Based on our analysis, self-funded and fully insured Medicare Part D EGWPs will continue to be financially favorable to plan sponsors compared to RDS plans in 2025. Furthermore, changes from the IRA will likely make obtaining the RDS more difficult in 2025 than prior years. Key provisions affected by the IRA will provide financial headwinds and tailwinds to Part D EGWPs and RDS plans, as summarized in Figure 1 and discussed in further detail within this article.
Figure 1: IRA financial provisions*
| IRA Financial Provisions | EGWPs | RDS Plans |
|---|---|---|
| Replacing the Coverage Gap Discount Program (CGDP) with the Manufacturer Discount Program (MDP) |
Headwind or Tailwind | Headwind |
| CMS Drug Price Negotiations | Tailwind | Headwind or Tailwind |
| Part D Inflation Rebate Payments | Tailwind | Headwind or Tailwind |
| Enriched Part D Defined Standard Benefit | Headwind | Headwind |
| Medicare Prescription Payment Plan (M3P) | Headwind | N/A |
| Reduced Federal Reinsurance | Headwind | N/A |
* A “Headwind” is a provision more likely to increase net plan liability, and a “Tailwind” is a provision more likely to reduce net plan liability.
Significant shift from RDS plans to EGWPs since the Medicare Modernization Act (MMA)
Prior to the MMA in 2003, plan-sponsored prescription drug coverage was the primary source of coverage for retirees accessing health benefit coverage through Medicare. The MMA created financial incentives for plan sponsors to continue offering retiree prescription drug coverage by providing a tax-free subsidy, known as the RDS. RDS plans are required to provide drug coverage that is at least actuarially equivalent to a modified, standard Medicare Part D drug benefit through 2024. In 2006, EGWPs were established, providing a framework for plan sponsors to offer Medicare Part D benefits to their retirees, but with certain flexibilities (e.g., enrollment period, enhanced benefits, and marketing) captured through waivers.1
The transition from RDS plans to EGWPs was initially slow, as there were limited financial incentives to motivate plan sponsors to make a change, until the Affordable Care Act (ACA) of 2010 was passed. The ACA established the Part D CGDP and repealed the preferential tax treatment received by RDS plans. Unlike RDS plans, EGWPs could take advantage of the CGDP, in which pharmaceutical manufacturers paid 50% of the cost of brand drugs during the coverage gap phase for non-low-income beneficiaries (NLIs). The CGDP increased to 70% by 2019 due to the Bipartisan Budget Act of 2018.2
The inability of RDS plans to access CGDP payments and federal reinsurance, coupled with the elimination of tax-free incentives for RDS plans, led to a significant number of plan sponsors converting RDS plans to EGWPs. The graph in Figure 2 illustrates enrollment in RDS plans and Part D EGWPs over time, combining both Medicare Advantage Prescription Drug (MAPD) EGWPs and Prescription Drug Plan (PDP) EGWPs.3,4,5
Figure 2: Historical RDS plan and Part D EGWP enrollment trends*
* Excluding Medicare-eligible enrollees receiving creditable prescription drug coverage through commercial plans. Part D EGWP coverage may be provided through a PDP EGWP or an MAPD EGWP.
Plan sponsors continuing to apply for the RDS may have done so for several reasons. RDS plans offer a greater degree of formulary and benefit control, leading to less disruption as beneficiaries transition into retirement. Non-calendar-year plans are ineligible for federal reinsurance, reducing the incentive to migrate from an RDS plan to an EGWP. Internal change management may create barriers for transitioning, as retirees need to learn new processes.
Financial incentives will continue to favor EGWPs over RDS plans in 2025
Historically, the financial incentives have favored plan sponsors offering EGWPs over RDS plans, and we expect this to continue while maintaining benefits. In Figure 3, we illustrate the differences in plan liabilities between RDS plans and EGWPs in 2023, 2024, and 2025 for two representative plan designs—a rich copay plan and a lean coinsurance plan—adjusted for trend and demand elasticity.
Figure 3: Liabilities as a percentage of allowed cost for rich and lean plans - Normalized
For rich plans, each plan option uses a $10/$20/$50 (generic/brand/specialty) copay design with a 3x mail multiplier, no deductible, and defined standard limits, adjusted for the plan year.
For lean plans, each plan option uses 20% coinsurance design with no deductible, and defined standard limits, adjusted for the plan year.
