Medicare Program; Contract Year 2027 and Certain Contract Year 2026 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, and Medicare Cost Plan Program

We are implementing the changes made to the Part D benefit design and the payment obligations of enrollees, Part D plan sponsors, manufacturers, and CMS by section 11201 of the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169).

We are codifying the statutory changes to the phases of the Part D benefit made by the IRA related to the deductible, the initial coverage limit, the coverage gap, the annual out-of-pocket threshold, and alternative prescription drug coverage options. In alignment with these changes to the Part D benefit, we are also codifying technical and conforming changes to our specialty tier regulations. We are codifying additional structural and operational statutory changes to the Part D benefit design, including making changes to the types of payments that count as True Out-Of-Pocket costs (TrOOP), establishing a policy for how an enrollee's costs for drugs not subject to the Part D defined standard deductible count towards becoming eligible for manufacturer discounts under the Medicare Part D Manufacturer Discount Program (Manufacturer Discount Program), making updates to the methodology for reinsurance payments from us to Part D sponsors, and implementing the Selected Drug Subsidy, among others. 2. Coverage Gap Discount Program

We are codifying the sunsetting of the Coverage Gap Discount Program and termination of all Coverage Gap Discount Program agreements as of January 1, 2025, in alignment with subsection (h) of section 1860D-14A of the Social Security Act (the Act), as added by section 11201 of the IRA. Specifically, we are revising Sec. 423.2300 by adding paragraph (b) to establish applicability dates for the Coverage Gap Discount Program, revising Sec. 423.2345 by adding paragraph (f) to terminate all Coverage Gap Discount Program agreements, and making conforming changes for clarity. 3. Manufacturer Discount Program

We are codifying the Manufacturer Discount Program, established in section 1860D-14C of the Act, as added by section 11201 of the IRA. Under the Manufacturer Discount Program, which replaces the Coverage Gap Discount Program and began on January 1, 2025, manufacturers that enter into a Manufacturer Discount Program agreement are required to provide discounts on applicable drugs in both the initial and catastrophic coverage phases of the Part D benefit. Specifically, we are adding new subpart AA to part 423 to codify the Manufacturer Discount Program requirements and are making several conforming changes throughout part 423 to reflect the new program. 4. Updates to Star Ratings

We have continued to identify enhancements to the Star Ratings program over time to increase the health and wellbeing of enrollees. In this final rule, we are finalizing changes to simplify and refocus the areas included in the Star Ratings, including changes to the measure set with the exception of the Diabetes Care--Eye Exam measure which will remain in the Star Ratings. We are also finalizing that we will not move forward with the implementation of the Health Equity Index (also called Excellent Health Outcomes for All) reward at Sec. Sec. 422.166(f)(3) and 423.186(f)(3) and will continue to include the historical reward factor in the Star Ratings methodology at Sec. Sec. 422.166(f)(1) and 423.186(f)(1). We appreciate commenters' suggestions on ways to further simplify and modify the Star Ratings program to further drive improved quality of care and reduce regulatory burden.

The measure removals will apply (that is, data will be collected and performance measured) for the 2027 measurement period and the 2029 Star Ratings, except for the Call Center--Foreign Language Interpreter and TTY Availability (Part C and D) measures and the Statin Therapy for Patients with Cardiovascular Disease (Part C) measure, which will apply beginning with the 2028 Star Ratings. Not proceeding with the HEI reward and maintaining the historical reward factor, finalizing additional information about the data available to Medicare Advantage (MA) organizations and Part D sponsors during the plan preview periods before each Star Ratings release at Sec. Sec. 422.166(h)(2) and 423.186(h)(2), and clarifying the process for measure

removals at Sec. Sec. 422.164(e)(2), 422.164(e)(3), 423.184(e)(2) and 423.184(e)(2), will be applicable upon the effective date of this final rule and apply beginning with the 2027 Star Ratings. We are also finalizing the technical clarification proposed in the Medicare and Medicaid Programs; Contract Year 2026 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, Medicare Cost Plan Program, and Programs of All-Inclusive Care for the Elderly proposed rule, which appeared in the Federal Register on December 10, 2024 (89 FR 99340) (hereinafter referred to as the “Contract Year 2026 proposed rule”) to provide details about how the enrollment-weighted measure score is calculated when a consumed or surviving contract is missing data for a measure; this provision will be applicable upon the effective date of this final rule and apply beginning with the 2027 Star Ratings. 5. Provisions Related to Supplemental Benefits Being Finalized From the Contract Year 2026 Proposed Rule

In the Contract Year 2026 proposed rule (89 FR 99340), we proposed several policies that were not finalized at that time, some of which are being finalized in this CY 2027 final rule. Specifically, we proposed to strengthen the administration of Special Supplemental Benefits for the Chronically Ill (SSBCI) by increasing transparency and clarifying eligibility requirements, including a requirement to make plan-developed SSBCI eligibility criteria publicly available; we are finalizing this provision as proposed. We also proposed to codify and clarify requirements for the administration of supplemental benefits through debit cards to promote transparency, consistency, and program integrity, and are finalizing this proposal with modifications, including not finalizing the proposed prohibition on marketing the dollar value of supplemental benefits. We are finalizing these proposals to support beneficiary access, informed choice, and appropriate administration of MA benefits.

Section 11201 of the Inflation Reduction Act of 2022 (IRA) made significant changes to the Part D benefit design that affect the structure of the Part D benefit and the payment obligations of enrollees, Part D plan sponsors, manufacturers, and CMS. Several of the changes made by section 11201 of the IRA took effect before the Contract Year 2027 proposed rule and other changes went into effect in 2026, as described later.

Section 11201(f) of the IRA directed the Secretary to implement section 11201 of the IRA for 2024, 2025, and 2026 by program instruction or other forms of program guidance. On February 1, 2023, we released guidance outlining changes to the Part D benefit that were specific to Calendar Year (CY) 2024 in the CY 2024 Advance Notice and Rate Announcement.\1\ In that guidance, we eliminated cost sharing for covered Part D drugs in the catastrophic phase of coverage, consistent with section 1860D-2(b)(4)(A)(i) of the Social Security Act (the Act), as amended by section 11201 of the IRA.\2\

\1\ https://www.cms.gov/files/document/2024-advance-notice-pdf.pdf.

\2\ https://www.cms.gov/files/document/2024-advance-notice-pdf.pdf.

On April 1, 2024, we released the Final CY 2025 Part D Redesign Program Instructions.\3\ In these program instructions, we implemented changes to the structure of the Part D benefit for CY 2025 made by section 11201 of the IRA. Section 11201 of the IRA added section 1860D- 2(b)(4)(B)(i)(VII) of the Act to reduce the annual out-of-pocket (OOP) threshold to $2,000 for CY 2025 (to be annually increased by the annual percentage increase, as described in section 1860D-2(b)(6) of the Act). The IRA also amended section 1860D-2(b) of the Act to eliminate the coverage gap phase and added subsection (h) to section 1860D-14A of the Act to sunset the Coverage Gap Discount Program. The IRA added section 1860D-14C of the Act to establish the Manufacturer Discount Program.

\3\ https://www.cms.gov/files/document/final-cy-2025-part-d-redesign-program-instructions.pdf.

On April 7, 2025, we issued the Final CY 2026 Part D Redesign Program Instructions which described changes to the Part D benefit for CY 2026.\4\ In these program instructions, we implemented further changes made by the IRA to the Part D benefit that go into effect in CY 2026, including certain changes to the Part D benefit that relate to the Medicare Drug Price Negotiation Program that also was established by the IRA. Beginning January 1, 2026, the maximum fair prices (MFPs) negotiated under the Medicare Drug Price Negotiation Program for the first cohort of selected drugs went into effect.\5\ This program, as established in Part E of title XI of the Act, permits the Secretary to negotiate MFPs for certain high expenditure, single source drugs and biological products with participating manufacturers. The IRA made further changes to payment obligations in Part D related to selected drugs (as defined in section 1192(c) of the Act) during a price applicability period (as defined in section 1191(b)(2) of the Act).

