The Inflation Reduction Act (signed into law in August of 2022) contained several provisions that aimed to reduce prescription drug out of pocket spending for American retirees.

Perhaps the most notable change in the Act is that beginning in 2025, the out-of-pocket maximum on prescription drugs will drop significantly from $7,050 to $2,000 for anyone on Medicare Part D or a Medicare Advantage plan that includes prescription drug coverage.

Good news, right? Not so fast.

For the 25% of retirees who, experts say, will surpass the new catastrophic limit, the news may be positive.

But for the majority of retirees who don’t spend quite that much on prescriptions, there’s a trickle-down effect that (early data indicates) may have a negative impact – even before the law takes effect.

Medicare Part D is provided by private insurance companies, not Medicare. Though plans must follow guidelines set forth by the government, coverage is purchased from insurance carriers who are licensed to sell in each state (unlike Medicare Part B, which is federal). These providers will be negatively impacted by the lower catastrophic limit, as not only will the cap decrease dramatically, but the portion of excess costs that they are forced to cover is increasing from 20% to either 60% or 80%, depending on the drug.

With a greater share of costs being covered by the carriers, something has to give. And beginning in 2024, that appears to be the cost of Part D premiums.

For standalone prescription drug plans, Medicare recipients are seeing substantial premium increases beginning in 2024, a year ahead of when the cap falls to $2,000. HealthView’s analysis of the five most populated 65+ states show that, on average, monthly premiums for three leading providers will increase by around 50%. Low-end plans, high-end plans, and those in between are all facing significant increases.

High-End Part D Plans: 42% increase

Mid-Level Part D Plans: 46% increase

Low-End Part D Plans: 57% increase

Retirees are likely unaware of this upcoming surge in costs which for an average healthy 65-year-old couple will amount to over $50,000 in lifetime expenses, assuming this trend lasts for only two years before returning to normal inflation. An important question is whether premiums will return to normal annual increases.

An increase of several hundred dollars a year may not seem that much until it is put in the context of this years’ Social Security COLA increases. The added cost for high-end Part D premiums (among the plans detailed in this report) will on its own account for 54% of the cost-of-living increase that retirees will receive in federal benefits. Adding in Part B premiums increases, and that number jumps to 70%.

Fortunately, retirees have a range of choices when it comes to prescription drug coverage. In most states, several Part D plans are available to choose from, with monthly premiums at different price points and levels of prescription coverage. Online tools are even available where users can enter their current prescriptions and view which plans cover those drugs. But, regardless of the plan, 2024 premiums have risen significantly.

Plus, subscribers can change their coverage every year without penalty, so as medical needs evolve, they can subscribe to plans that meet their growing needs. This approach may help mitigate costs – especially early in retirement when higher-end plans might not be needed – but a detailed approach to plan selection is always warranted regardless of age.

Advisors can help clients understand the impact of these specific cost increases, and also the larger healthcare inflation challenge that has existed for decades. Ensuring funds will be available to address medical needs through retirement is a planning, investment and decumulation challenge, but with reliable healthcare cost projection software, clients can make decisions today that will provide peace of mind tomorrow.

HealthView always recommends re-running health cost projections at least annually to account for changes similar to the Part D surge. Advisors can use this new legislation and subsequent premium impact as an opportunity to revisit retirement healthcare cost planning with clients. Typical decumulation strategies like “The 4% Rule” does not apply to health expenses due to the unique impact of healthcare cost inflation, so personalized healthcare cost plans are necessary to help clients ensure their medical costs are covered throughout retirement.