The analysis in Figure 3 isolates the impact the 2025 benefit redesign will have on plan sponsors offering EGWPs and compares that to RDS plans. The type of benefit offered will contribute to the ultimate impact of the redesign on the plan’s liability. When isolating only the impact of the IRA without factoring in trend and demand elasticity, EGWPs offering rich copay plans appear to be impacted more favorably in 2025 compared with leaner coinsurance-driven benefits. The rich EGWP displays decreasing plan liability over the modeled years, while the lean EGWP shows an increase in net plan liability from 2024 to 2025. These results may vary based on other aspects of the benefits offered, e.g., deductibles and maximum out-of-pocket (MOOP) limits.
Additionally, the analysis highlights that EGWPs will maintain financial favorability over RDS plans under the redesign in almost all situations, and that the favorability may increase. One item driving this outcome is the expected increase in the direct subsidy, which is anticipated to outweigh any changes to the projected RDS plan federal subsidy based on guidance to date from the Centers for Medicare and Medicaid Services (CMS). Furthermore, EGWPs will benefit from subsidies (and reconciliations) due to the Manufacturer Discount Program (MDP), which replaces the CGDP, and federal reinsurance program, both of which are not available to RDS plans. Furthermore, changes from the IRA will likely make obtaining the RDS more difficult in 2025 than prior years.
As previously stated, Figure 3 is intended to solely illustrate the impact of the IRA on EGWP and RDS plans in isolation, which exclude trend and demand elasticity. Including those factors in the analysis to simulate what plans may anticipate shows an increase in the plan liability as a percentage of allowed cost as illustrated in Figure 4.
Figure 4: Liabilities as a percentage of allowed cost for rich and lean plans - Trended
For rich plans, each plan option uses a $10/$20/$50 (generic/brand/specialty) copay design with a 3x mail multiplier, no deductible, and defined standard limits, adjusted for the plan year.
For lean plans, each plan option uses 20% coinsurance design with no deductible, and defined standard limits, adjusted for the plan year.
Percentages are based on allowed costs which vary by year.
When incorporating drug utilization trends, cost trends, and demand elasticity, EGWPs remain financially favorable over RDS plans in the scenarios modeled above. The plan liability for EGWPs increases from 2024 to 2025 for both the lean and rich plan options. In addition to increases in trend and demand elasticity, a portion of this increase in plan liability is also driven by greater leveraging of plan liability than in prior years, with increases in allowed cost in 2025. Furthermore, member cost sharing will be less sensitive to changes in allowed cost on average in 2025.
Our analysis reflects current guidance from CMS, listed below. Any subsequent guidance could affect the conclusions drawn from our analysis, including:
- The 15% reduction in the risk scores anticipated for EGWPs due to the forthcoming 2025 Prescription Drug Hierarchical Condition Category (RxHCC) risk score model change6
- MOOP accumulating at the greater of the defined standard or actual cost-sharing levels as described in the original IRA language7
- Any changes to the methodology used to calculate the RDS (although we do not expect changes)
The IRA’s other impacts on EGWPs
For each item in Figure 1 above, we provide additional detail supporting the headwinds and tailwinds assessments facing EGWPs and RDS plans below.
Replacing the CGDP with the MDP
Manufacturers will pay 10% and 20% of applicable drug cost in the initial coverage and catastrophic phases in 2025 (after MOOP), respectively. Unlike the CGDP, where manufacturer liability is limited to the coverage gap phase, there is no cap on the MDP after members exceed their MOOPs. EGWPs can take advantage of the MDP while RDS plans cannot. EGWPs with high catastrophic spend may experience a tailwind from manufacturer payments in 2025 versus 2024 due to the uncapped manufacturer liability. In contrast, EGWPs with lower catastrophic spend may see a headwind. The MDP payments will not accumulate to the MOOP as the CGDP payments accumulate to the true out-of-pocket (TrOOP) cost, slowing member progression. Additionally, RDS plans may experience headwinds passing actuarial equivalence tests, as the CGDP was not considered in testing, resulting in richer coverage and higher RDS plan costs.