\4\ https://www.cms.gov/files/document/final-cy-2026-part-d-redesign-program-instruction.pdf.

\5\ For more information on the Medicare Drug Price Negotiation Program, please see: https://www.cms.gov/priorities/medicare-prescription-drug-affordability/overview/medicare-drug-price-negotiation-program.

As described in the Final CY 2026 Part D Redesign Program Instructions, the defined standard Part D benefit for CY 2026 consists of the following phases and liabilities, with the CY 2026 changes reflected in bolded and italicized font:

Annual deductible. The enrollee pays 100 percent of their gross covered prescription drug costs (GCPDC) until the deductible is met.

Initial coverage. The enrollee pays 25 percent coinsurance for covered Part D drugs. The Part D plan sponsor typically pays 65 percent of the costs of applicable drugs and selected drugs \6\ and 75 percent of the costs of all other covered Part D drugs. The manufacturer, through the Manufacturer Discount Program, typically covers 10 percent of the costs of applicable drugs. In the initial coverage phase, we pay a 10 percent subsidy for selected drugs during a price applicability period. This phase ends when the enrollee has

reached the annual OOP threshold of $2,100 for CY 2026.

\6\ An applicable drug under the Manufacturer Discount Program is a Part D drug approved under a new drug application (NDA) under section 505(c) of the Federal Food, Drug, and Cosmetic Act (FFDCA) or, in the case of a biological product, licensed under section 351 of the Public Health Service Act (PHSA), but does not include a selected drug (as defined in section 1192(c) of the Act) dispensed during a price applicability period (as defined in section 1191(b)(2) of the Act) with respect to that drug. Selected drug has the meaning given such term in section 1192(c) of the Act and any applicable regulations and guidance.

Catastrophic. The enrollee pays no cost sharing for Part D drugs. Part D plan sponsors typically pay 60 percent of the costs of all covered Part D drugs. The manufacturer pays a discount, typically equal to 20 percent, for applicable drugs. Medicare pays a reinsurance subsidy equal to 20 percent of the costs of applicable drugs, and equivalent to 40 percent of the costs of all other covered Part D drugs that are not applicable drugs. In the catastrophic phase, Medicare provides 40 percent reinsurance for selected drugs during a price applicability period.

As part of the overall restructuring of the Part D benefit, the IRA also made changes to the treatment of Advisory Committee on Immunization Practices (ACIP)-recommended adult vaccines and covered insulin products under Part D. Section 11401 of the IRA added section 1860D-2(b)(8) of the Act to require that, effective for plan years beginning on or after January 1, 2023, the Medicare Part D deductible shall not apply to, and there is no coinsurance or cost sharing for, an adult vaccine recommended by ACIP that is a covered Part D drug. Further, section 11406 of the IRA added section 1860D-2(b)(9) of the Act to require that, effective for plan years beginning on or after January 1, 2023, the Medicare Part D deductible shall not apply to covered insulin products, and the Part D cost-sharing amount for a one- month supply of each covered insulin product must not exceed the applicable cost-sharing amount for all enrollees. For CYs 2023, 2024, and 2025, this amount was $35.

Sections 11401(e) and 11406(d) of the IRA directed the Secretary to implement the vaccine and insulin cost sharing changes for CYs 2023, 2024, and 2025 by program instruction or other forms of program guidance. In accordance with the law, we issued several memoranda via the Health Plan Management System (HPMS) that implemented sections 11401 and 11406 of the Act for CYs 2023, 2024, and 2025.\7\ These provisions of the IRA were then codified in the “Contract Year 2026 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, Medicare Cost Plan Program, and Programs of All-Inclusive Care for the Elderly)” final rule, which appeared in the Federal Register on April 15, 2025 (90 FR 15792) (CY 2026 final rule).\8\

\7\ See the following HPMS memoranda: Contract Year 2023 Program Guidance Related to Inflation Reduction Act Changes to Part D Coverage of Vaccines and Insulin (and Revision); Final Contract Year (CY) 2024 Part D Bidding Instructions; and Final CY 2025 Part D Redesign Program Instructions.

\8\ https://www.federalregister.gov/documents/2025/04/15/2025-06008/medicare-and-medicaid-programs-contract-year-2026-policy-and-technical-changes-to-the-medicare.

In the CY 2026 final rule, consistent with section 1860D-2(b)(9)(B) of the Act, we finalized the requirement that, for CY 2026 and each subsequent year, the applicable cost-sharing amount for a covered insulin product is the lesser of: (1) $35, (2) an amount equal to 25 percent of the MFP established for the covered insulin product in accordance with Part E of title XI of the Act; or (3) an amount equal to 25 percent of the negotiated price, as defined in Sec. 423.100, of the covered insulin product under the Part D Prescription Drug Plan (PDP) or Medicare Advantage Prescription Drug (MA-PD) plan. 2. Redesigned Part D Benefit (Sec. Sec. 423.100 and 423.104)

We proposed to codify at Sec. Sec. 423.100 and 423.104 changes to the Part D benefit made by the IRA related to the deductible, the initial coverage limit, the coverage gap, the annual out-of-pocket (OOP) threshold, and alternative prescription drug coverage options. a. Deductible (Sec. 423.104(d)(1))

The IRA Part D benefit redesign does not change how the annual deductible for standard prescription drug coverage is calculated. However, as discussed previously, sections 11401 and 11406 of the IRA provide that, effective for plan years beginning on or after January 1, 2023, the Medicare Part D deductible shall not apply to ACIP- recommended adult vaccines or covered insulin products under Part D. We codified these changes in the CY 2026 final rule.\9\ Specifically, the vaccine changes codified at Sec. 423.120(g)(1) and the insulin changes codified at Sec. 423.120(h)(1) state, respectively, that the Part D deductible does not apply with respect to ACIP-recommended adult vaccines and covered insulin products.

\9\ https://www.federalregister.gov/documents/2025/04/15/2025-06008/medicare-and-medicaid-programs-contract-year-2026-policy-and-technical-changes-to-the-medicare.

In alignment with these changes, we proposed to revise the regulatory text at Sec. 423.104(d)(1) by adding language to state there, too, that the deductible does not apply to ACIP-recommended adult vaccines or covered insulin products, as defined in Sec. 423.100. b. Initial Coverage Limit (Sec. Sec. 423.104(d)(2) and 423.104(d)(3))

Section 11201 of the IRA amended section 1860D-2(b)(3)(A) of the Act to specify that the initial coverage limit only applies for years preceding CY 2025. Prior to this statutory change, once an enrollee met their deductible, they would enter the initial coverage phase, which would extend until the enrollee's gross covered prescription drug costs, as defined in Sec. 423.100, reached the initial coverage limit. At that point the enrollee would enter the coverage gap phase. The enrollee would remain in the coverage gap phase until the enrollee's incurred costs, as defined in Sec. 423.100, met the OOP threshold, at which point the enrollee would enter the catastrophic phase.

By eliminating the initial coverage limit beginning in CY 2025, the IRA eliminated the coverage gap phase, resulting in a three-phase benefit for Part D prescription drug coverage which includes the deductible phase, the initial coverage phase, and the catastrophic phase. As such, as of CY 2025, there is no longer an initial coverage limit and the initial coverage phase extends to the annual OOP threshold, at which point the catastrophic phase begins. Once an enrollee enters the catastrophic phase, they pay no cost sharing for Part D drugs.

As a result of these changes, we proposed to revise Sec. 423.104(d)(2) and (d)(3) to reflect the elimination of the initial coverage limit beginning in CY 2025. Specifically, we proposed to revise the section heading at Sec. 423.104(d)(2) by removing “the initial coverage limit” and replacing it with “prescription drug plans” to accurately reflect the new benefit structure in which there is no initial coverage limit beginning in CY 2025 and to ensure consistency with the statutory changes made by the IRA. This heading language change is intended to accurately encompass the regulations included in the paragraphs that are subordinate to Sec. 423.104(d)(2), which include regulations related to tiered copayments and the specialty tier.

