When Congress created the Part D benefit for Medicare beneficiaries, it also required group health plan sponsors and certain other entities to notify Medicare-eligible participants and the Centers for Medicare & Medicaid Services (“CMS”) whether the plan’s prescription drug coverage is “creditable,” meaning it is expected to pay, on average, as much as the standard Medicare Part D prescription drug coverage. The required notice is commonly referred to as the “Notice of Creditable Coverage.” The Inflation Reduction Act of 2022 (“IRA”) made substantial enhancements to the Medicare Part D benefit, including, lowering beneficiaries’ out-of-pocket costs to $2,000 in 2025, increasing the actuarial value of the Part D benefit, and authorizing CMS to implement the Part D redesign for 2024–2026. CMS considered revising one of the common methods group health plans use to calculate creditability to account for the higher actuarial value of the new Part D benefit, but did not do so in the Final CY 2025 Part D Redesign Program Instructions. On January 10, 2025, however, CMS published the Draft CY 2026 Part D Redesign Program Instructions that include a proposed update to the creditable coverage simplified determination methodology for the 2026 calendar year.

Creditable Coverage

Medicare-eligible individuals who are not enrolled in creditable coverage for a continuous period of 63 days or more and fail to enroll in Part D when they are first eligible will incur a late enrollment penalty when they do enroll in Part D. Plan sponsors of group health plans that do not receive the retiree drug subsidy (“RDS”) have been able to choose between two methods to evaluate whether the plan’s prescription drug coverage is creditable: (1) an actuarial equivalence test; or (2) a simplified determination methodology.

The Current Version of the Simplified Determination Methodology

The current version of the creditable coverage simplified determination methodology is from 2009. Under that methodology, a plan is considered to provide creditable coverage if it:

  1. Provides coverage for brand and generic prescriptions;
  2. Provides reasonable access to retail providers;
  3. Is designed to pay on average at least 60% of participants’ prescription drug expenses; and
  4. Satisfies at least one of the following:
    1. The prescription drug coverage has no annual benefit maximum or a maximum annual benefit payable by the plan of at least $25,000;
    2. The prescription drug coverage has an actuarial expectation that the amount payable by the plan will be at least $2,000 annually per Medicare-eligible individual; or
    3. For entities that have integrated health coverage, the integrated health plan has no more than a $250 deductible per year, has no annual benefit maximum or a maximum annual benefit payable by the plan of at least $25,000 and has no less than a $1,000,000 lifetime combined benefit maximum.

An “integrated plan” means:

any plan of benefits that is offered to a Medicare-eligible individual where the prescription drug benefit is combined with other coverage offered by the entity (i.e., medical, dental, vision, etc.) and the plan has all of the following plan provisions:

1) a combined plan year deductible for all benefits under the plan;
2) a combined annual benefit maximum for all benefits under the plan; and
3) a combined lifetime benefit maximum for all benefits under the plan.

A prescription drug plan that meets the above parameters is considered an integrated plan for the purpose of using the simplified method and would have to meet steps 1, 2, 3 and 4(c) [annual deductible no greater than $250 ] of the simplified method. If it does not meet all of the criteria, then it is not considered to be an integrated plan and would have to meet steps 1, 2, 3 and either 4(a) or 4(b).

The subsequent enactment of the Affordable Care Act in 2010 generally eliminated group health plans with annual and lifetime benefit maximums. Likewise, other changes to the group health plan market have resulted in a significant reduction in the prevalence of group health plans with separate health and drug coverage. Between these post-ACA changes and the IRA, CMS determined that the 2009-era creditable coverage simplified determination methodology was due for an update.

The Proposed Update to the Simplified Determination Methodology

CMS proposes to revise the simplified methodology to consider prescription drug coverage to equal or exceed the actuarial value of the defined standard Part D benefit—and, therefore, to be creditable—if it meets all of the following:

  • Provides reasonable coverage for brand name and generic prescription drugs and biological products;[1]
  • Provides reasonable access to retail pharmacies; and
  • Is designed to pay on average at least 72% of participants’ prescription drug expenses.

CMS estimated the actuarial value of the defined standard Part D benefit in 2026 using 2023 Part D claims experience adjusted to the projected 2026 benefit levels to determine the actuarial value standard of 72%, an increase from the current 60% standard. CMS also added coverage of biological products to the coverage requirements and removed references to the annual and lifetime benefit maximums and annual deductible amounts. Notably, CMS does not propose specific criteria to determine “reasonable coverage” or “reasonable access.”

CMS specifically requests comments on the following:

  • The prevalence with which non-RDS group health plans use the existing simplified determination methodology in lieu of actuarial equivalence testing;
  • The prevalence with which non-RDS plans currently meet creditable coverage requirements (through either the simplified determination methodology or actuarial equivalence testing) and the anticipated impact on such plans if the proposal is finalized for calendar year 2026;
  • Specific impacts of the changes to the Part D benefit and the corresponding revisions to the simplified determination methodology described above, including data reflecting such impacts on the populations of Part D-eligible individuals who have maintained non-RDS creditable coverage (e.g., how many of those individuals or what percentage of that population would continue to have access to creditable coverage if the policies in this section are finalized for calendar year 2026);
  • Anticipated changes, if any, to group health plan offerings to maintain plans that offer creditable coverage (RDS or non-RDS); and
  • Other feedback or data relevant to this section of these draft program instructions.

Comments on the Draft CY 2026 Part D Redesign Program Instructions are due to CMS no later than February 10, 2025 and must be submitted to PartDRedesignPI@cms.hhs.gov with the subject line “Draft CY 2026 Part D Redesign Program Instructions.”

GROOM INSIGHT: If the update is finalized as proposed, plan sponsors that use the simplified determination method to determine whether the plan’s coverage is “creditable” will need to carefully review the actuarial value of their prescription drug coverage to ensure the coverage satisfies the new actuarial value standard of 72%. They also will need to review their plans for compliance with the new requirement to provide reasonable coverage of biological products. 

[1] “Biological products” refers to a diverse category of products that are produced using biotechnology in a living system, such as a microorganism, plant cell, or animal. Monoclonal antibodies, vaccines, and biosimilars are examples of biological products. 

 

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