Employers that provide prescription drug coverage to individuals who are eligible for Medicare Part D must inform these individuals and the Centers for Medicare and Medicaid Services (CMS) whether their prescription drug coverage is “creditable.”
Prescription drug coverage is considered creditable if its actuarial value equals or exceeds the actuarial value of standard Medicare Part D prescription drug coverage; coverage that does not meet this standard is called “non-creditable.”
There are a few permissible ways for employers to determine whether their prescription drug coverage is creditable. Employers with insured plans should ask their health insurance carriers if they have made this determination for the insured product. If an employer must make the determination itself, it may be able to use a simplified method, depending on the plan’s design and the applicable CMS standards for the relevant calendar year. When a plan’s design is not eligible for the simplified method, an actuarial determination must be made.
Employers should also keep in mind that changes to the Medicare Part D benefit under the Inflation Reduction Act of 2022 may affect the creditable coverage status of their prescription drug coverage.
Creditable Coverage
Employers with group health plans that provide prescription drug coverage to individuals who are eligible for Medicare Part D must comply with certain disclosure requirements. Employers must inform these individuals and CMS whether their prescription drug coverage is “creditable,” meaning at least as good as Medicare Part D coverage. These disclosures must be made on an annual basis and at certain other designated times.
There is no penalty or fee for the employer for offering prescription drug coverage that is non-creditable. Non-creditable prescription drug coverage can still be a valuable benefit for employees. However, individuals need to know whether their prescription drug coverage is creditable or non-creditable. If the coverage is non-creditable and Medicare-eligible individuals fail to enroll in Part D during their initial enrollment period, they can be subject to a higher Part D premium if they enroll in Part D at a later date.
Creditable Coverage Determination
A group health plan’s prescription drug coverage is considered creditable if its actuarial value equals or exceeds the actuarial value of standard Medicare Part D prescription drug coverage, as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS guidelines. In general, this actuarial determination measures whether the expected amount of paid claims under the group health plan’s prescription drug coverage is at least as much as the expected amount of paid claims under the Medicare Part D prescription drug benefit.
For plans that have multiple benefit options (for example, PPO, HDHP and HMO), the creditable coverage test must be applied separately for each benefit option. For coverage beginning on or after Jan. 1, 2027, account-based plans such as health reimbursement arrangements (HRAs), health flexible spending accounts, and health savings accounts are exempt from creditable coverage disclosure requirements.
Under existing CMS guidance, there are a few different ways for an employer to determine whether its prescription drug coverage is creditable:
- As a first step, employers with insured prescription drug plans should ask their carriers whether they have made a determination about whether the plan’s coverage is creditable.
- For self-insured plans, or where the carrier for an insured plan has not made a determination about whether the plan is creditable, employers may use a simplified determination—as long as the coverage meets certain design requirements. If it doesn’t, the employer must use an actuarial determination method.
Simplified Determination (Revised)
In light of the significant changes to Medicare Part D made by the Inflation Reduction Act of 2022, CMS has adopted a revised simplified determination methodology for establishing whether prescription drug coverage is creditable. Under this methodology, a group health plan must be designed to pay, on average, at least 72% of a participant’s drug expenses (increased from 60% under the prior methodology) to be considered creditable coverage.
- For calendar year 2026 only, group health plan sponsors that are not applying for the retiree drug subsidy may use either the prior simplified determination methodology or the revised simplified determination methodology to determine whether their prescription drug coverage is creditable.
- For calendar year 2027 and subsequent years, CMS will no longer permit use of the prior simplified determination methodology. For 2027, the revised methodology requires plans to pay, on average, at least 73% of a participant’s drug expenses to be considered creditable, with CMS establishing updated percentages for later years through sub-regulatory guidance.
Employers whose prescription drug coverage meets certain design requirements may rely on the revised simplified determination that the coverage is creditable. Employers that apply for the retiree drug subsidy cannot use the revised simplified determination method.
A plan’s prescription drug coverage will be deemed creditable under the revised simplified determination method if it satisfies all of the following criteria:
- It provides reasonable coverage for brand name and generic prescription drugs and biological products;
- It provides reasonable access to retail pharmacies; and
- It is designed to pay, on average, at least 72 percent (for 2026; increased to 73 percent for 2027) of participants’ prescription drug expenses.
How the Revised Simplified Methodology Differs from the Prior Simplified Methodology
CMS updated the simplified methodology to better reflect how modern group health plans are designed. While the revised approach retains key elements of the prior methodology, such as requirements for reasonable coverage of brand name and generic drugs and access to retail pharmacies, it now also includes biological products.
CMS also removed several outdated requirements. Annual and lifetime benefit limit standards were eliminated because such limits are largely prohibited under the Affordable Care Act. In addition, CMS removed requirements related to an annual deductible, acknowledging that most employer plans integrate medical and prescription drug coverage. As a result, plans with higher deductibles (including high‑deductible health plans) may, depending on their overall design, be able to satisfy the criteria for creditable coverage under the revised methodology.
Actuarial Determination
If a plan sponsor cannot use the revised simplified determination method to evaluate the creditable coverage status of the prescription drug coverage it offers, then it must make an annual actuarial determination. This determination must assess whether the expected amount of paid claims under the prescription drug coverage is at least as much as the expected amount of paid claims under the standard Medicare prescription drug benefit.
The actuarial determination does not require an attestation by a qualified actuary, unless the plan sponsor is an employer electing the retiree drug subsidy. Nonetheless, an employer may need to hire an actuary to make the determination.
Links & Resources
CMS’ Creditable Coverage web page includes information and resources about the Medicare Part D disclosure requirements, including:
- Model creditable coverage notices for individuals
- The online disclosure form for CMS
This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2018-2020, 2024-2026 Zywave, Inc. All rights reserved.