We also proposed to revise Sec. 423.104(d)(2)(i), which currently specifies that coinsurance for actual costs for covered Part D drugs above the annual deductible applies up to the initial coverage limit. To align our regulations with current statute and the redesigned Part D benefit structure where beneficiaries move directly from the initial coverage phase to the catastrophic phase once they reach the OOP threshold, we proposed to revise this language to specify that for each year preceding 2025, this coinsurance applies up to the initial coverage limit and, for 2025 and each subsequent year, this coinsurance applies up to the

annual OOP threshold specified in Sec. 423.104(d)(5)(iii).

We also proposed to revise Sec. 423.104(d)(3), which specifies how the initial coverage limit is determined. We first proposed to remove the references in Sec. 423.104(d)(3) to paragraphs (d)(4) and (d)(5) of this section because those paragraphs refer to regulations related to cost sharing in the coverage gap and the out-of-pocket threshold, which do not affect how the initial coverage limit is determined. We proposed to revise Sec. 423.104(d)(3)(ii) to specify that the methodology for increasing the initial coverage limit was in effect from 2007 to 2024. We also proposed to add new Sec. 423.104(d)(3)(iii) to state that, for 2025 and each subsequent year, there is no initial coverage limit.

Finally, we proposed two conforming changes at Sec. 423.128(e), which refers to the explanation of benefits that a Part D sponsor must furnish directly to enrollees. First, we proposed to revise Sec. 423.128(e)(3)(ii) which states that Part D sponsors are required to include information on the cumulative, year-to-date total amount of benefits provided in relation to the initial coverage limit for the current year in the explanation of benefits provided to enrollees. In alignment with section 1860D-4(a)(4)(B)(i) of the Act, as amended by section 11201 of the IRA, we proposed to revise Sec. 423.128(e)(3)(ii) by adding language to specify that the requirement to include information about the initial coverage limit was only in effect for years preceding 2025. Second, we proposed to revise Sec. 423.128(e)(7) which states that the explanation of benefits must be provided no later than the end of the month following any month when prescription drug benefits are provided under this part, including the covered Part D spending between the initial coverage limit described in Sec. 423.104(d)(3) and the out-of-pocket threshold described in Sec. 423.104(d)(5)(iii). In alignment with the elimination of the initial coverage limit and coverage gap phase beginning in CY 2025, we proposed to add language to specify that the covered Part D spending between the initial coverage limit and the out-of-pocket threshold requirement is only applicable for years preceding 2025.

Rather than striking the regulations that apply through CY 2024, we proposed to maintain these regulations, with the described revisions, for historical purposes and for any reconciliation activities related to benefit years prior to 2025. c. Coverage Gap (Sec. Sec. 423.100 and 423.104(d)(4))

Section 11201 of the IRA eliminated the coverage gap phase of the Part D benefit by amending section 1860D-2(b) of the Act to eliminate the initial coverage limit beginning in CY 2025.

To align with these changes to the Part D benefit, we proposed to revise Sec. 423.104(d)(4) by adding language to reflect that the coverage gap phase was eliminated. The proposed revision would state that the methodology for determining cost sharing in the coverage gap that is described in this section applies only for years preceding 2025. This proposed change aligns with our proposed revision to the definition of “coverage gap” in Sec. 423.100 to specify that the coverage gap means the period in prescription drug coverage that occurs between the initial coverage limit and the OOP threshold during the years 2006 through 2024.

We proposed to revise Sec. 423.104(d)(4)(iii), which describes the generic gap coinsurance percentage, by adding an end date to paragraph (C) of this section to state that the 25 percent generic gap coinsurance percentage only applied for years 2020 through 2024. This aligns with the IRA's elimination of the coverage gap phase in CY 2025. We also proposed to revise Sec. 423.104(d)(4)(iv), which describes the applicable gap coinsurance percentage, by revising paragraph (E) to specify that the applicable gap coinsurance percentage for 2019 was 75 (not 80 percent) and to add an end date indicating that the 75 percent applies for years 2019 through 2024, and removing paragraph (F), which incorrectly stated that the applicable gap coinsurance percentage for 2020 and subsequent years was 75 percent. These changes align with changes made by the Bipartisan Budget Act (BBA) of 2018 and the IRA. Section 53116 of the BBA amended section 1860D-2(b)(2)(D)(ii) of the Act to specify that the applicable gap percentage for 2019 is 75 percent, not 80 percent, thus accelerating by 1 year a reduction in enrollee cost sharing in the coverage gap phase. We note that this revision to paragraph (E) is, in part, a technical correction to align our regulations with the statutory change made by the BBA, which was implemented in 2019. This revision does not change how the applicable gap percentage was calculated in the past, as these amounts were properly determined consistent with the statutory requirement. We additionally proposed to add a new paragraph at Sec. 423.104(d)(4)(v) to specify that, for 2025 and each subsequent year, there is no coverage gap.

Finally, we proposed conforming changes to Sec. Sec. 422.2267(e)(5)(ii)(B)(1) and 423.2267(e)(5)(ii)(A)(2) which state that information on prescription drug expenses, including information on the deductible, the initial coverage phase, coverage gap, and catastrophic coverage, is required to be included in the Summary of Benefits provided to prospective enrollees. Due to the elimination of the coverage gap in CY 2025, we proposed to revise Sec. Sec. 422.2267(e)(5)(ii)(B)(1) and 423.2267(e)(5)(ii)(A)(2) by adding language to specify that the requirement to include information about the coverage gap was only in effect for years preceding 2025.

Even though the coverage gap phase was eliminated in CY 2025, we proposed to maintain these regulations, with the described revisions, for historical purposes and for any reconciliation activities related to benefit years prior to 2025. d. Annual Out-of-Pocket Threshold (Sec. 423.104(d)(5))

Section 11201 of the IRA amended section 1860D-2(b)(4)(B)(i) of the Act to limit the annual OOP threshold for CY 2025 and each subsequent year. As amended, section 1860D-2(b)(4)(B)(i)(VII) of the Act specifies that the annual OOP threshold is $2,000 for CY 2025. For subsequent years, section 1860D-2(b)(4)(B)(i)(VIII) of the Act specifies that the annual OOP threshold will be increased by the annual percentage increase described in section 1860D-2(b)(6). Accordingly, as specified in the CY 2026 Rate Announcement, the annual OOP threshold for CY 2026 was determined to be $2,100.\10\ This amount was calculated, consistent with section 1860D-2(b)(4)(B) of the Act, by multiplying the CY 2025 OOP threshold amount of $2,000 by the 2026 annual percentage increase and rounding to the nearest multiple of $50. Once an enrollee's incurred costs, as defined at Sec. 423.100, exceed the annual OOP threshold, an enrollee will enter the catastrophic phase where there is no cost sharing for Part D drugs.

\10\ https://www.cms.gov/files/document/2026-announcement.pdf.

As a result of these changes, we proposed to revise Sec. 423.104(d)(5) to state the specific years for which certain aspects of this section apply and describe the new methodology for determining the annual OOP threshold, consistent with section 1860D-2(b)(4)(B)(i) of the Act.

We proposed to revise Sec. 423.104(d)(5)(i) to specify that, once an enrollee's incurred costs, as defined at Sec. 423.100, exceed the annual OOP threshold described in paragraph (d)(5)(iii) of this section, they would have $0 cost sharing for 2024 and each subsequent year and, for each year preceding 2024, the cost-sharing structure currently outlined at paragraphs (d)(5)(i)(A) and (d)(5)(i)(B) of this section would apply. We also proposed to revise Sec. 423.104(d)(5)(i)(A)(2) to specify that the methodology described in this section for determining an enrollee's copayment amount applies through 2023. These changes reflect the elimination of enrollee cost sharing for Part D drugs in the catastrophic phase beginning in CY 2024, consistent with section 1860D-2(b)(4)(A)(i) of the Act, as amended by section 11201 of the IRA.

