What You Should Know About the New Medicare Prescription Drug Spending Limit

In 2024, Medicare beneficiaries start to benefit from prescription drug coverage changes in recent laws, but the benefits won’t be as generous for some as they expected.

The phaseout has begun of unlimited out-of-pocket prescription drug spending for Part D policyholders. The changes apply to those who have Medicare Part D prescription drug insurance.

Those in Medicare Advantage plans also benefit but the details vary from plan to plan. Medicare beneficiaries who opted not to take out Part D insurance policies are on their own for most prescription drug spending.

At its inception, Part D had a coverage gap, also known as the doughnut hole. After the individual’s prescription drug spending exceeded a certain level, he or she had to pay for all prescription drug costs until a second spending level was exceeded and the individual entered the “catastrophic spending zone.” The spending levels changed each year with inflation.

In the catastrophic spending zone, the policyholder paid coinsurance of 5% of all subsequent prescription costs with no dollar limit.

The Inflation Reduction Act of 2022 enacted a two-step change for those in Part D plans who have high levels of prescription drug spending.

In 2024, the 5% coinsurance by the policyholder is eliminated. Once the policyholder’s out-of-pocket prescription exceeds about $3,300, the policyholder won’t pay any more for prescriptions this year. Insurance companies and drug manufacturers will pay most of the costs.

There’s a bigger change coming. Beginning in 2025, everyone on a Part D prescription drug plan will have an annual out-of-pocket spending cap of $2,000.

The changes and their effects might not reduce prescription drug spending as much as you expect and could increase spending, at least in the short term, for some people.

The new spending limits apply only to those who have Part D prescription drug policies. The changes also cover only outpatient prescription drugs. Drugs administered in doctors’ offices or hospitals generally are covered under Medicare Part B, not Part D. Over-the-counter medications aren’t covered.

Insurers and drug manufacturers pay a lot of the costs policyholders no longer pay after the spending caps are reached, so those companies are taking actions to reduce their costs.

You might find that premiums for your Part D insurance increased for 2024 or will increase in 2025.

In addition, the spending limits apply only to drugs covered by your Part D policy. An insurer decides which drugs its policies cover (and can change coverage during the year).

Some insurers are eliminating certain drugs from their lists of covered medications, known as a formulary. Expensive brand-name drugs are the most likely to be eliminated.

Insurers also might require a patient to try a cheaper drug before a more expensive drug will be covered.

Insurers also are requiring pre-approval for certain drugs. If the insurer concludes the medication isn’t medically necessary for that patient, it won’t be approved and won’t be covered.

Most people won’t be affected much by the changes. The bulk of prescriptions are for generic drugs or relatively low-cost brand-name drugs. The spending limits are estimated to affect about 1.5 million people.

The most expensive drugs generally are those you see advertised on television. Also, cancer drugs that aren’t administered in doctors’ offices or hospitals tend to be expensive pills.

Users of those medications are the most likely to benefit from the spending limits but also need to review their Part D policies during Medicare’s annual open enrollment to see if any significant coverage changes are being made for the following year.

The Kaiser Family Foundation estimated that the average Medicare beneficiary had 21 Part D drug plans to choose from for 2024, excluding Medicare Advantage plans. This is the fewest number of Part D options since the program began and is 25% lower than in 2020.

KFF estimated that in 2024 the average enrollment-weighted monthly premium for Part D plans was $48, about 21% higher than in 2023.

More changes along those lines for Part D policies are likely in 2025.