One of the less-publicized provisions of the Inflation Reduction Act of 20221 (IRA) changes the way beneficiary cost sharing accumulates to the new out-of-pocket threshold value, which is $2,000 for 2025.2 This provision directly impacts how much patients will pay out-of-pocket (often referred to as “patient out-of-pocket”) in order to satisfy their own maximum out-of-pocket (MOOP) limit. All plans are required to use the same out-of-pocket threshold value. Despite this, many beneficiaries may pay significantly less due to the new accumulation logic.
What does accumulation refer to?
In this context, “accumulation” refers to how much spend counts toward a beneficiary’s deductible or MOOP. Under typical employer or commercial insurance, the amount a beneficiary pays out-of-pocket is generally equal to the amount that accumulates to their deductible and MOOP. That is to say, if a beneficiary spends $100 on a doctor’s visit, then that $100 counts toward their deductible and MOOP.3
In Part D, however, more stakeholders are involved and determining how much spend accumulates is not as simple. Historically, in addition to patient out-of-pocket, manufacturer contributions made through the Coverage Gap Discount Program (CGDP) and certain federal subsidies accumulated to the out-of-pocket threshold. The Centers for Medicare and Medicaid Services (CMS) called the total accumulation amount the true out-of-pocket (TrOOP) cost, which accumulated toward the out-of-pocket threshold ($8,000 in 2024).4 But even after beneficiaries reached this TrOOP limit, prior to 2024 most Part D beneficiaries paid 5% coinsurance, so the TrOOP limit was not a “conventional” MOOP because there was no actual “maximum” amount.
How does accumulation work under the IRA?
Among other changes to the standard Part D benefit design, the IRA introduces a hard MOOP—once the beneficiary attains $2,000 in TrOOP costs in 2025, they are no longer responsible for any cost sharing—aligning the TrOOP more closely with the typical definition of a MOOP.5 Another important change introduced by the IRA is that cost sharing for basic Part D coverage counts toward the MOOP, even if that basic coverage is reduced by certain other payers.6 Federal regulators refer to the amount of drug cost that accumulates (or counts) toward the MOOP in Part D as “TrOOP eligible cost.”7 For enhanced plans,8 TrOOP eligible cost is based on the greater of defined standard benefit cost sharing and the actual patient out-of-pocket (including any cost-sharing subsidies), such that actual patient out-of-pocket will never be higher than TrOOP eligible costs.9 This regulatory guidance has been referred to as the “greater of” logic.
This “greater of” provision is impactful because the defined standard benefit is frequently leaner (i.e., has higher cost sharing) than the benefit a beneficiary may actually have. In fact, around 90% of non-low-income (unsubsidized) beneficiaries are enrolled in plans with enhanced benefits.10 Enhanced plans generally offer fixed copays on generic tiers, either coinsurance or copays on brand tiers, and coinsurance on specialty tiers. Plans are considered “enhanced” if they are meaningfully richer than the defined standard benefit. Other plans are considered “basic” and are roughly equivalent in richness to the defined standard benefit.11
What does the “greater of” logic mean for beneficiaries?
The IRA’s accumulation logic means many beneficiaries who satisfy their MOOP will do so without spending $2,000 out-of-pocket—i.e., their specific MOOP will be less than their $2,000 limit in TrOOP eligible costs. Assuming enhanced benefits similar to 2024, we expect roughly half of non-low-income beneficiaries who reach MOOP will spend less than $1,200 out-of-pocket in 2025.12
Most likely, the only beneficiaries who will pay the full $2,000 to satisfy their MOOPs in 2025 will be non-low-income beneficiaries who are enrolled in a plan with basic Part D coverage13 or who are in an enhanced plan but exclusively utilize drugs with cost sharing greater than or equal to what is under (i.e., leaner than) the defined standard benefit. The most common instance of the latter occurs for specialty drugs on tier 5, which are almost always subject to a coinsurance greater than or equal to the defined standard coinsurance amount. In some cases, this could also occur for non-preferred brand (tier 4) drugs, where the plan offers a coinsurance benefit (typically 40% to 50%, compared to the defined standard 25%).
Additionally, low-income beneficiaries will satisfy their MOOPs with patient out-of-pocket well under $2,000 because they are highly subsidized.14 We expect roughly half of low-income beneficiaries who reach their MOOPs will spend less than $50 and virtually all low-income beneficiaries who reach their MOOPs to do so by spending less than $300 out-of-pocket.
Figure 1: Estimated median patient out-of-pocket required to satisfy MOOP
The “greater of” logic drives this dynamic. The beneficiary effectively receives credit toward their MOOP based on the defined standard cost sharing. For example, assume a beneficiary has a copay of $10 for a drug that costs $100 and the deductible has already been met. The defined standard cost sharing would be 25% or $25. Although the beneficiary pays $10 out-of-pocket, the full $25 will accumulate toward their MOOP. The incremental $15 is not paid by the beneficiary, but rather by the health plan.