We proposed to revise Sec. 423.104(d)(5)(iii)(F) to add an end date to state that this paragraph describes how the annual OOP threshold was determined for years 2021 through 2024. We also proposed to add new Sec. 423.104(d)(5)(iii)(G) to establish that for 2025, the annual OOP threshold was set at $2,000, consistent with section 1860D- 2(b)(4)(B)(i)(VII) of the Act. Additionally, we proposed to add new Sec. 423.104(d)(5)(iii)(H) to specify the methodology for determining the annual OOP threshold for 2026 and each subsequent year. Consistent with section 1860D-2(b)(4)(B)(i)(VIII) of the Act, we proposed that the annual OOP threshold for 2026 and each subsequent year would be the amount specified in this paragraph for the previous year, increased by the annual percentage increase specified in paragraph (d)(5)(iv) of this section, and rounded to the nearest $50. e. Alternative Prescription Drug Coverage (Sec. 423.104(e)(5)) and Enhanced Alternative Coverage (Sec. 423.104(f)(1))

Part D sponsors must provide their enrollees with qualified prescription drug coverage which, as defined at Sec. 423.100, means coverage that consists of either: (1) standard prescription drug coverage or (2) alternative prescription drug coverage. Standard prescription drug coverage, as defined at Sec. 423.100, means coverage of Part D drugs that meets the requirements of Sec. 423.104(d) and includes two distinct types of coverage: (1) defined standard coverage and (2) actuarially equivalent (AE) standard coverage.

Prior to the implementation of the IRA, defined standard coverage consisted of coverage of covered Part D drugs subject to an annual deductible, 25 percent coinsurance for costs above the annual deductible but at or below an initial coverage limit, coinsurance that was equal to the costs of non-applicable and applicable drugs during the coverage gap multiplied by the gap coinsurance percentages, and catastrophic coverage with nominal cost sharing for the remainder of the coverage year once an enrollee's incurred costs, as defined in Sec. 423.100, exceeded the annual OOP threshold. After the implementation of the IRA, defined standard coverage, as discussed in more detail in the introduction of this section of this final rule, now consists of an annual deductible, an initial coverage phase where the enrollee pays 25 percent coinsurance for covered Part D drugs until they reach the annual OOP threshold ($2,100 for CY 2026), and a catastrophic phase where the enrollee pays no cost sharing for Part D drugs. AE standard coverage, as defined at Sec. 423.100, provides for cost sharing as described in Sec. 423.104(d)(2)(i)(B) or cost sharing as described in Sec. 423.104(d)(5)(ii), or both. In other words, under an AE plan, Part D sponsors modify certain benefit parameters, such as cost-sharing structures, while maintaining the same actuarial value. The changes the IRA made to the defined standard benefit are discussed in detail in the preceding sections of this final rule.

The IRA also, through section 11201 which amended section 1860D- 2(c) of the Act, made changes to the requirements for alternative prescription drug coverage. Alternative prescription drug coverage, as defined in Sec. 423.100, means coverage of Part D drugs, other than standard prescription drug coverage, that meets the requirements of Sec. 423.104(e). Alternative prescription drug coverage includes two types of coverage: (1) basic alternative coverage and (2) enhanced alternative coverage. Both basic alternative and enhanced alternative coverage must provide access to negotiated prices, coverage of Part D drugs, and meet the requirements described in Sec. 423.104(e).

Basic alternative coverage is alternative coverage that is actuarially equivalent to defined standard coverage, as determined through the processes and methods established under Sec. 423.265(d)(2). Prior to the implementation of the IRA, Part D sponsors offering basic alternative coverage could, within the parameters for alternative prescription drug coverage as described in Sec. 423.104(e), combine certain features to maintain an actuarial value of coverage equal to defined standard prescription drug coverage, such as: (1) reducing the deductible, (2) making changes in cost sharing in an actuarially equivalent manner to the 25 percent cost sharing above the deductible and below the initial coverage limit under defined standard coverage and in an actuarially equivalent manner to the gap coverage coinsurance during the coverage gap, or (3) modifying the initial coverage limit. With the changes made to the Part D benefit by the IRA, including the elimination of the initial coverage limit and the coverage gap, certain features that could be offered by basic alternative plans are no longer available. Thus, we proposed to revise our regulations at Sec. 423.104(e) to align with these changes, as discussed in more detail later.

Enhanced alternative coverage is alternative coverage that includes both required basic prescription drug coverage and supplemental benefits, as described at Sec. 423.104(f)(1)(ii). Prior to the implementation of the Part D benefit redesign provisions in the IRA, supplemental benefits included: the coverage of drugs that are specifically excluded from the definition of a Part D drug in Sec. 423.100 under paragraph (2)(ii) and/or any one or more of the following changes that increase the actuarial value of benefits above the actuarial value of defined standard prescription drug coverage:

Reduction (or elimination) of the defined standard deductible.

Reduction of cost sharing in the initial coverage phase.

Increase of the initial coverage limit threshold.

Additional cost-sharing reduction in the coverage gap phase.

Reduction (or elimination) of cost sharing in the catastrophic phase.

As noted in the Final CY 2025 Part D Redesign Program Instructions, section 1860D-2(a)(2)(A)(i) of the Act does not include a reduction in the annual OOP threshold in its list of permissible supplemental benefits, and we have never interpreted such provision to allow for a reduction in the annual OOP threshold. Because the IRA established a defined annual OOP threshold of $2,000 for CY 2025, and an amount equal to the previous year's OOP threshold increased by the annual percentage increase for 2026 and subsequent years, and did not modify the list of permissible supplemental benefits in section 1860D-2(a)(2)(A)(i) of the Act to include a reduction in the annual OOP threshold, Part D sponsors may not lower the annual OOP threshold below the specified amount. Additionally, the IRA eliminated cost sharing in the catastrophic phase beginning in CY 2024 and eliminated the coverage gap phase and replaced the

Coverage Gap Discount Program with the Manufacturer Discount Program beginning in CY 2025. Thus, only the following supplemental benefits remain as possible enhancement features: coverage of drugs that are specifically excluded from the definition of a Part D drug, and/or

Reduction (or elimination) of the defined standard deductible

Reduction of cost sharing in the initial coverage phase.

Given these changes to alternative prescription drug coverage, we proposed to revise Sec. 423.104(e)(5) to align our requirements for alternative prescription drug coverage with the changes made by the IRA. We proposed to revise Sec. 423.104(f)(1) to align our requirements for enhanced alternative drug coverage with the changes made by the IRA.

We first proposed to revise Sec. 423.104(e)(5) to establish a distinction between the requirements for alternative prescription drug coverage that are applicable for years preceding 2025 and requirements for 2025 and each subsequent year. Specifically, we proposed to add language that, for years preceding 2025, alternative prescription drug coverage is required to provide coverage that is designed to provide payment for costs incurred for covered Part D drugs that is equal to the initial coverage limit. We also proposed to add language stating that, for 2025 and each subsequent year, this coverage must be equal to the annual OOP threshold, consistent with section 1860D-2(c)(1)(C) of the Act. Similarly, we proposed to revise Sec. 423.104(e)(5)(i) to specify that when calculating the required payment amount for costs incurred for covered Part D drugs, the amount the initial coverage limit exceeds the deductible should be used for years preceding 2025, and the amount the annual OOP threshold exceeds the deductible should be used for 2025 and each subsequent year. We proposed maintaining Sec. 423.104(e)(5)(ii) without change; therefore, the amount calculated in Sec. 423.104(e)(5)(i) would be multiplied by 100 percent minus the coinsurance percentage specified in paragraph (d)(2)(i) of this section to determine the required payment amount.

