Retirees with stand-alone Medicare drug plan coverage not subject to low-income subsidies are likely to see increases in their monthly premiums next year as the Inflation Reduction Act begins to take effect. The legislation adopted in 2022 includes limited authority for Medicare to negotiate drug prices, but also reduces the share of so-called catastrophic drug costs currently borne by taxpayers, shifting more of the expense to insurers and, by implication, to enrollees in the form of higher premiums.
Medicare prescription drug plans, known as Medicare Part D, are separate private insurance plans that accord with Medicare guidelines to provide coverage for prescription medications and are not part of traditional Medicare. About 44% of Medicare beneficiaries with drug coverage purchase a separate stand-alone plan and will incur an average price increase of 20% next year, according to the Kaiser Family Foundation. Tennesseans can expect a 21% average monthly premium increase, while Georgians will get socked with a 32% hike on average.
The remaining 56% of covered retirees get their drug coverage as part of a Medicare Advantage (Part C) private insurance plan and are likely to see smaller increases due to the financial incentives from Medicare to Part C providers. But Medicare Advantage plans have some disadvantages and are under increasing scrutiny for allegations denial of coverage and advertising practices, so many retirees opt to purchase more flexible Medicare supplement or "Medigap" policies coupled with stand-alone Part D drug coverage at a higher cost to keep their options open.
Medicare remains one of the most popular government subsidy programs in existence, with 65 million participants comprising 21% of all U.S. health spending. It is also one of the biggest budget busters, representing 10% of all federal outlays and expected to reach 18% by 2032, just as the Medicare trust fund runs dry, according to plan actuaries. Beneficiary premiums comprise only 15% of program revenue; payroll taxes and general tax revenue make up most of the rest, which is still not sufficient to pay all the bills.
The Inflation Reduction Act of 2022 makes several major changes to the Medicare Part D program. The provision that received the most attention was the implementation of Medicare's authority to negotiate the prices of a limited number of popular and costly pharmaceuticals beginning in 2025. The provision which has received less attention and is primarily responsible for the impending premium hikes is the phase-in of caps on out-of-pocket spending for high-cost drugs and the shifting of some of the cost of those medications from taxpayers to insurance companies and drugmakers.
Currently, Part D plan participants can still incur substantial and potentially devastating drug costs. After reaching the present $7,400 out-of-pocket limit, the insured pays a 5% copay on name-brand prescriptions without limit. Above the catastrophic threshold, taxpayers cover 80% of the cost with the insurer picking up 15%. The Inflation Reduction Act phases in a flat $2,000 maximum out-of-pocket limit, with Uncle Sam covering just 20% of the additional cost. The insurer share rises from the current 20% to 60-80% in 2025, with the difference coming from manufacturer discounts.
This transfer of the cost burden from taxpayers to insurers is an important element of the law, which is projected to reduce the federal budget deficit by $238 billion over a decade according to the Congressional Budget Office. However, just like taxes and tariffs, these additional costs to insurance companies are likely to be passed on to consumers through higher premiums. This should come as no surprise: By definition, deficit reduction requires some combination of raising taxes and reducing government spending. With taxes off the table, consumers who directly benefit from Part D will pay more to offset the reduction in federal outlays.
Medicare Advantage plans that include drug coverage will not be affected as much, at least in 2024. Advantage plans are paid a fixed amount per enrollee by Medicare and earn substantial rebates by holding costs below Medicare benchmarks, which will offset much of the additional Part D costs next year. But these cost pressures apply to Medicare Advantage as well and are likely to be passed through in future years, perhaps as early as 2025 amid increasing scrutiny of allegations related to denial of coverage or reimbursement. Several hospital systems have removed Medicare Advantage plans from their networks or terminated contracts altogether due to coverage disputes. Medicare's own watchdog found in 2019 that the top 15 Medicare Advantage plans denied authorization for 13% of claims and 18% of valid payment requests that met Medicare coverage rules. Beneficiaries should think carefully before committing to a Medicare Advantage plan, as this could be a one-way trip. And as you are bombarded with TV commercials this week, remember that broker commissions for Medicare Advantage are double those for Medigap plans for a reason.
If you are enrolled in Part D, you still have time to compare options, but the annual window closes on Dec. 7. Medicare.gov is the place to start, where you can create an account, enter your medications, and review offerings in your state. Another under-utilized resource is the federally funded State Health Insurance Assistance program (Shiphelp.org), that provides unbiased information and advice on all things Medicare. The National Council on Aging (NCOA.org) also offers advice on finding an unbiased Medicare expert. Medicare options are complicated, and a little homework can make a huge difference.
Christopher A. Hopkins, CFA, is co-founder of Apogee Wealth Partners LLC.