CMS drug negotiations
An increasing number of brand drugs will be selected yearly by CMS for price negotiation between 2026 and 2028, reaching a peak of 20 additional drugs annually from 2029 and beyond. EGWPs will benefit from lower drug prices through lower plan liability and lower beneficiary cost sharing while RDS plans will not be able to directly take advantage of discounts resulting from the negotiations. RDS plans may experience additional headwinds with higher drug prices from manufacturers subject to negotiations, as manufacturers may shift costs to other plans. This may lead to increased formulary control and benefit redesign to help manage increased cost. There is also the possibility of commercial plans leveraging CMS drug negotiations to obtain deeper discounts, which would provide RDS plans with a tailwind scenario.
Part D inflation rebate payments
Manufacturers are required to pay rebates to Medicare if their prices for Part D drugs increase faster than the rate of inflation over a defined period. Drug price increases for EGWPs may be limited as a result. Similar to CMS drug negotiations, RDS plans will not benefit directly from protection against drug price inflation and may even experience higher drug prices from manufacturers, subject to negotiations, presenting possible headwinds for RDS plans as the RDS ceiling limits plan sponsor reimbursement on high-cost claimants. A tailwind scenario would be possible if commercial plans can successfully leverage this provision in their negotiations to limit drug price inflation.
Enriched Part D defined standard benefit
Plan sponsors offering retiree plans may struggle with providing creditable coverage in 2025 due to the enrichment of the defined standard plan, primarily through the introduction of the $2,000 maximum out-of-pocket (MOOP). Depending on the existing benefit design, plan sponsors may need to significantly enrich benefits in 2025 to ensure passing the “gross test” required for creditable coverage. For those plans seeking the RDS, plan sponsors likely will be unable to pass the increased cost for richer benefits to retirees through increased member contributions and still satisfy net test requirements, thereby raising the overall cost to plan sponsors.
Medicare Prescription Payment Plan (M3P)
Members will have the opportunity to spread the payment of their out-of-pocket cost throughout the year. EGWPs generally offer copay benefits, which may result in limited participation from members (although they may not be able to restrict participation either). This is a possible headwind for EGWPs due to an increase in administrative costs and bad debt associated with offering M3P. RDS plans will not be required to offer the payment plan.
Reduced federal reinsurance
Historically, EGWPs have had lower catastrophic exposure than individual plans, primarily due to richer benefits. However, lower federal reinsurance coupled with a $2,000 MOOP will increase the risk for plan sponsors offering EGWPs, presenting a possible headwind. Plan sponsors offering EGWPs will need to look for ways to reduce their exposure, such as through improved pharmacy benefit manager (PBM) contracting or tighter formulary controls. Private reinsurance could reduce plan sponsors’ risk with very high-cost members. Federal reinsurance does not apply to RDS plans, which will not be affected by the reduction.
Questions plan sponsors should be asking
Plan sponsors should revisit their retiree prescription drug offerings for the 2025 plan year considering the upcoming changes. Here are some questions all plan sponsors offering retiree prescription drug coverage should be asking in 2025 and beyond, regardless of their current offering.
- Will the nonfinancial benefits of applying for the RDS outweigh the financial gains from transitioning to an EGWP?
Plan sponsors will need to evaluate whether certain items (e.g., renegotiating contracts to align with a calendar year or changes in member communications) are worthwhile trade-offs to lower costs. Plan sponsors in union contracts may explore renegotiation, which could benefit both plan sponsors, through lower costs, and beneficiaries, through richer benefits. - What benefit design changes will need to be made in 2025 to meet actuarial equivalence tests?
This will affect plan sponsors offering both RDS plans and EGWPs. Plan sponsors offering RDS plans may need to significantly enrich their benefits to meet the gross test without significantly increasing retiree contributions. Similarly, EGWPs not offering MOOPs below $2,000 will need to implement this new cap, which will enrich benefits. - What level of beneficiary disruption (i.e., formulary and benefit design) should I tolerate if a change in the retiree option is made?
While most disruption can be managed through customization, communication, and education, not all disruption can be avoided. There will even be disruption for plan sponsors currently offering EGWPs in 2025. - How will the MOOP accumulation affect plan liability?
The methodology for MOOP accumulation is one of the unknowns potentially affecting plan liability the most. Plan sponsors should prepare for revised pricing and other downstream impacts, depending on the timing of updated guidance from CMS. - How do I plan for a change in cash flows?
Plan sponsors offering self-funded EGWPs should be updating or creating a financial cash flow forecast to better avoid any surprises stemming from the changes in subsidies and year-end reconciliations. Plan sponsors will also need to be flexible (e.g., CMS may decide not to offer advance federal reinsurance prepayments given the lower catastrophic liability). - How will the risk score model change affect my financials for EGWPs?