Finally, we proposed to revise Sec. 423.104(f)(1) to specify that an increase in the initial coverage limit could be considered a supplemental benefit only for years preceding 2025. This change reflects the elimination of the initial coverage limit beginning in CY 2025. All other requirements for enhanced alternative coverage that are described in Sec. 423.104(f) remain applicable under the redesigned Part D benefit. Therefore, we did not propose any additional changes to this section.

Comment: Many comments were supportive of our proposals to codify the changes to the phases of the Part D benefit made by the IRA. We did not receive any comments opposed to our codification of these requirements.

Response: We thank the commenters for their support of our proposals.

Comment: A few comments expressed support for our proposed revision to the regulatory text at Sec. 423.104(d)(1) to specify that the deductible does not apply to ACIP-recommended adult vaccines or covered insulin products. A commenter encouraged CMS to provide simple and clear guidance on immunization coverage to plans, their beneficiaries, as well as the range of providers who serve them.

Response: We thank the commenters for their support of this proposal. We agree that clear guidance is important to support implementation of these requirements. We will continue to provide guidance to Part D plan sponsors, providers, and beneficiaries regarding coverage of ACIP-recommended adult vaccines as appropriate. We refer the commenter to Medicare.gov, the Medicare Learning Network Fact Sheet on Medicare Part D Vaccines, and Chapters 5 and 6 of the Medicare Prescription Drug Benefit Manual for some of our existing guidance on this topic.\11\

\11\ MLN Fact Sheet on Part D Vaccines: https://www.cms.gov/files/document/mln908764-medicare-part-d-vaccines.pdf; Chapter 5: https://www.cms.gov/files/document/chapter-5-benefits-and-beneficiary-protection-v92011.pdf; Chapter 6: https://www.cms.gov/medicare/prescription-drug-coverage/prescriptiondrugcovcontra/downloads/part-d-benefits-manual-chapter-6.pdf.

Comment: Many commenters who were supportive of our proposals to codify the changes to the phases of the Part D benefit also expressed concerns about potential unintended consequences of the redesigned Part D benefit. Commenters stated that the reallocation of financial risk under the redesigned Part D benefit creates incentives for plans to control costs through increased utilization management, increased usage of step therapy protocols, narrower formularies, restricted pharmacy networks, and reduced coverage for certain brand or specialty drugs.

Several commenters emphasized that, without sufficient safeguards, these behaviors could undermine the intended affordability and access benefits of the redesigned Part D benefit. A few commenters highlighted the potential negative impacts these behaviors may have on high-cost and medically complex populations, including beneficiaries with end- stage renal disease (ESRD), hospitalized patients transitioning from inpatient to outpatient care, and low-income beneficiaries. A commenter noted that these behaviors may also increase administrative burden for hospital clinicians, thus delaying treatment initiation and complicating discharge planning and care coordination.

Due to these concerns, several commenters urged CMS to strengthen its oversight of Part D plans, particularly with respect to formulary design, utilization management practices, and appeals processes. A commenter also urged CMS to require minimum formulary protections for certain drugs and prohibit Part D plans from removing drugs mid-year in response to increased plan liability.

A few commenters requested that CMS monitor the impacts on access to drugs and evaluate whether costs are being shifted to beneficiaries. A couple of commenters emphasized the importance of monitoring both standalone prescription drug plans and Medicare Advantage prescription drug plans. A few commenters also requested that CMS increase transparency around formulary and evidentiary review findings so stakeholders can better understand how access is evolving under the redesigned Part D benefit.

Response: We thank the commenters for their support of our proposals to codify the changes made by the IRA to the phases of the Part D benefit. We appreciate the commenters sharing their concerns regarding potential unintended consequences of the redesigned Part D benefit, including the possibility that changes in plan liability could influence formulary design, utilization management practices, and beneficiary access to prescription drugs. We agree that robust oversight and monitoring are essential to the successful implementation of the redesigned Part D benefit, particularly for medically complex beneficiaries and those transitioning across care settings. We will continue to monitor the implementation of the redesigned Part D benefit as part of our ongoing program oversight.

We emphasize that Part D plan sponsors remain subject to existing statutory and regulatory requirements regarding formulary design, utilization management, pharmacy access, coverage determinations, and appeals. We will continue to oversee plan compliance with these requirements and monitor plan behavior through our comprehensive clinical formulary review process, which includes

evaluation of tier placement and utilization management restrictions and criteria.

We note that there are several longstanding statutory and regulatory safeguards in place to protect beneficiary access to critical medications. Section 1860D-11(e)(2)(D)(i) of the Act and Sec. 423.272(b)(2)(i) require that CMS not approve a bid from a Part D sponsor if the design of its plan and its benefits, including its formulary structure and utilization management program, are “likely to substantially discourage enrollment by certain Part D eligible individuals.” In addition, Sec. 423.120(b) establishes requirements for Part D formularies, including the requirement at Sec. 423.120(b)(2)(i) that formularies include at least two Part D drugs within each therapeutic category and class. Section 1860D-4(b)(3)(G) of the Act and Sec. 423.120(b)(2)(v) further require Part D sponsors to include all covered Part D drugs in the classes and categories of clinical concern identified by the Secretary, with limited exceptions as described in Sec. 423.120(b)(2)(vi) and Chapter 6, Section 30.2.5 of the Medicare Prescription Drug Benefit Manual. Finally, Sec. 423.120(e) limits the circumstances under which a Part D sponsor may make negative formulary changes during a contract year.

We appreciate the commenters' recommendations regarding transparency and will consider appropriate opportunities to share additional information regarding the formulary review and oversight process in the future.

Comment: Several commenters requested that we develop clear and simple beneficiary communications about the changes to the Part D benefit. The commenters stated that beneficiaries and their caregivers must understand how costs accrue over the plan year, what payments count towards the annual OOP threshold, how catastrophic coverage works, and what costs to expect across benefit phases. Another commenter recommended that CMS encourage plans to use mobile applications and digital tools for beneficiary education on the new benefit structure.

Response: We thank the commenters for their suggestions. We agree that beneficiary education and clear communication are critical to the successful implementation of the redesigned Part D benefit. We will continue to support the development of educational materials to help beneficiaries understand the redesigned Part D benefit. We encourage the commenters to refer beneficiaries to the Medicare & You Handbook, which provides general information on Medicare benefits, costs, rights, and protections; the Evidence of Coverage document provided by their Part D plan, which provides details on what their plan covers, how much they will pay, how to file a complaint, and more; and Medicare Plan Finder on Medicare.gov which allows users to compare Medicare health and drug plans in their area and compare costs.

Comment: A commenter requested that CMS establish a formal mechanism for patients and patient advocacy organizations to communicate directly with CMS, including any barriers to getting prescribed medications when enrollees need them. Another commenter urged CMS to commit to ongoing provider and hospital engagement as part of a long-term monitoring and evaluation strategy for the Part D redesign. The commenter noted that hospitals and frontline clinicians are uniquely positioned to identify access barriers and unintended consequences as they emerge and that their input should be systematically incorporated into CMS oversight frameworks.

Response: We appreciate the commenters' recommendations. There are multiple avenues through which beneficiaries, providers, and other stakeholders may raise concerns regarding access to prescription drugs, including through the grievance, coverage determination, or appeals processes, consistent with the requirements outlined in 42 CFR part 423, subpart M. Beneficiaries may also submit inquiries, complaints, grievances, appeals, and requests for information to the Medicare Beneficiary Ombudsman and 1-800-MEDICARE. Additionally, we developed the Complaint Tracking Module (CTM) in the Health Plan Management System (HPMS) to track complaints received by CMS from beneficiaries, providers, and their representatives regarding specific plans. Complaints are recorded in the CTM and assigned to the appropriate plan and, as required under the contract provisions established at Sec. 422.504(a)(15) and Sec. 423.505(b)(22), plans are required to address and resolve the complaints received by CMS against them in the CTM. Plans must also adhere to the timelines to resolve complaints in compliance with Sec. 422.125 and Sec. 423.129. We will consider additional opportunities to engage with stakeholders as part of our ongoing oversight of the Part D program as appropriate.