The following three examples illustrate how a given beneficiary’s costs would accumulate to MOOP under different enhanced benefit designs. For all three examples, we assume the beneficiary does not receive low-income subsidies and fills one $600 preferred brand (tier 3) script each month and no other drugs.
As illustrated in Figure 2, under the defined standard benefit the beneficiary would have paid:
- The defined standard deductible of $590 plus $2.50 (25% of the $10 remaining after the deductible) for the first script
- Then, $150 (25% of $600) for the second through 10th scripts
- Followed by $57.50 (25% of the remaining $230 to reach their $2,000 TrOOP limit) on the 11th script to reach their MOOP after paying $2,000
- The beneficiary would pay $0 for the final script.
Figure 2: Illustrative cumulative patient out-of-pocket accumulation to MOOP – Defined standard benefit
Example 1: Copay benefit
Figure 3 assumes the beneficiary has a $40 copay and a deductible of $300 for the $600 per month preferred brand drug.
Using the “greater of” logic, the beneficiary pays their plan’s enhanced $300 deductible plus their enhanced $40 fixed copay for the first script. Then the beneficiary pays their $40 copay for the second through 11th scripts. The beneficiary does not pay anything for the final script because they reached the $2,000 TrOOP limit in month 11.
In this example, the beneficiary satisfies their MOOP after spending $740 out-of-pocket.
Figure 3: Illustrative cumulative patient out-of-pocket accumulation to MOOP – Copay benefit
Example 2: Coinsurance benefit
Figure 4 assumes the beneficiary has a 20% coinsurance and a deductible of $300 for the $600 per month preferred brand drug.
Using the “greater of” logic, the beneficiary pays their plan’s enhanced $300 deductible plus their enhanced 20% coinsurance on the remaining $300 for the first script ($60). Then the beneficiary pays $120 (20% of $600) for each of the second through 10th scripts and $46 (20% of the last $230) on the 11th script. The beneficiary does not pay anything for the final script because they reach the $2,000 TrOOP limit in month 11.
In this example, the beneficiary satisfies their MOOP after spending $1,486 out-of-pocket.
Figure 4: Illustrative cumulative patient out-of-pocket accumulation to MOOP – Coinsurance benefit
Example 3: Copay benefit with limited deductible
Figure 5 assumes the beneficiary has a $40 fixed copay for the $600 per month preferred brand drug (similar to Example 1 above). However, in this example, we assume the plan’s $300 deductible does not apply to the drug this beneficiary is taking.
Using the “greater of” logic, the beneficiary pays their plan’s enhanced $40 fixed copay for the first script because the deductible does not apply. Then the beneficiary continues to pay their $40 copay for the second through 11th scripts. The beneficiary does not pay anything for the final script because they reach the $2,000 TrOOP limit in month 11.
In this example, the beneficiary satisfies their MOOP after spending $440 out-of-pocket.
This scenario demonstrates new dynamics around the deductible under the IRA adjudication rules. In 2025 and beyond, the plan deductible is considered satisfied when one of the following conditions is satisfied:
- The beneficiary pays the plan deductible ($300 in this example) in cost sharing for drugs subject to the deductible
- The TrOOP accumulator reaches the defined standard deductible ($590)
In this illustrative example, the “greater of” logic results in the beneficiary’s deductible being satisfied when the TrOOP accumulator reaches the defined standard deductible (during the first script). In this case, the beneficiary paid no cost sharing toward the deductible. Moreover, if the beneficiary’s second script of the year was for a drug subject to the deductible, they would still only pay the plan copay or coinsurance for that drug rather than the deductible. Given this dynamic, excluding tiers from the deductible is a considerably richer benefit than in prior years. A similar dynamic would occur if the plan had no deductible at all.
Figure 5: Illustrative cumulative patient out-of-pocket accumulation to MOOP – Copay benefit with limited deductible
The patient out-of-pocket required to reach each beneficiary’s MOOP is heavily dependent on that beneficiary’s benefits and drug costs. There will certainly be wide variation in what any given beneficiary pays to satisfy their MOOP. Beneficiaries with the most enhanced benefits, such as low (or no) deductibles or copays, will reach their MOOPs by spending the least out-of-pocket. Beneficiaries with the least enhanced benefits, such as high coinsurance on non-preferred brands, will spend closer to the $2,000 TrOOP limit to reach their MOOPs.
What does this mean for other Part D stakeholders?
Because beneficiaries progress to their MOOPs more quickly than they would have if the “greater of” accumulation did not exist, other stakeholders pay their post-MOOP share of claims earlier. These beneficiaries who have a large payment early in the year may be likely to opt into the Medicare Prescription Payment Plan (M3P), which spreads these high up-front costs over the remainder of the benefit year, without affecting what other stakeholders pay for claims each month.15 It remains to be seen how beneficiaries may react to out-of-pocket costs that may be even lower than they expect and whether there are other downstream impacts of the “greater of” logic. Some beneficiaries are already likely to benefit from more affordable drugs under the IRA benefit redesign, and the application of the “greater of” accumulation logic may further improve affordability and increase utilization for beneficiaries utilizing non-specialty brand drugs in particular, which tend to require the least spend before beneficiaries reach the MOOP. Utilization could increase over time as beneficiaries become more familiar with adjudication dynamics and select enhanced plans that provide greater benefits for their specific drugs.
