The Retiree Drug Subsidy (RDS) is a government-funded program that has historically been the go-to choice for plan sponsors who offer group health care coverage to retired employees. Established under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), its simplicity, limited member impact, and convenience made it a reliable option that financially supported plan sponsors in providing prescription drug benefits to their retiree populations.

However, the health care landscape has changed. Shifts in subsidies, changes within the pharmaceutical industry — such as the growth of biosimilars, gene therapies, and generic drugs — and adjustments to tax structures have diminished RDS' financial advantages. Furthermore, the impacts of the Inflation Reduction Act of 2022 (IRA) add further incentive for plan sponsors to explore RDS alternatives.

The Inflation Reduction Act, signed into law in August 2022, established a diverse package of health, tax, and climate change measures  — including several provisions to reduce Medicare patients' prescription drug costs and curb federal drug spending. Since RDS plans are commercial drug plans rather than Medicare plans, none of the price-control measures enacted by the IRA apply to them. Consequently, retirees on RDS plans are not benefiting from the reductions in out-of-pocket costs.