Comment: A commenter who supported CMS's proposal to codify the Part D benefit changes also expressed concerns about the unintended consequences of the IRA's changes. The commenter stated that plans have experienced higher-than-anticipated costs due to changes in plan liability, higher utilization among beneficiaries reaching the out-of- pocket cap, and continued growth in the prescription drug pipeline. The commenter noted that if current utilization trends continue, there may be additional pressure on bids in CY 2027.

The commenter expressed prior concerns related to premium increases resulting from the Part D benefit redesign. They noted that they appreciated CMS's voluntary Part D Premium Stabilization Demonstration but indicated that additional policy changes are needed to assist Part D plan sponsors in preserving the affordability historically associated with Part D plans. Specifically, the commenter recommended modifications to the RxHCC model, including incorporating Direct and Indirect Remuneration (DIR) into the model and using drug utilization to better account for variation in drug costs among beneficiaries.

The commenter also urged CMS to provide additional flexibility to Part D plans to manage costs by streamlining regulations and reducing administrative burdens.

Response: CMS acknowledges the commenter's concerns about balancing changes in plan liability under the Part D redesign with a need to preserve affordability for Part D enrollees. We will continue to monitor impacts of the redesigned Part D benefit and seek to identify opportunities to improve program efficiency and reduce unnecessary administrative burden. We appreciate the commenter's recommendations on streamlining regulations and reducing administrative burden and will consider this feedback in future rulemaking as appropriate. However, we note that changes to the RxHCC model are outside the scope of this rulemaking.

After consideration of the public comments we received, we are finalizing these proposals as proposed. 3. Specialty Tier (Sec. 423.104)

Section 1860D-2(b)(2) of the Act established the parameters of the Part D program's defined standard benefit and allows for alternative benefit designs that are actuarially equivalent to the defined standard benefit, including the use of tiered formularies. Although not required, Part D sponsors are permitted to include a specialty tier in their plan design. A specialty tier, as defined in Sec. 423.104(d)(2)(iv), is a formulary cost-

sharing tier dedicated to high-cost Part D drugs with ingredient costs for a 30-day equivalent supply (as described in paragraph (d)(2)(iv)(A)(2) of this section) that are greater than the specialty- tier cost threshold specified in paragraph (d)(2)(iv)(A) of this section. Consistent with Sec. 423.104(d)(2)(iv)(D), Part D sponsors may maintain up to two specialty tiers.

Use of one or two specialty tiers provides the opportunity for Part D sponsors to manage high-cost drugs apart from tiers that have less expensive drugs. Our policies for the specialty tier aim to strike the appropriate balance between plan flexibility and Part D enrollee access to drugs, consistent with our statutory authority.

As described further later, the implementation of the IRA has made it necessary for us to make changes to our current specialty-tier regulations related to adjusting the specialty-tier cost threshold and determining the maximum allowable cost sharing to align with the redesigned Part D benefit. In the Contract Year 2027 proposed rule, we proposed to codify technical and conforming changes to our specialty- tier regulations at Sec. 423.104. a. Technical Correction to the Specialty-Tier Cost Threshold Determination (Sec. 423.104(d)(2)(iv)(A)(4))

We proposed a technical correction in Sec. 423.104(d)(2)(iv)(A)(4), which describes how the specialty-tier cost threshold is determined for the plan year. The current regulation text incorrectly refers to paragraph (d)(2)(iii) for the cost threshold determination, but it should refer to the top one percent methodology for determining the specialty-tier cost threshold at paragraph (d)(2)(iv)(A)(3). We therefore proposed to correct this inadvertent technical error. b. Limit on Specialty-Tier Cost Threshold Adjustment (Sec. 423.104(d)(2)(iv)(B))

We annually calculate a minimum dollar-per-month threshold amount to determine which drugs are eligible, based on relative high cost, for inclusion on the specialty tier. This cost threshold is adjusted to maintain approximately 1 percent of Part D drugs as specialty-tier eligible. In the final rule titled “Medicare and Medicaid Programs; Contract Year 2022 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, Medicaid Program, Medicare Cost Plan Program, and Programs of All-Inclusive Care for the Elderly” (CY 2022 final rule), we codified at Sec. 423.104(d)(2)(iv)(B) our methodology to increase the specialty-tier cost threshold as follows:

(1) CMS increases the specialty-tier cost threshold for a plan year only if the amount determined in paragraph (d)(2)(iv)(A)(3) of this section for a plan year is at least 10 percent above the specialty tier cost threshold for the prior plan year.

(2) If an increase is made in accordance with this paragraph (d)(2)(iv)(B), CMS rounds the amount determined in paragraph (d)(2)(iv)(A)(3) of this section to the nearest $10, and the resulting dollar amount is the specialty-tier cost threshold for the plan year.

Our current regulation only contemplates increasing the specialty- tier cost threshold and does not consider decreasing the threshold when market conditions might warrant such a change. Given the many changes made to the Part D benefit by the IRA, we believe that it may be necessary in future years to decrease the specialty-tier cost threshold due to reductions in Part D drug costs. In general, shifting market dynamics, such as increased utilization of lower cost generic drugs, could potentially lead to reductions in Part D drug costs. The Medicare Drug Price Negotiation Program, as established in Part E of title XI of the Act, which permits the Secretary to negotiate MFPs for certain high expenditure, single source drugs and biological products with participating manufacturers, could also lead to a future need for a downward adjustment. The MFPs for the first 10 selected drugs went into effect on January 1, 2026, with new MFPs taking effect and new drugs being selected for negotiation each subsequent year. Therefore, it is possible that as a result of general market dynamics and more high expenditure drugs being selected for negotiation and their negotiated MFPs taking effect, the methodology for determining the specialty-tier cost threshold, as described in Sec. 423.104(d)(2)(iv)(A), may yield an amount that is at least 10 percent below the previous plan year's specialty-tier cost threshold.

Thus, we proposed to revise Sec. 423.104(d)(2)(iv)(B)(1) and (2) by adding language to allow CMS to reduce the cost threshold under certain circumstances. Specifically, in paragraph (B)(1) of this section, we proposed to replace “increase” with “modifies” and add “or below” following “10 percent above.” In paragraph (B)(2), we proposed to replace “increase” with “modification.” c. Specialty Tier Maximum Allowable Cost Sharing (Sec. 423.104(d)(2)(iv)(D))

Each year, we set the maximum allowable cost sharing for the specialty tier based on the plan's deductible, in accordance with Sec. 423.104(d)(2)(iv)(D). The intent of this policy is to ensure a plan's value is reflective of the defined standard benefit. The regulation limits a plan with the full defined standard deductible to a 25 percent coinsurance on its specialty tier but allows a plan that fully eliminates the deductible up to a 33 percent coinsurance on its specialty tier. Based on the pre-IRA benefit design, we determined that the 33 percent maximum coinsurance was mathematically equivalent to the effective coinsurance for a beneficiary who would have paid the defined standard deductible for any given year plus the 25 percent coinsurance in the initial coverage phase until their drug costs reached the initial coverage limit. In other words, prior to CY 2025, beneficiary OOP costs divided by total drug costs equaled a 33 percent effective coinsurance for the beneficiary regardless of the plan deductible, represented by the following equation: [GRAPHIC] [TIFF OMITTED] TR06AP26.028

To operationalize the concept of maximum allowable cost sharing for the specialty tier based on the plan's deductible, CMS, in the CY 2022 final rule, codified the following calculation at Sec. 423.104(d)(2)(iv)(D)(3) to determine the deductible range that corresponded to each specialty-tier coinsurance percentage point from 25 percent through 33 percent. Thus, under the pre-IRA Part D benefit design, we used this equation for the calculation:

[GRAPHIC] [TIFF OMITTED] TR06AP26.029

Consistent with the first equation, the numerator here represents beneficiary OOP costs while the denominator represents total drug costs, resulting in an effective coinsurance of 33 percent, to align with the defined standard benefit. This equation was then solved for the deductible, and each specialty-tier coinsurance percentage point was inserted, to calculate the maximum allowable deductible value corresponding to that coinsurance percentage.

