Historical Context

 The introduction of Medicare Part D under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) fundamentally changed the prescription drug coverage landscape for Medicare beneficiaries. For employer-sponsored group health plans, particularly self-funded plans, these changes introduced complex requirements for determining whether their prescription drug coverage qualifies as “creditable coverage” for Medicare Part D purposes. Properly establishing creditable coverage is a critical compliance function, impacting Medicare-eligible individuals’ exposure to potentially lifelong late enrollment penalties and the employer’s regulatory obligations.

The Centers for Medicare & Medicaid Services (CMS) governs creditable prescription drug coverage determinations under Section 1860D-13(b) of the Social Security Act and implementing regulations at 42 CFR § 423.56. Creditable coverage is defined as prescription drug coverage whose actuarial value equals or exceeds that of Medicare’s defined standard Part D coverage, not accounting for certain manufacturer discounts, as determined by accepted actuarial principles and CMS guidelines.

Entities providing prescription drug coverage to Medicare-eligible individuals must annually determine and disclose whether the coverage is creditable or non-creditable, both to affected plan participants and to CMS. They must provide a written notice to all Medicare-eligible participants before October 15 each year.

This regulatory structure ensures that Medicare-eligible individuals can make informed coverage decisions and avoid Late Enrollment Penalty (LEP) assessed when non-creditable coverage is maintained for 63 days or more.  The penalty is calculated as 1% of the Medicare Part D base beneficiary premium for each full uncovered month, added to the plan premium for life (unless the individual qualifies for Extra Help). For 2026, the base beneficiary premium is $38.99, making each month of lapse equal to a $0.39 monthly penalty.

The passage of the Inflation Reduction Act of 2022 (IRA) has resulted in major changes to the structure, cost-sharing, and actuarial value of Medicare Part D benefits. These include: (a) reduction of the Maximum Out-of-Pocket (OOP) threshold to $2,100 for 2026, (b) elimination of the Coverage Gap phase, and (c) strengthening the Simplified Determination Method was from the historic safe harbor “60% threshold” to 72% for plan years starting in 2026.

The MMA and IRA led to publications by the American Academy of Actuaries defining that actuarial equivalence must be demonstrated under generally accepted actuarial principles, as outlined in Actuarial Standards of Practice (ASOP) Nos. 5, 8, 23, 25, 31, and 41.  The regulations also require that actuarial equivalence must be certified by a member of the American Academy of Actuaries, performed and documented using robust data and reasonable assumptions reflecting the demographics and risk profile of covered Medicare-eligible members, and required when a plan’s design does not meet the simplified criteria, or for sponsors applying for the RDS.