What is Part D redesign?

Some policymakers have proposed redesigning Part D — Medicare’s voluntary prescription drug benefit — to protect beneficiaries from high out-of-pocket costs, realign financial incentives for the organizations that sponsor Part D plans, and reduce overall program spending. Several changes have been proposed to the standard Part D benefit, including:

  • Creating a maximum out-of-pocket cap for beneficiaries when they reach the catastrophic spending phase of the program, something that currently doesn’t exist.
  • Ensuring that Part D plans are incentivized to promote drugs that offer the most value at the lowest cost — for example, by reducing government subsidies for reinsurance and shifting responsibility for large claims to plans themselves.
  • Requiring drug manufacturers to provide cost discounts.

In 2020, three bills were introduced in Congress that featured changes to the Part D benefit: H.R. 3, S. 2543, and H.R. 19 (see table). The two House bills were reintroduced in 2021.

Why do some policymakers argue for Part D redesign?

Since its start in 2006, Part D has undergone little change, even as Medicare spending on the prescription drug benefit has grown substantially, from $44.3 billion in 2006 to $102.3 billion in 2019. Most of this growth has been in the catastrophic phase of coverage — which begins when beneficiaries have spent $6,550 out of pocket. Medicare spending on Part D catastrophic coverage more than doubled between 2013 and 2017 to more than $59 billion, driven largely by the high prices of specialty drugs. Meanwhile, beneficiaries contend with a cost-sharing requirement in the catastrophic phase — 5 percent coinsurance — that can sometimes severely limit their access to these expensive medications.

Concerns about the sustainability of spending at this level spurred recommendations in 2016 for realigning Part D plans’ financial incentives. Currently, plans place high-cost drugs on preferred formulary tiers so that beneficiaries enter the catastrophic coverage phase as early in the year as possible — knowing that Medicare will subsidize claims at 80 percent for those beneficiaries.

By shifting financial responsibility for these claims from Medicare to the plans themselves, some analysts believe that Part D plan sponsors — the organizations that contract with Medicare to offer plans — would be likely to negotiate more aggressively with drug manufacturers for better prices and formulary placement. Others argue that redesign isn’t necessary, pointing to the popularity of the Part D program and the fact that premiums have been stable for years. Opponents of the proposed changes also say they could lead to significant increases in the size of discounts manufacturers owe for certain classes of drugs.

How would Part D redesign differ from current policy?

The current design of the program has three phases of coverage:

Initial coverage: Beneficiaries pay 25 percent of drug costs and the Part D plan pays 75 percent for brand-name and generic drugs.

Coverage gap: Beneficiaries enter the gap when they hit $4,130 in spending. They continue to pay 25 percent of costs, while drug manufacturers pay 70 percent of costs for brand-name and biosimilar drugs and the Part D plan pays the remaining 5 percent for brand-name and biosimilar drugs, or 75 percent for generics.

Catastrophic coverage: Once beneficiaries have paid $6,550 out of pocket, they enter the catastrophic phase, where they are on the hook for 5 percent of drug costs. The Part D plan pays 15 percent and Medicare pays 80 percent. Under current policy, Medicare beneficiaries have no hard cap on out-of-pocket drug costs.

The table below lays out the similarities and differences between the three congressional proposals for redesigning the Part D program. These bills, introduced during the last Congress (116th), are the starting point for the policy debate in 2021.

How would proposals for Part D redesign affect Medicare beneficiaries?

Redesign will help in two ways: lower out-of-pocket costs and lower premiums. The most significant savings to beneficiaries will be realized in their cost sharing, which will have a hard cap. In two proposals it will be reduced during the initial and coverage gap phases. In its score, or cost estimation, of an earlier draft of the Senate bill, the Congressional Budget Office (CBO) found a modest reduction in beneficiary premiums (CBO did not rescore beneficiary savings under the bill’s most recent version). CBO did not analyze the impact on premiums in its score for H.R. 3, and it has not scored H.R. 19.

How would Part D redesign affect the federal budget?

CBO estimated that redesign as proposed under S. 2543 would save the federal government $3.39 billion over 10 years. The agency’s estimate for the H.R. 3 version of redesign would increase spending by $9 billion; however, the bill’s other prescription drug pricing reforms for Medicare, including price negotiation and inflation-based rebates, would generate savings of $491 billion over 10 years. The difference in the Part D redesign cost estimates for the Senate and House proposals is the out-of-pocket spending cap for beneficiaries, which is significantly lower in H.R. 3.