However, in CY 2025, under statutory changes made by the IRA, the ICL was eliminated and, as a result, the methodology codified at Sec. 423.104(d)(2)(iv)(D)(3) was no longer valid. Therefore, in the Final CY 2025 Part D Redesign Program Instructions,\12\ we established a new methodology to determine the specialty-tier coinsurance/deductible ranges to represent the effective coinsurance for a beneficiary under the redesigned Part D benefit. In the Final CY 2026 Part D Redesign Program Instructions,\13\ we continued to use the methodology outlined in the Final CY 2025 Part D Redesign Program Instructions.

\12\ https://www.cms.gov/files/document/final-cy-2025-part-d-redesign-program-instructions.pdf.

\13\ https://www.cms.gov/files/document/final-cy-2026-part-d-redesign-program-instruction.pdf.

In accordance with the Final CY 2025 Part D Redesign Program Instructions, we proposed to codify this methodology for determining the specialty-tier coinsurance/deductible ranges to represent the effective coinsurance for a beneficiary under the Part D benefit. To ensure that a plan's value reflects the defined standard benefit, we proposed to codify a methodology similar to the methodology used to calculate the cost-sharing requirements in Sec. 423.104(d)(2)(iv)(D). For Part D plans with the full deductible provided under the defined standard benefit, the coinsurance is 25 percent, consistent with the defined standard benefit. Using the CY 2025 defined standard benefit parameters of a $590 deductible, a $2,000 annual OOP threshold, and a 25 percent coinsurance after the deductible is met and before the annual OOP threshold is reached, the total drug costs can be calculated at $6,230. This results in an effective coinsurance of 32.1 percent. To ensure that coinsurance for the specialty tier remains in alignment with cost sharing under the defined standard benefit, we are retaining the 33 percent maximum coinsurance currently effective at Sec. 423.104(d)(2)(iv)(D)(2).

We proposed to use, as in previous years, an effective coinsurance equation to calculate the deductible that corresponds to each specialty-tier coinsurance percentage point from 25 percent through 33 percent. Consistent with our decision to retain the 33 percent maximum coinsurance, we proposed to use 33 percent to calculate the deductible that corresponds to each specialty-tier coinsurance percentage point. This equation would continue to represent beneficiary OOP costs in the numerator divided by total drug costs in the denominator. The following equation illustrates how we would calculate the effective coinsurance for the Part D benefit for purposes of calculating specialty-tier cost- sharing percentages: [GRAPHIC] [TIFF OMITTED] TR06AP26.030

As with the previous methodology, the equation is solved for the deductible, and each maximum allowable specialty tier coinsurance value is inserted, to determine the maximum allowable deductible value corresponding to that coinsurance. For example, the results for CY 2026 are shown in Table 2. [GRAPHIC] [TIFF OMITTED] TR06AP26.031

Consistent with the approach taken for both CY 2025 and CY 2026 as detailed in the Final CY 2025 Part D Redesign Program Instructions, we proposed to codify this methodology for determining specialty-tier coinsurance/deductible ranges. Thus, we proposed to revise Sec. 423.104(d)(2)(iv)(D)(3)(i) to describe how the maximum coinsurance percentage was determined for years preceding 2025. We also proposed to add new Sec. 423.104 (d)(2)(iv)(D)(3)(ii) to describe the methodology for calculating the maximum coinsurance percentage for 2025 and each subsequent year.

Comment: We received several comments that were supportive of our proposal to allow for a decrease in the specialty-tier cost threshold when market conditions might warrant such a change.

Response: We thank the commenters for their support of our proposal.

Comment: Several commenters opposed our proposal to allow for a decrease in the specialty-tier cost threshold when market conditions might warrant such a change. These commenters stated that lowering the specialty-tier cost threshold would expand the number of drugs eligible for placement on the specialty tier and expose beneficiaries to higher cost sharing. Commenters expressed concern that this would move drugs from non-specialty tiers with fixed copayments or lower coinsurance into the specialty tier, resulting in increased and less predictable out-of-pocket (OOP) costs. A few commenters also noted that because tiering or cost-sharing exception requests may be denied for specialty- tier drugs, beneficiaries have no recourse to appeal their cost-sharing liability, even when the drug is needed for clinical reasons and expanding their specialty tier would exacerbate these issues.

Some commenters asserted that this proposal would undermine the goals of the IRA's Part D redesign provisions and prevent beneficiaries from benefitting from the IRA's affordability protections. Some commenters further noted that Part D plans have increasingly shifted from fixed copayments to coinsurance in response to IRA-related changes, and they argued that allowing the specialty-tier cost threshold to decrease would exacerbate these trends rather than limit them.

Several commenters also raised concerns about beneficiary access to prescription drugs. A few commenters stated that higher specialty-tier cost sharing contributes to delayed initiation of therapy, treatment disruptions, and prescription abandonment, particularly for beneficiaries with serious or complex medical conditions who rely on specialty drugs as well as those living in long-term care settings. Additionally, some commenters expressed concern that decreasing the specialty-tier cost threshold would lead to increased usage of utilization management, including prior authorization and step therapy, further limiting access to medically appropriate therapies.

A few commenters raised concerns that lowering the specialty-tier cost threshold could also increase opportunities for vertically integrated Pharmacy Benefit Managers (PBMs) to inappropriately steer beneficiaries toward PBM-affiliated pharmacies or favor higher-cost drugs on their formularies. These commenters recommended anti-steering provisions, increased formulary oversight, and other guardrails.

Response: We appreciate the commenters' feedback on our proposal to allow for a decrease in the specialty-tier cost threshold. We do not agree that movement of drugs to the specialty tier will necessarily result in increased beneficiary cost sharing. Under Sec. 423.104(d)(2)(iv)(D)(1) through (3), the maximum allowable cost sharing for drugs on the specialty tier is set between 25 percent and 33 percent. In contrast, drugs placed on non-preferred tiers may be subject to coinsurance rates that exceed these limits, up to 50 percent. Further, we do not agree that specialty-tier placement uniformly increases beneficiary out-of-pocket costs.

As noted by many commentors, more plans are moving non-specialty drug tiers from a copayment to a coinsurance cost-sharing structure, so we do not agree that placement on the specialty tier will always result in a change from a fixed copayment amount to a coinsurance. Placement on the specialty tier may, in some cases, result in lower cost sharing than placement on other formulary tiers.

We also note that the specialty-tier cost threshold is established through a data-driven methodology that examines a year's worth of prescription drug event (PDE) data to determine the dollar amount associated with the top one percent of Part D drug claims. This methodology is intended to ensure that the specialty tier remains focused on the highest-cost drugs in the program. Historically, the dollar amount associated with the top one percent of claims has increased over time, and we do not anticipate that the specialty-tier cost threshold will decrease in the near term. However, we believe it is appropriate to maintain regulatory flexibility to account for future market changes, including those that may result from the increasing number of drugs subject to negotiation in the Medicare Drug Price Negotiation Program.

We acknowledge the commenters' concerns regarding affordability and access, including the interaction between specialty-tier placement, cost sharing, and utilization management requirements. As discussed earlier, Part D sponsors remain subject to existing requirements related to formulary design, utilization management, pharmacy access, and beneficiary protections. Given that the cost-sharing limits on the specialty tier are intended to align with the defined standard benefit, we do not consider placement on the specialty tier to be a cause for concern regarding access and affordability. In addition, the redesigned Part D benefit includes affordability protections, such as the reduced annual out-of-pocket threshold, which will mitigate beneficiary exposure to high prescription drug costs across the benefit.

