Medicare Part D Redesign: Do You Know Your Creditable Coverage Status?

Medicare is a government program that provides health insurance for people 65 or older, people under age 65 with certain disabilities, and anyone with End-Stage Renal Disease (ESRD). It is administered by the Centers for Medicare and Medicaid Services (CMS), a division of the Department of Health and Human Services (HHS).

Since 2006, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) prescription drug benefit (Medicare Part D, or Part D) allows all persons who are eligible for and enrolled in Medicare (due to age, disability or ESRD) to purchase Part D prescription drug coverage if they live in a service area of a Part D plan. This coverage can be purchased when people are first eligible for Medicare or during a Medicare open enrollment window (annually between October 15 to December 7). Penalties may apply if you do not purchase Part D when first eligible. To avoid these financial penalties, people must provide proof they were enrolled in a plan with “creditable” coverage. The Medicare Part D notice is the proof plan participants receive to know if their coverage meets the creditable definition or is not creditable.

On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA).

While the legislation does not directly affect group health plans, plan sponsors should be aware of a change to Medicare Part D’s creditable coverage status for individuals enrolled in a high deductible health plan (HDHP). Starting in 2025, out-of-pocket costs for prescription drugs under Medicare Part D will be limited to $2,000 annually. Due to these changes, we anticipate HDHP plans will have a much more difficult time meeting creditable status and will likely not be creditable. CMS provides information and resources for the changes to Medicare under the IRA on the CMS Part D Improvements website.

Under the IRA, HHS will establish a program to negotiate prescription drug prices for individuals covered by Medicare, and the HHS Secretary will be responsible for negotiating with drug manufacturers to determine the fair price for drugs using factors outlined in the legislation regarding fair market value, along with research and development costs. The program, which will be phased in over several years, will require CMS to negotiate maximum prices for brand-name drugs that account for the greatest amount of Medicare spending and do not have generic equivalents The program will begin with 10 Medicare Part D drugs in 2026, growing to 20 brand-name drugs per year in 2029 and beyond. Other important changes include capping the cost of insulin at $35 per month beginning in 2023, and starting in 2025, Medicare Part D out-of-pocket prescription drug costs will be capped at $2,000 annually.

Creditable Coverage Determination

Prescription drug coverage is “creditable” if the actuarial value of the coverage equals or exceeds the actuarial value of standard Medicare prescription drug coverage, using actuarial principles in accordance with CMS guidelines. The actuarial determination measures whether the expected cost of paid claims under the employer-sponsored prescription drug coverage is at least as much as the standard Medicare Part D benefit. Employers must provide a Creditable Coverage Notice to employees at least annually before October 15 regarding the status of creditable prescription drug coverage.

Current Rules

Currently, CMS provides different ways for employer-sponsored plans to make a creditable coverage determination. Most carriers will provide this information to their fully insured plans, but self-funded plan sponsors often must make the creditable coverage determination themselves or rely on another third party, such as an actuary, to assist with the determination.

• Many employers use the simplified determination method to determine whether coverage is creditable. CMS provides a set list of standards, and a plan will be determined to be creditable if the plan’s prescription drug plan design meets all the stated standards. The simplified determination method, while straightforward forward, is not available for some plan designs, such as high deductible health plans (HDHPs).
• If the employer cannot use the simplified determination method to determine the creditable coverage status of the prescription drug plan, they must make an actuarial determination to determine if coverage is creditable. This determination should be completed annually.

New Rules Starting in 2025

One of the most impactful changes from the Inflation Reduction Act is the substantial decrease in the out-of-pocket maximum (OOPM) limit from $8,000 in 2024 to $2,000 in 2025. This IRA change may affect whether a group health plan’s prescription drug coverage is creditable, particularly for HDHPs that have minimum deductibles set by the Internal Revenue Service (IRS).

In the CMS Part D Redesign Instructions, CMS stated the simplified determination method would no longer be a “valid methodology to determine whether an entity’s prescription drug coverage is creditable or not.” However, CMS revised Section 90 of the Final Instructions released in April to state that they will continue to permit the use of the simplified determination methodology, without modification to the existing parameters, for CY 2025. The Final Instructions specify that CMS will re-evaluate the continued use of the existing creditable coverage simplified determination method, or establish a revised one, for CY 2026.

