Inflation Reduction Act’s impact on retiree benefits: What employers need to know

The Inflation Reduction Act of 2022 was signed into law last August, establishing a diverse package of health, tax, and climate change provisions – including several provisions to lower prescription drug costs for Medicare patients and reduce federal drug spending. Implemented in phases, the first was designed to accomplish three things: capping out-of-pocket insulin prices at $35 a month, requiring rebates from drug companies if drug prices rise faster than inflation, and reducing adult vaccine costs while expanding coverage for them.

The Inflation Reduction Act mandates that participating plan sponsors must attest that the actuarial value of prescription drug coverage for qualifying covered retirees, Part D eligible individuals who are not enrolled in a prescription drug plan or a Medicare Advantage prescription drug (MAPD) plan, is at least equal to the actuarial value of Part D standard prescription drug coverage.

Employers reassessing whether to sponsor retiree health plans

These changes ushered in by the new law have prompted some employers to reassess whether they should continue to offer retiree health benefits and, if so, in what format. Additionally, several policy proposals currently under consideration could profoundly impact retirees’ health costs and benefits. This is especially significant given the current state of other post-employment benefits (OPEB) liabilities, which are severely under- or un-funded.

OPEB encompasses items such as health insurance, life insurance, Medicare supplemental insurance, and other types of benefits not categorized as a pension. Currently, states owe $1.2 trillion in unfunded OPEB liabilities to retired public employees. That debt is poised to escalate absent any meaningful reform, such as targeted efforts by states to pre-fund or reduce these liabilities.

Though the act has resulted in several uncertainties – such as employers questioning coverage offerings and OPEB deficits that could widen – it also protects and benefits retirees in several ways. Thanks to Medicare’s ability to negotiate prices with drug manufacturers, beneficiaries’ prescription prices will decrease, and a yearly cap will limit out-of-pocket drug costs to $2,000 beginning in 2025. Plan members will also have the option to pay their prescription costs in monthly amounts spread over the year rather than all at once.

As is the case with any legislative overhaul, the act is complicated and includes both pros and cons. Some employee health plan sponsors question whether the government’s capabilities to negotiate with Medicare on lower drug prices could prompt manufacturers to increase medication costs for employer plans. However, no one can definitively say what long-term outcomes may result from these moves. For example, bringing more transparency and cost control to some Medicare-covered drugs may actually end up increasing pressure for similar actions in private markets, and for more drugs. That’s exactly what has happened with the cost of insulin. Once the price was capped for Medicare beneficiaries, three major drug manufacturers – Eli Lilly, Novo Nordisk and Sanofi – all followed suit. In domino-like fashion, the three biggest insulin makers announced cuts within weeks of each other, bowing to mounting political pressure to lower prices.

There will likely be hiccups and unforeseen hitches in the adjustment period as various phases of the new law are rolled out over the next few years. However, in an effort to ensure the positive components of the Inflation Reduction Act outweigh the negatives and actually benefit retirees, it’s important for those who have a role in the implementation of new policies and procedures to remain accountable and patient.

Retirees need support and service during rollout

It’s uncertain what shape the post-implementation marketplace may take after these phases are complete, but it is understandable that all involved parties have legitimate concerns. The potential exists for unintentional consequences due to stressors the new requirements put on employers who offer retiree health care plans. OPEB liabilities are precariously perched and could sway in an undesirable direction if extreme care is not taken by states to rectify the situation. And that’s why immediate action is essential.

Related: More employers moving retirees to Medicare Advantage: Here’s why

When it comes to preparation, there are actions plan sponsors can take to ensure their members experience a smooth transition and have all their questions answered, no matter what uncertainties the new law may bring. One simple yet effective action is the regular assessment of employee populations so that plan sponsors can anticipate their needs based on staffers’ career stages, ages and goals – especially with the range of current and soon-to-be retirees expanding exponentially. Similarly, building lifetime health care options for participants and providing access to personalized advice and benefit management solutions will make a world of difference when it comes to easing retirees’ health care transitions.

Plan sponsors and the benefit managers they rely on to help in this capacity can protect and guide retirees as they navigate and question the changes in store. By prioritizing seniors and working to ensure their continued access to quality care, sponsors and solutions providers will have already carried out a large part of the Inflation Reduction Act’s original intention – to support and protect retirees’ benefits.

The health care benefits sector is a challenge at the best of times. Factoring in new legislation, government program updates, and policy regulations inevitably leads to even more marketplace confusion. It’s difficult for members and plan sponsors to stay ahead of the curve, which is why it’s imperative to analyze new developments as they emerge, helping to guide plan beneficiaries through that intimidating maze. Facing these opportunities head on will continue to carve a path of innovation, leading to the creation of a better world for so many retirees.

Sheela Andrews is Chief Product Officer at RetireeFirst, the premier people-centric Retiree Benefit Management solutions provider.