Plan sponsors typically have not engaged in initiatives to improve the accuracy of risk score coding. However, plan sponsors may explore this option, either through their PBMs or health plan partners, to avoid missing any opportunities given the anticipated significant increases in the direct subsidy. - What will the direct subsidy be in 2025?
The direct subsidy for EGWPs is based on the national average bid amount and national average member premium in the individual market, because EGWPs do not submit bids. Plans should prepare for increased uncertainty around any estimate of the direct subsidy for 2025. - What steps (if any) should I take to help lower costs?
Historically, plan sponsors have typically chosen the path of minimizing disruption over the path of managing cost. With increased exposure to cost in the catastrophic phase, plan sponsors should at least consider the ramifications of the status quo. Decisions around formularies affecting only a few beneficiaries or considering private reinsurance options for self-funded EGWPs may help reduce plan sponsor cost and risk, respectively.
Methodology
We relied on Milliman’s Health Cost Guidelines (HCGs) and other internal Milliman research to estimate the impact of the IRA on EGWPs and RDS plans. We used this research to develop results for two representative benefit designs in the EGWP market. For both plan designs, we used the same pharmacy contracting terms and manufacturer rebates. We excluded the impact of trend and demand elasticity to isolate the impact of the IRA on plan liability, and we also modeled the resulting plan liability when incorporating trend and demand elasticity to more closely simulate what plans may actually observe.
- Rich plan: $10/$20/$50 (generic/brand/specialty) copay design with a 3x mail multiplier, no deductible, and defined standard limits, adjusted by plan year.
- Lean plan: 20% coinsurance design with no deductible, and defined standard limits, adjusted by plan year.
We used additional Milliman research to estimate the direct subsidy for the 2025 plan year, which was further used in developing the corresponding EGWP liability estimates.
Conclusions
The changes to the Medicare Part D program will continue to largely favor EGWPs over RDS plans in 2025. While plan sponsors may have good reasons to remain with the RDS plan, we believe plan sponsors should only do so after considering the questions above. Plan sponsors also have other options beyond RDS plans and EGWPs, such as offering creditable prescription drug coverage through their commercial plans or offering a fixed premium contribution for Medicare beneficiaries to use the individual market.
Plan sponsors could see lower or higher plan liabilities for EGWPs, with not all the pieces for determining the impacts currently in place. Changes to EGWP plan liability are contingent upon the current benefit design, the changes needed to satisfy actuarial equivalence tests, and the existing plan experience. We are still waiting for updates to the RxHCC model and guidance on MOOP accumulation. In the meantime, plan sponsors should evaluate solutions to enrich benefits (if necessary), prepare for operational changes, and manage plan liability without sacrificing health outcomes.
1 Neuman, P. (May 17, 2004). The State of Retiree Health Benefits: Historical Trends and Future Uncertainties. KFF. Retrieved February 8, 2024, from https://www.kff.org/wp-content/uploads/2013/01/the-state-of-retiree-health-benefits-historical-trends-and-future-uncertainties.pdf .
2 CMS (August 28, 2018). Updates to the Coverage Gap Discount Program (CGDP). Retrieved February 8, 2024, from https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/2019updates_august2018.pdf .
3 McArdle, F. et al. (April 14, 2014). Retiree Health Benefits at the Crossroads. KFF. Retrieved February 8, 2024, from https://www.kff.org/report-section/retiree-health-benefits-at-the-crossroads-implications-of-recent-legislation-for-retiree-health-coverage/ .
4 2014 Medicare Trustees Report. Retrieved February 8, 2024, from https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/reportstrustfunds/downloads/tr2014.pdf .
5 2023 Medicare Trustees Report. Retrieved February 8, 2024, from https://www.cms.gov/oact/tr/2023.
6 CMS (September 14, 2023). 2025 Part D Risk Adjustment Model Update User Group. Retrieved February 8, 2024, from https://www.csscoperations.com/internet/csscw3_files.nsf/F2/PtDUserGroupSlideDeck_20230914_508.pdf/$FILE/PtDUserGroupSlideDeck_20230914_508.pdf.
7 The full text of the original IRA is available at https://www.congress.gov/117/bills/hr5376/BILLS-117hr5376enr.pdf.