Planning for Medicare Out-of-Pocket Prescription Costs
By Anna Hays, Vice President, Senior Wealth Management Officer
A solid financial plan considers all of the details that you know, especially your goals and how to use your resources to achieve them. It also forecasts expenses like out-of-pocket health care and prescription drug costs that are difficult to predict and can change quickly because of an accident or unanticipated illness. Fortunately for Medicare beneficiaries, the Inflation Reduction Act signed by President Biden on August 16, 2022, will provide some stability for planning out-of-pocket prescription drug expenses.
Let’s rewind to 1965 and the passage of the initial Medicare statute to understand how Medicare has evolved and the scope of the recent changes. The initial Medicare statute passed in 1965 created Part A and Part B. Part A covers hospital and hospice services and has a limited skilled nursing benefit. Part B covers doctor’s visits, outpatient care and prescription drugs administered in a doctor’s office. Medicare did not cover prescription drugs obtained through a retail pharmacy until the Medicare Modernization Act established Part D in 2003. The new prescription drug benefit allowed insurers like Blue Cross Blue Shield, United Health Care and Humana to offer prescription drug plans through Part D. However, the Medicare Modernization Act did not allow the federal government to negotiate prices with drug manufacturers.
Part D has four separate coverage phases: (1) the initial deductible period; (2) the initial coverage period; (3) the coverage gap (a.k.a. the “donut hole”); and (4) catastrophic coverage. As originally designed, Medicare Part D beneficiaries who fell into the Part D coverage gap had to pay 100% of their prescription costs. In 2020, the Affordable Care Act reduced cost sharing in the coverage gap to 25% from 100% of prescription’s price. In the final catastrophic coverage phase, there is a 5% copayment for prescriptions covered by a Part D plan.
Each of Part D’s coverage phases has a separate annual dollar limit that corresponds with what Part D calls “true out-of-pocket” (TrOOP) expenses. For example, in 2022 the Part D initial deductible is $480, the coverage gap begins at $4,430, and catastrophic coverage begins when total out-of-pocket expenses reach $7,050. A Medicare beneficiary’s expenses that count toward the TrOOP include the annual deductible, co-payments made in the initial coverage period, payments made while in the coverage gap, and manufacturer’s discounts received on brand-name drugs while in the coverage gap.
Still, Medicare has been unable to negotiate any prescription drug prices or rein in Part D out-of-pocket expenses – until now.
Although the new law does not allow Medicare to negotiate every prescription drug price right away, it will be able to start negotiating prices for some of the highest priced drugs covered by Part B and Part D in 2026. Drugs that will be eligible for price negotiation cannot have a generic substitute or what’s called a “biosimilar competitor”. Depending on the type of drug, either nine or thirteen years must have passed since the FDA approved its use. Medicare will be able to negotiate prices for 10 more drugs in 2026, followed by 15 more in 2027 and 2028 and 20 more in 2029.
More immediately, several provisions become effective next year. Beginning in 2023, copayments for insulin covered by a Part D plan or administered through medical equipment covered by a Part B plan will be capped at $35 per month. Cost sharing for vaccines like shingles and pneumonia will also be eliminated, and manufacturers will be required to pay rebates to Medicare if their drug prices rise faster than inflation.
In 2024, the new law eliminates the 5% coinsurance for Medicare beneficiaries who enter Part D’s catastrophic coverage phase. In 2025, Part D beneficiary out-of-pocket costs will be capped at $2,000. Also, from 2024 through 2029, the increase in Part D premiums will be capped at 6% per year.
As Medicare implements these changes, Cape Cod 5 will continue to partner with the Massachusetts SHINE program to provide our clients with information about Medicare’s out-of-pocket costs. We will also continue to be your resource for financial plans that help you attain your goals and manage unexpected events like out-of-pocket health care costs along your journey.
Anna Hays is an attorney, Certified Financial Planner (CFP®) and Senior Wealth Management Officer with Cape Cod 5. She has over 25 years of experience developing estate and trust plans that integrate financial goals.