is tasked with reviewing stakeholders’ comments and deciding what aspects of the Proposed Rule will be finalized, what will be rescinded, and what will be paused for further review. We will be watching closely to see which provisions, if any, make it into the Final Rule.

Medicare Part D Coverage of Anti-Obesity Medications

Another key provision of the Proposed Rule is CMS’s proposal to reinterpret the statutory exclusion of anti-obesity medications from coverage under Medicare Part D. Historically, drugs used for “weight loss” have been excluded from the statutory definition of a covered Part D drug. Thus, Part D will only cover anti-obesity medications if they are prescribed for a medically accepted FDA-approved indication other than obesity, such as diabetes or cardiovascular disease. State Medicaid programs are also required to cover these drugs for diabetes or cardiovascular disease, but only 13 states currently also cover these drugs for obesity treatment. The proposed reinterpretation would permit Medicare Part D coverage and require Medicaid coverage of anti-obesity medications when used to treat individuals with obesity who do not have another condition pursuant to which Medicare Part D or Medicaid would cover the drug. Despite the recent surge in popularity of GLP-1s, a relatively new class of highly effective anti-obesity medications, CMS has thus far been reluctant to expand coverage of these drugs to include treatment for obesity because of the significant cost; in 2022 alone, Medicare spent $6 billion on GLP-1s for treating medically accepted indications other than obesity. However, the Proposed Rule was closely followed by the Biden administration’s selection of Ozempic, Rybelsus, and Wegovy, Novo Nordisk’s GLP-1 products, for negotiation under the Negotiation Program in 2025. Notably, the IRA considers products with the same “active moiety” as one product, so despite any difference in dosage strength, formulations, and clinically indicated uses (i.e., whether the drug is used to treat obesity or diabetes), Ozempic, Rybelsus, and Wegovy will be subject to the same negotiated MFP. The Trump administration has signaled that it will continue with negotiating Medicare prices for the 15 drugs selected for the second cycle of the Negotiation Program by the Biden administration, including Novo Nordisk’s GLP-1 products. It is unclear yet whether the Trump administration’s intention to continue the drug price negotiation also signals that the administration will finalize the proposed coverage for obesity. The administration currently appears focused on finding savings, which the drug price negotiation achieves and the expansion of coverage does not.

Draft CY 2026 Part D Redesign Program Instructions

On January 10, CMS published draft CY 2026 Part D Redesign Program Instructions (Draft Instructions) for implementation of the Part D changes to the benefit structure. The policies set forth in the Draft Instructions only include policies that have been modified or updated from the Final CY 2025 Program Instructions and any new proposed policies for CY 2026 (we covered the Final CY 2025 Program Instructions in our previous edition). Some key highlights of the Draft Instructions:

• Increase in Beneficiary OOP Cost Maximum. The annual out-of-pocket cost cap of $2,000 for Part D beneficiaries is increased to $2,100, based on the annual percentage increase (API) in average Part D costs for the previous year.
• Selected Drug Subsidy Program. The IRA’s redesign of Part D includes a government subsidy program for Selected Drugs, pursuant to which PDPs will receive a 10% subsidy to reduce their liability for Selected Drugs. This subsidy applies to those Selected Drugs that would otherwise be Applicable Drugs eligible for discounts under the Manufacturer Discount Program (Selected Drugs are excluded from the Manufacturer Discount Program). The Selected Drug 10% subsidy is available in the initial coverage phase until the beneficiary reaches the out-of-pocket threshold of $2,100. Afterwards, in the catastrophic phase, CMS will provide 40% reinsurance for Selected Drugs.
• Inclusion and Substitution of Selected Drugs on Part D Formularies. Starting in the initial price applicability year 2026, PDPs will generally be required to include Selected Drugs on their formularies. However, the IRA permits PDPs to remove a Selected Drug if the PDP replaces it with a newly available generic (referred to as immediate substitution) that is on the same or lower cost-sharing tier and has the same or less restrictive utilization management requirements (i.e., prior authorization, step therapy, quantity limits, etc.). Due to changes to Part D regulations, the Draft Instructions designate the codification of the IRA’s requirement at 42 CFR 423.120(e)(2)(i) and 423.120(f)(2), (3), and (4). These regulations specify the types of products PDPs may use to replace Selected Drugs on their formularies as well as the circumstances in which a generic or interchangeable biological product may be substituted for a Selected Drug based on the timing of its availability on the market. However, the PDP cannot substitute an authorized generic of a brand-name Selected Drug; the substitution must be with a different generic manufacturer. The Draft Guidance also invites input from stakeholders as to whether CMS should expand the IRA’s exception to permit PDPs to remove Selected Drugs within 90 days of adding a corresponding generic drug or interchangeable biological product (referred to as a maintenance change). The Final CY 2026 Part D Redesign Program Instructions will be published by April 7, 2025.

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