Medicare Part D Notice Requirements

Plan sponsors must provide a Medicare Part D annual notice to all Medicare-eligible participants explaining whether the group plan’s prescription drug benefits are “creditable” or “non-creditable” coverage for the upcoming calendar year. CMS issued two model notices, a “creditable coverage notice” and a “non-creditable coverage notice,” employers may use for this purpose. The Medicare Part D Notice discloses whether the plan’s drug benefits are creditable or non-creditable for the upcoming calendar year so that employees or family members can decide whether the employer plan or a Medicare Part D prescription drug plan would be more beneficial for them. Part D requires group health plan sponsors providing prescription drug coverage to Part D eligible individuals to disclose to Part D eligible individuals and to CMS whether the coverage is “creditable” and cooperate with Medicare Part D plans and Medicare Part D enrollees in order to coordinate benefits.

The date an employer must provide the notice varies depending on circumstances; however, employers are required to provide the Medicare Part D notice to individuals annually before October 15, which coincides with the Part D annual enrollment period (October 15 to December 7).

All deadlines are listed here:

• Prior to the commencement of the annual enrollment period for Medicare Part D (October 15);
• Prior to an individual’s initial enrollment period (IEP) for Medicare Part D;
• Prior to the effective date of coverage for any Medicare Part D eligible individual who enrolls in the plan sponsor’s prescription drug coverage;
• Whenever the employer no longer offers prescription drug coverage or changes prescription drug coverage so that it is no longer creditable or becomes creditable; and
• Upon request by a Medicare Part D eligible individual.

The notice must be provided to Medicare Part D eligible individuals who are eligible to enroll in the plan sponsor’s prescription drug plan. This includes employees, Consolidated Omnibus Budget Reconciliation Act (COBRA) participants, and retirees, as well as their spouses and dependents. Individuals are eligible for Medicare Part D if they are enrolled in either Medicare Part A or Medicare Part B and live in the service area of a Medicare Part D plan. In other words, if somebody is both Medicare Part D eligible AND eligible to enroll in the plan sponsor’s prescription drug plan, a notice is required.

Since it may be difficult for a plan sponsor to identify which individuals are eligible for Medicare Part D (e.g., spouses or disabled dependents), many plan sponsors choose to provide the disclosure notice to everyone who is eligible to enroll in their prescription drug plan.

When providing the notices, CMS prefers using paper documents because Medicare Part D eligible individuals are more likely to receive and understand them, and because it is easier to ensure that paper documents have been received by both employees and eligible spouses and dependents. However, although paper notices sent by mail are preferred, the notices may be sent electronically in accordance with the Department of Labor’s (DOL’s) electronic delivery safe harbor for required disclosures under the Employee Retirement Income Security Act (ERISA). To be eligible for the safe harbor, employees must have access to the internet as an integral part of their daily job duties at their regular workplace (a public kiosk is not sufficient) and to those who provide consent to electronic distribution.

CMS has indicated a plan sponsor providing a disclosure notice may generally provide a single notice to both the eligible individual and all his or her eligible dependents. However, a separate disclosure notice must be provided if the plan sponsor knows that any eligible spouse or dependent resides at a different address from the participant.

Potential Impact on Medicare Part D Enrollment

We expect employers to receive additional questions from plan participants in a high deductible health plan (HDHP) as the Medicare D notice may state the prescription drug coverage is not creditable coverage under the HDHP plan. Plan participants may choose to enroll in Medicare D coverage during the Part D enrollment window (to avoid the Medicare late enrollment penalty) and may drop the employer plan as a qualifying life event.

Recommendations for Plan Participants

Consider Moving to Medicare Before Retiring

Anyone nearing the Medicare eligibility age should consider all their options for health coverage which may include staying on their employer-sponsored plan or moving to Medicare. Current high deductible health plan members may be subject to the Medicare D late enrollment penalty if they do not enroll in Medicare D when eligible or select a plan with creditable prescription drug coverage.

Explore All Options and Priorities

Individuals enrolled in employer-sponsored coverage will receive a notification annually regarding the creditable coverage status of their prescription drug coverage. It is important to keep this employer notice, as creditable coverage status must be reported upon Part D enrollment. Individuals interested in transitioning to Part D should research all the options available from their employer. Some plans the employer offers may be creditable, and some may be non-creditable. To ensure they do not incur a Medicare Part D enrollment penalty, they must enroll in creditable prescription drug coverage upon becoming eligible.

Medicare has hundreds of plan options. Eligible individuals should look at various options and take the following factors into consideration:

• Prescription drugs taken
• Gaps in coverage
• Deductibles
• Creditable coverage status of your employer plan

EPIC’s Medicare partner, Medicare Choice Group, can provide a seamless transition for individuals covered by employer-sponsored coverage moving to Medicare.

