The Medicare prescription drug program is undergoing significant changes in 2025 as part of reforms passed in the 2022 Inflation Reduction Act (IRA). These reforms aim to reduce out-of-pocket costs for Medicare Part D enrollees and introduce new mechanisms to make prescription drug payments more manageable.
Review of 2024 Changes
There were six key Medicare reforms passed in 2022 as part of the Inflation Reduction Act. Some changes took effect in 2023, while others came into effect in 2024. Below are the 2024 changes, for background.
Elimination of the 5% Coinsurance in the Catastrophic Phase
Starting January 1, 2024, Medicare Part D enrollees are no longer required to pay the 5% coinsurance for prescription drugs during the catastrophic coverage phase. This phase kicks in after an enrollee’s total drug costs exceed a certain threshold. In 2024, when you reach this phase, your out-of-pocket expenses for covered drugs are capped, relieving you of any further costs for the rest of the year. If you have expensive medications and do not qualify for the Extra Help program, this reform is particularly beneficial.
2024 Out-of-Pocket Cost Structure
In 2024, after paying the initial deductible, Medicare Part D enrollees are responsible for 25% of their drug costs until they hit the catastrophic coverage limit. The cap on out-of-pocket expenses, including the catastrophic phase elimination, is about $3,300 for the year.
Changes Effective in 2025
$2,000 Annual Cap on Out-of-Pocket Costs
One of the most significant changes in 2025 is the introduction of a $2,000 annual cap on out-of-pocket costs for Medicare Part D enrollees. This cap will adjust for inflation in subsequent years, providing ongoing relief from high drug costs.
This cap only applies to Medicare Part D and Medicare Advantage plans with prescription drug coverage. It does not cover costs associated with Medicare Part B, which includes drugs administered by healthcare providers in outpatient settings (e.g., some cancer treatments and injectable drugs).
For individuals with high medication costs, this cap could result in significant savings.
Monthly Installments for Out-of-Pocket Costs
Beginning January 1, 2025, Medicare Part D and Medicare Advantage prescription drug plans must offer an option for enrollees to spread their out-of-pocket costs into monthly payments. This option, known as the Medicare Prescription Payment Plan, aims to smooth out the financial burden throughout the year, so you can avoid large, unpredictable expenses in any given month.
Enrollment and Billing
You must opt into this plan; it is not automatic. You can choose to enroll at the start of the plan year or at any point during the year. Once enrolled, you will be billed monthly for your out-of-pocket prescription costs, beginning with the initial deductible phase. The plan only applies to out-of-pocket costs for prescription medications, not premiums.
Monthly bills are calculated by subtracting any out-of-pocket costs already incurred before joining the program from the $2,000 annual cap. The remaining costs are then evenly distributed over the remaining months of the year.
The Centers for Medicare & Medicaid Services are expecting to provide calculators as this change is implemented, to help beneficiaries understand their potential monthly payments under this plan.
Stabilizing Medicare Part D Premium Increases
The IRA includes provisions to limit the increase of the “base beneficiary premium” for Medicare Part D to no more than 6% per year from 2024 to 2029. While this cap restricts how much the basic component of the premium can grow, it does not directly limit the total premiums that individual plans may charge, which could still vary based on other factors.
To clarify:
Base Beneficiary Premium Cap
This is a standard amount used to set the basic premium rates for Medicare Part D. The law limits its increase to a maximum of 6% per year.
Actual Premiums
The final cost that enrollees pay can be higher. Individual plan premiums might rise more than 6% annually because health plans add other factors to the base premium when determining their rates. These factors can include additional services, benefits, or administrative costs.
While the base rate’s increase is capped, the overall premiums you pay for your specific plans can still go up by more than 6% each year. You should review your plan options during open enrollment carefully. Even with the base beneficiary premium capped, total premiums and out-of-pocket costs can vary across plans.
Income and Eligibility
The new caps and payment plans are available to all Medicare Part D enrollees, regardless of income.
These reforms are designed to make prescription drug costs more predictable and manageable for Medicare beneficiaries, particularly those with high medication expenses. As these changes come into effect, it is crucial for beneficiaries to understand how they impact their specific plans and to consider their options during open enrollment periods.
By understanding these updates and planning ahead, you can prepare ahead to manage your prescription drug costs and potentially save significantly more. If you have questions about how these changes could impact you personally, Wise Insurance can help. We can work with you to review your health insurance needs, existing coverage, and assess potential changes to help you find the right plan.
Emily Trevino, Senior Managing Partner at Wise Insurance, leverages her extensive background in biology and business finance to master Medicare, health insurance, and retirement planning. With over a decade in the field, Emily has co-authored “Medicare Breakdown – The Alphabet Soup of Medicare,” marking her as a pivotal figure in insurance education. Her commitment extends through active participation in the National Association of Benefits and Insurance Professionals (NABIP) and speaking at major industry events. Emily’s drive for community service and personal resilience shines through her adventurous pursuits and dedication to societal well-being. Connect with Emily on LinkedIn to explore the future of informed insurance decisions.