While it has always been more costly for plans to offer enriched benefits relative to the defined standard, the new accumulation logic significantly increases the cost of enhanced benefits (which is passed through as higher premiums). This may have implications for the degree of benefit enhancements plans apply in 2025 and beyond.
It is worth noting that the specifics of the “greater of” logic were set forth in regulatory guidance by the U.S. Department of Health and Human Services (HHS) and are not directly found in statute. Given the U.S. Supreme Court’s recent ruling in Loper-Bright v. Raimondo, which overturned Chevron deference,16 there is increased uncertainty surrounding how healthcare policies, including parts of the IRA not codified in statute, may be reevaluated.17 It is possible that some stakeholders may seek to overturn this rule if it significantly hinders business operations, although it is uncertain whether such a case would succeed on its merits. However, for plan year 2025 health plans have already submitted bids incorporating the impact of the logic on expected costs based on 2025 prescription drug event (PDE) guidance.18
1 The full text of the IRA is available at https://www.congress.gov/117/plaws/publ169/PLAW-117publ169.pdf.
2 Cline, M., Karcher, J., Klaisner, J., & Klein, M. (August 2022). Weathering the Reform Storm. Milliman Brief. Retrieved August 21, 2024, from https://www.milliman.com/en/insight/weathering-the-reform-storm.
3 There are some exceptions. Many plans do not accumulate copayments toward the deductible. Additionally, grandfathered plans are not required to accumulate copayment amounts toward the MOOP. On a technically different basis, the IRS does not permit amounts paid by most unrelated third parties to be considered as cost sharing, so payments of this type (such as pharmacy manufacturer coupon cards) are also often excluded from counting toward a deductible and/or MOOP.
4 CMS (March 31, 2023). Announcement of Calendar Year (CY) 2024 Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies. Retrieved August 21, 2024, from https://www.cms.gov/files/document/2024-announcement-pdf.pdf.
5 42 USC 1395w-102(b)(4)(A)(i)(II), which took effect beginning in 2024.
6 42 USC 1395w-102(b)(4)(C)(iii)(II), which takes effect beginning in 2025. Of note, this provision means that cost-sharing reductions as part of an enhanced alternative plan and supplemental coverage provided by a retiree health plan would also count toward the MOOP.
7 This term has been used in prescription drug event reporting for many years, but has taken new importance given the impact of the cost-sharing accumulation changes in the IRA.
8 The four different permitted benefit types for Part D coverage are defined in 42 CFR 423.100 under “standard coverage” and “alternative coverage.” Per 42 USC 1395W-102(a)(2), enhanced alternative plans may offer reduced cost sharing and/or cover optional drugs not typically included in Part D.
9 This is outlined in Section 30 of the 2025 Part D redesign program guidance, found at https://www.cms.gov/files/document/final-cy-2025-part-d-redesign-program-instructions.pdf.
10 Milliman research based on 2024 benefits and enrollment information.
12 Milliman analysis using 2022 CMS research identifiable files, claims adjudicated under representative plan designs by payer, and plan type based on 2024 benefit landscape. Excludes beneficiaries enrolled in Employer Group Waiver Plans (EGWPs).
13 This includes plans with a defined standard, actuarially equivalent, or basic alternative Part D benefit design.
14 Because low-income cost-sharing (LICS) payments have always counted toward accumulation, a similar accumulation dynamic for subsidized beneficiaries was true prior to the IRA and will continue to be the case now.
15 For more information on the M3P, see https://www.milliman.com/en/insight/medicare-prescription-payment-plan-for-plan-sponsors.
16 Karcher J., Lantz N., Boggs G., (July 31, 2024) Supreme Court's 2024 rulings: A new era for health insurance and retirement benefits regulations. Retrieved August 21, 2024 from https://www.milliman.com/en/insight/supreme-court-2024-rulings-health-insurance-retirement-benefits.
17 Gregorian, J. et al. (July 22, 2024). Loper Bright v. Raimondo: What life sciences companies should consider. DLA Piper. Retrieved August 21, 2024, from https://www.dlapiper.com/en/insights/publications/2024/07/loper-bright-v-raimondo-what-life-sciences-companies-should-consider.
18 CMS (April 15, 2024). Prescription Drug Event Record Reporting Instructions for the Implementation of the Inflation Reduction Act for Contract Year 2025. Retrieved August 21, 2024, from https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/PDE_Record_Reporting_Instructions_for_the_Implementation_of_the_IRA_for_Contract_Year_2025_508_G.pdf.