Medicare Part D Enrollment

Time to Enroll

To be eligible for Medicare Part D, an individual must be entitled to benefits under Medicare Part A or be enrolled in Medicare Part B and live in the service area of a Medicare Part D plan. For purposes of Part D eligibility, CMS has interpreted “entitled to benefits” under Part A and “enrolled” under Part B to require that an individual actually have coverage under either Part A or Part B. A Part D “eligible” individual is entitled to obtain qualified prescription drug coverage under Part D. Part D eligible individuals may include active employees, disabled employees, COBRA participants, retirees and their covered spouses and dependents.

If an individual does not join a Medicare Part D plan when the individual enrolls in Medicare Part A and B, there is an open enrollment period every year from October 15 to December 7, with coverage beginning the following January 1.

There is a special enrollment period for Medicare Part D when an individual loses “creditable” prescription coverage from another source, including losing creditable coverage provided to an individual who is on COBRA. This special enrollment period begins in the month the creditable prescription drug coverage is lost and continues for the following two months. If an individual enrolls in Medicare Part D during this special enrollment period, there is no premium penalty that would otherwise apply to a person who did not sign up for Medicare Part D when they first became eligible for Medicare Part D.

Penalties for Late Enrollment

Participants who fail to enroll for Part D when first eligible (at age 65), will be charged higher premiums if they enroll for Part D at a later date. The “Late Enrollment Penalty” is generally at least 1% of the premium ($34.70 in 2024), rounded to the nearest $.10, for each month they were without creditable coverage, but not enrolled in Part D. The penalty is waived if the participant had employer coverage, including prescription drug coverage that is creditable and the participant enrolls for Part D within 63 days of losing the group coverage. Since the “national base beneficiary premium” may increase each year, the penalty amount may also increase each year.

Avoiding the Late Enrollment Penalty

There are ways individuals can avoid a Medicare Part D late enrollment penalty.

Enroll in Part D When First Eligible

Individuals who are eligible should consider joining a Part D plan or a Medicare Advantage plan with drug coverage to avoid a penalty. It is possible they may find a standard plan with very low monthly premiums.

Enroll in Part D After a Loss of Creditable Coverage

When an individual loses “creditable” prescription coverage from another source, they are entitled to a special enrollment period that begins in the month the creditable prescription drug coverage is lost and continues for the following two months. If an individual enrolls in Medicare Part D during this special enrollment period, there is no premium penalty that would otherwise apply to a person who did not sign up for Medicare Part D when they first became eligible for it.

In addition to employer-sponsored prescription drug plans, creditable coverage could include the following types of coverage: union plan, TRICARE, Indian Health Service, coverage under the Department of Veterans Affairs or individual health coverage.

Action Items for Employers

Creditable Coverage Determination

Obtain written confirmation from the carrier/TPA on whether the plan is considered “creditable coverage” or “non-creditable coverage” for the upcoming calendar year. We anticipate HDHP plans will have a much more difficult time meeting creditable status and will likely not be creditable. Many carriers include a statement regarding creditable coverage status in the renewal package. (If the upcoming calendar year status is not yet known, assume the same status as the prior year. If incorrect, however, replacement notices must be distributed once creditable coverage status is known.)

Provide Notice to Plan Participants

Provide the appropriate notice (creditable or non-creditable) to plan participants. The sample notice requires some customization (e.g., employer group name, employer contact info, etc.) that must be completed before sending the notice to plan participants. The completed notice can be sent on its own or provided it with other health plan enrollment notices.

Provide Medicare Education to Plan Participants

Provide Medicare education and resources for plan participants to reference when making their enrollment decisions. Many employees are continuing to work beyond the traditional retirement age. This means a more complex question about what is the best path for coverage between staying on the employer plan and enrolling in Medicare.

EPIC’s Medicare partner, Medicare Choice Group, can provide a seamless transition for individuals who are covered by employer-sponsored coverage and considering the move to Medicare.

How Can I Get More Information About Medicare Part D Redesign?

Use the Contact Us button on this page to request one of our seasoned team members get in touch with you, and check out the additional resources below!

• EPIC Compliance Insights Page
• EPIC Compliance Webinars
• Medicare Choice Group
• Medicare’s Forms, Publications, & Mailings page

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EPIC offers this material for general information only. EPIC does not intend this material to be, nor may any person receiving this information construe or rely on this material as, tax or legal advice. The matters addressed in this document and any related discussions or correspondence should be reviewed and discussed with legal counsel prior to acting or relying on these materials.