Canada (EN)
The Inflation Reduction Act (IRA) is transforming Medicare Part D, and with it, the financial dynamics of retiree healthcare. For employers sponsoring group retiree plans, these changes present both challenges and strategic opportunities.
What is Medicare Part D?
Medicare Part D, when sponsored by employers for retiree healthcare benefits, serves as a critical mechanism to help former employees access affordable prescription medications. This federal program enables retirees to obtain necessary prescriptions, supporting their overall health and well-being. By providing this coverage, employers offer a valuable safety net that makes essential medications more accessible and assists retirees in managing their healthcare expenses.
The future of Medicare Part D: Richer benefits, rising costs
Beginning in 2025, Medicare Part D will feature a significantly enhanced benefit structure. Retirees will see:
- A $2,000 annual out-of-pocket cap, adjusted for healthcare inflation
- Elimination of the 5% coinsurance in the catastrophic phase
- $35/month insulin caps and free adult vaccines
- Expanded low-income subsidies and price negotiations for high-cost drugs
These improvements raise the actuarial value of the standard Part D benefit to about 83%, up from 63% in 2006. While this is a win for retirees, Alight has seen numerous cases where this change has increased costs for plan sponsors, driving leveraged premium increases for group Medicare Advantage Part D (MAPD) plans, with some premium increases exceeding 300% since 2024.
Short-term relief for medication costs but with a long-term risk
The Inflation Reduction Act includes a temporary cap on Part D premium growth — 6% annually through 2029. This provision boosts federal subsidies to all Medicare Part D plans (both group and individual) in the short term but is scheduled to expire for 2030, triggering a projected $250 – $400 per member per year (PMPY) revenue loss for plans. If not currently reflected in group plan accounting valuations, this could result in accounting losses as early as year-end. Employers need to proactively assess how these changes will affect their financial obligations and long-term retiree healthcare strategy.
The case for the individual Medicare marketplace
As group plans face rising costs and volatility, many employers are exploring the individual Medicare marketplace as a more efficient alternative. Individual plans offer:
- Access to $0 premium Medicare Advantage Part D Plan HMOs and PPOs
- Medicare Part B premium credits in select plans
- Cost-effective Medigap medical plans and stand-alone Medicare Part D coverages|
- Personalized choice and significant savings for retirees, typically over $2,000 per member annually
Alight’s analyses (covered in depth in this webinar) show that transitioning to individual plans can yield significant balance-sheet savings, depending on group size and structure. Employers can reduce liability, eliminate risk and improve retiree satisfaction.
What should employers consider for 2026 when offering retiree healthcare benefits?
To stay ahead of the curve, employers should consider:
- Conducting financial feasibility studies comparing group vs. individual strategies
- Evaluating HRA purchasing power in the evolving marketplace
- Engaging actuarial experts to assess the impact of IRA provisions, especially the expiration of the premium growth cap
The IRA is driving a reset in retiree healthcare strategy. Employers who act quickly can protect their financial position while delivering better outcomes for retirees. To hear more from our experts on this topic, watch our recent webinar.
Available Now On Demand
Webinar: Why move from Group to Individual Medicare plans?
What plan sponsors need to know.
