Many OPEB Plan sponsors provide subsidized benefits to Medicare-eligible retirees. These benefits are frequently some of the most expensive OPEB benefits because they are paid for life. They are also arguably the most difficult to value. The difficulty stems from the long-term nature of the promise; benefits might be paid 50+ years into future, and since Medicare is primary, these benefits are very sensitive to any change in the Medicare program.
Twenty years ago, Medicare did not include prescription drug benefits. In 2006, Medicare Part D went into effect, and the program began to cover some prescription drugs. The percentage of prescription drug benefits that are paid by Medicare Part D has increased steadily, more than offsetting the rapid increase in prescription drug costs for plans. These Medicare improvements, along with subsidies offered to programs that continue to cover prescription drugs for Medicare-eligible participants, have actually decreased the cost of supplemental Medicare coverage for OPEB sponsors.
However, this could change due to the passage of the Inflation Reduction Act in August 2022. The bill is designed to reduce the federal deficit by $300 billion and invest $369 billion in reducing climate change through various investments in cleaner energy. Magic!! Where does the funding come from? Well, the second biggest source is through prescription drug price reform, $288 billion in savings.
What is planned for prescription drug price reform?
There are numerous provisions in the Inflation Reduction Act targeted to lower prescription drug prices. In 2023, drug manufacturers will be required to pay rebates to Medicare if the cost of certain drugs increase by more than inflation (CPI-U). These rebates will translate to lower prices for Medicare beneficiaries – but drug manufacturers may in turn raise prices for programs outside of Medicare to recoup some of those lost revenues, thereby increasing costs for plan sponsors. However, the big increase in plan cost will be in 2025 with a redesign of the current Medicare Part D cost sharing design: we estimate these changes could increase Rx plan costs for Medicare-eligible retirees by 15% or more. For example, the Federal government’s share of brand drugs in the catastrophic phase (which is after the deductible, initial coverage limit, and certain out-of-pocket limits are hit) will decrease from 80% to 20%, and plan participant’s cost of 5% will disappear. In return, the plan sponsor’s share increases from 15% to 60%, and the remaining 20% will be paid by prescription drug manufacturers. This change alone will likely have a big impact on plan costs.
So far, prescription drug price reform sounds glum for plan sponsors, as a lot of the costs are just being shifted to them. However, these increases may be somewhat or even entirely offset over time by the Government having a greater ability to negotiate prices for certain high-cost drugs starting in 2026, and therefore have more control over drug price increases. This change could slow recent rapid increases in prescription drug prices, lowering overall costs for Medicare, its beneficiaries, and plan sponsors. The impact on the plan’s share of Medicare prescription drug costs after 2025 will depend on many factors, including:
- Regulations that are yet to be drafted,
- CMS’s implementation of these regulations, and
- The response of the pharmaceutical industry.
Bolton’s view is that Medicare Part D prescription drug plans will see a significant increase in plan costs in 2025, which will be offset by lower Medicare prescription drug trends beginning in 2026.
How will this affect my OPEB liability?
These changes won’t come into play until after 2024 and are hard to determine; why should you care now?
OPEB valuations are long-term estimates. Since the Inflation Reduction Act was passed in 2022, actuaries are required by the Actuarial Standards of Practice and various accounting standards to consider its impact on future Plan costs. While there are still so many unknowns, we will need to follow along as draft regulations are released and guidance is issued by CMS and other bodies. As we learn more about how to quantify potential changes in costs, particularly those beginning in 2026 and how much they may or may not offset the expected increases in plan costs from the other changes included in the IRA, we will continue to refine our estimates.
Is this a replay of the old excise tax (the “Cadillac tax”)?
The Cadillac Tax was a feature of the Affordable Care Act (ACA) which was designed to make it revenue neutral. It set a 40% excise tax on plan premiums over a certain level, which would eventually have impacted plan sponsors who offered benefits that were greater than that amount. Arguably, the biggest problem with the Cadillac Tax was that its impact was backloaded; the ACA was passed in 2010, but the tax wasn’t scheduled to be in effect until 2018. It ended up being delayed twice, and was eventually repealed before it ever took effect. Additionally, it would have been very hard to administer – and even if it could have been administered, plan sponsors who offered plans that were generous enough for their costs to exceed the thresholds would either have to face more costs associated with the tax, or make serious reductions in plan value to avoid the tax, which would have hurt plan participants. As a result, this provision of the ACA was very unpopular, and after multiple delays Bolton took the position that this feature of the ACA would never be enacted. Therefore, while we were required to value the impact of the Cadillac tax for accounting purposes until it was legally repealed, we often did not value its impact on the recommended Trust contribution for plans that had a contribution policy based on a separate funding report.
By contrast, the revenue generated by this plan is not backloaded, and the revenue will be used to pay for popular programs to reduce climate change. Additionally, there are provisions to reduce prescription drug costs for participants, as well as to control Rx price increases. Therefore, it is unlikely that the IRA provisions will be repealed before they become effective.
It will be interesting to see how the IRA’s provisions will impact prescription drug prices for Medicare, its beneficiaries, and the rest of the market. We will be keeping a close eye on it as additional regulations and guidance are released, and continue to refine our price estimates as more information becomes available. Contact a Bolton consultant for more information.