With Medicare open enrollment underway, an important change is coming next year that everyone needs to know. Starting in 2025, Medicare Part D will undergo some of the most significant changes in its history, driven by the Inflation Reduction Act of 2022. These changes, including eliminating the “donut hole,” capping out-of-pocket costs, introducing new cost-smoothing options, and adjusting how premiums can increase, are designed to make prescription drug costs more affordable. Here’s what to expect:
1. Elimination of the “Donut Hole”
Historically, Medicare Part D enrollees encountered a coverage gap known as the “donut hole,” where the cost of covered prescriptions would increase once the amounts you and your plan paid for your drugs hit a certain limit (currently $5,030 in 2024). This structure required beneficiaries to pay up to 25% of their drug costs until reaching the “catastrophic” phase ($8,000 in 2024), after which Medicare covered most remaining expenses.
Starting in 2025, the donut hole will be fully eliminated. Instead, enrollees will pay no more than 25% of their drug costs until they reach a new annual out-of-pocket maximum. This adjustment will simplify coverage and reduce gaps, giving beneficiaries more consistent, predictable prescription costs throughout the year.
2. $2,000 Out-of-Pocket Maximum
One of the most significant changes for Medicare beneficiaries is the introduction of a $2,000 out-of-pocket cap on Part D drug expenses. This cap will potentially lower costs and provide peace of mind for those managing chronic conditions or taking higher tier drugs. Once an individual reaches the $2,000 threshold in any given year, they won’t need to pay any additional out-of-pocket expenses for covered drugs for the rest of the year.
This reform provides major financial relief, especially for those who rely heavily on prescription drugs. For enhanced Part D plans with additional benefits, certain out-of-pocket credits may apply, allowing some beneficiaries to reach this cap even sooner.
3. Medicare Prescription Payment Plan (Cost Smoothing)
To ease the burden of high one-time costs, the Inflation Reduction Act introduced an optional “smoothing” payment plan. This allows Part D enrollees to spread their out-of-pocket drug costs over the year, reducing the strain of large, upfront payments. With the smoothing option, someone who reaches their $2,000 cap early in the year can choose to pay smaller, more manageable amounts across 12 months.
This is particularly beneficial for seniors on fixed incomes, as it helps make monthly budgeting more predictable.
4. Premium Stabilization Measures
With the $2,000 out-of-pocket cap potentially impacting insurance company revenue, Medicare is enacting premium stabilization measures to limit hefty premium increases. CMS has announced that base Part D premiums will be limited to a maximum annual increase of 6% starting in 2025.
This cap on premium growth is intended to prevent beneficiaries from facing sharp premium spikes and is coupled with greater federal reinsurance support for certain high-cost medications. These efforts aim to keep Medicare affordable for the millions of beneficiaries relying on it, although individual plan premiums may vary slightly.
Why It’s Important to Review Your Options
Although the 2025 changes to Medicare Part D will generally reduce costs, it’s essential to evaluate your current plan to ensure it aligns with your needs. Depending on your specific prescriptions, budget, and out-of-pocket preferences, you might benefit from switching plans.
A licensed Medicare insurance agent can help you navigate these changes and ensure you’re making the most of Medicare’s new structure. Although we do not sell insurance products at Kotys Wealth Professionals, we know how important insurance is to our clients, especially retirees. If you’d like to discuss your retirement plan with an advisor who will take all of your financial needs into consideration, please give us a call at 219-465-6924.
Mark Rosinski, CFP®, CPA
Wealth Advisor
mark@kotyswealthpro.com
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