Comment: A few commenters who opposed our proposal to allow for a decrease in the specialty-tier cost threshold urged CMS to establish clear guardrails before any downward adjustment is made in the future. These commenters stated that such guardrails should include a beneficiary impact analysis, advance notice, meaningful stakeholder input, and strengthened affordability protections so beneficiaries do not experience higher out-of-pocket costs. Another commenter recommended that CMS conduct research on the effects of our proposed regulatory change on patient out-of-pocket costs and health outcomes.

Response: We thank the commenters for their suggestions. We remain committed to robust oversight and monitoring of Part D formularies and utilization management practices. If future evidence indicates that additional safeguards or refinements to our specialty-tier policies are warranted, we may consider such adjustments in future rulemaking.

Comment: A commenter who supported our proposal to allow for a decrease in the specialty-tier cost threshold recommended that CMS establish clear guardrails to ensure that this bidirectional flexibility does not inadvertently enable routine mid-year tiering changes or create cost-sharing disruptions.

Response: We thank the commenter for their recommendation. We clarify that specialty-tier cost threshold adjustments are effective at the start of a contract year and should not result in mid-year formulary changes. All

existing formulary change policies and protections remain in place. As stated previously, if future evidence indicates that additional safeguards or refinements to our specialty-tier policies are warranted, we may consider such adjustments in future rulemaking.

Comment: A commenter requested that we explain why we are retaining the 33 percent specialty-tier maximum allowable coinsurance when our calculations show a maximum allowable coinsurance percentage of 32 percent. The commenter noted that CMS reports that this calculation, using the CY 2025 values of $590 for the defined standard benefit deductible and $2,000 for the out-of-pocket limit, results in an effective coinsurance rate of 32.1 percent. The commenter also noted that the same calculation, using the CY 2026 values of $615 for the defined standard benefit deductible and $2,100 for the out-of-pocket limit, results in an effective coinsurance rate of 32.0 percent. By retaining the 33 percent maximum coinsurance percentage, the commenter stated that enrollees in Part D plans with deductibles below that of the defined standard benefit cost-sharing would be charged cost sharing that is above the effective coinsurance rate, thus, reducing access to covered Part D drugs and potentially leading to negative health outcomes. The commenter recommended that CMS set the maximum allowable coinsurance percentage for the specialty tier at 32 percent.

Response: To maintain continuity in transitioning our specialty- tier calculation from the prior methodology to the updated methodology reflecting the redesigned Part D benefit, CMS opted to maintain consistency in the cost-sharing thresholds compared to the thresholds prior to redesign. CMS agrees with the commenter's calculations of effective coinsurance amount. When performing the annual calculation using updated benefit parameters, we note that the effective coinsurance amount calculated using the full deductible amount and 25 percent coinsurance results in a value that varies slightly from year to year. For CY 2025, the calculation resulted in an effective coinsurance of 32.10 percent compared to 32.04 percent for CY 2026. We note that similar magnitudes of variance existed in the calculation of this annual effective coinsurance even before the IRA's changes to the Part D benefit design went into effect. An alternative approach to the calculation could use this calculated value as the upper limit to the specialty tier coinsurance; however CMS opted to use a single value annually to maintain stability year-over-year. As such, the methodology laid out in this final rule relies on the effective coinsurance value of 33 percent as the basis for all calculations. We also note that this is a mathematical equivalence calculation, for a hypothetical beneficiary taking only specialty-tier drugs, and not intended to reflect actuarial equivalence.

Comment: A commenter thanked CMS for the detailed illustrative example of how the maximum coinsurance percentage would be calculated, noting that it provides important clarity for plans.

Response: We thank the commenter for their support.

After consideration of the public comments we received, we are finalizing our specialty-tier proposals as proposed. 4. Changes in True Out-Of-Pocket (TrOOP) Costs (Sec. Sec. 423.100 and 423.464)

A beneficiary's progression through the Part D benefit phases is determined by the total amount of costs incurred by the beneficiary for covered Part D drugs in the plan year. This amount is also referred to as the beneficiary's accumulated TrOOP spending. Incurred costs are defined at section 1860D-2(b)(4)(C) of the Act and the statutory definition has been revised several times since the beginning of the Part D program.

As discussed in the Contract Year 2027 proposed rule, section 11201 of the IRA amended the definition of incurred costs to include, for CY 2025 and subsequent years, costs incurred that are reimbursed through insurance, a group health plan, or certain other third party payment arrangements, but not including the coverage provided by a prescription drug plan or an MA-PD plan that is basic prescription drug coverage or any payments by a manufacturer under the Manufacturer Discount Program.

Section 11201(f) of the IRA directed the Secretary to implement section 11201 of the IRA for 2024, 2025, and 2026 by program instruction or other forms of program guidance. In the Final CY 2025 Part D Redesign Program Instructions, we released guidance to implement the IRA's additions to section 1860D-2(b)(4)(C) of the Act. Specifically, we stated that supplemental Part D coverage provided by enhanced alternative Part D plans and other health insurance (OHI) will be counted as incurred costs and included in the calculation of TrOOP for CY 2025. This includes supplemental coverage provided by Employer Group Waiver Plans (EGWPs), plan reductions in cost sharing for enrolled beneficiaries, such as reductions by Medicare-Medicaid Plans and D-Special Needs Plans (SNPs), and Center for Medicare and Medicaid Innovation (CMMI) model benefits that reimburse costs for covered Part D drugs (unless stated otherwise in an applicable CMMI model's respective Request for Applications or model guidance).

We further stated in the Final CY 2025 Part D Redesign Program Instructions that under section 1860D-2(b)(4)(C)(iii)(II) of the Act, only amounts reimbursed by supplemental coverage will be newly included in the calculation of TrOOP. For enhanced alternative plans, plan liability is mapped to the defined standard benefit to distinguish between basic and supplemental benefits provided under the Part D sponsor. Because of this, if beneficiary cost sharing is greater than what it would have been under the defined standard benefit, a negative value is recorded on a Prescription Drug Event (PDE) record for the field representing the value of the supplemental coverage. Such negative values will be disregarded (that is, be treated as zero) when calculating TrOOP, because they do not represent reimbursement to the beneficiary.

Additionally, we noted that section 1860D-2(b)(4)(C)(iii)(II) of the Act states that reimbursements through “certain other third party payment arrangements” are to be included in the calculation of TrOOP. We did not identify any third-party payment arrangements in addition to those described in the preceding paragraphs that could be included in the calculation of TrOOP.

Further, we stated that, as required by section 1860D- 2(b)(4)(C)(iii)(II) of the Act, any manufacturer payments made under the Manufacturer Discount Program, which was newly created under the IRA, do not count as incurred costs and are not included in the calculation of TrOOP in 2025.

In the Final CY 2026 Part D Redesign Program Instructions, we stated that certain policies described in the Final CY 2025 Part D Redesign Program Instructions, including the policy with respect to incurred costs, also applied in CY 2026.

In the Contract Year 2027 proposed rule, we proposed to codify at Sec. 423.100 the policies we established in the Final CY 2025 Part D Redesign Program Instructions for CY 2025 and applied via the Final CY 2026 Part D Redesign Program Instructions for CY 2026 with respect to the definition of incurred costs for 2025 and subsequent years, without modification. These policies are

currently in effect for CY 2026. Specifically, we proposed to add a new subparagraph (3) to the definition of incurred costs at Sec. 423.100 defining incurred costs for 2025 and subsequent years to include costs that are reimbursed through insurance, a group health plan, or certain other third party payment arrangements, but not including the coverage provided by a PDP or an MA-PD plan that is basic prescription drug coverage or any payments by a manufacturer under the Manufacturer Discount Program under section 1860D-14C of the Act. We also proposed to amend Sec. 423.464(f)(2)(i)(C) to remove the exclusion of expenditures for covered Part D drugs made by insurance or otherwise, a group health plan, or other third party payment arrangements, including expenditures by plans offering other prescription drug coverage and replace it with an exclusion limited to expenditures for covered Part D drugs made by government-funded health programs or the coverage provided by a PDP or an MA-PD plan that is basic prescription drug coverage or any payments by a manufacturer under the Manufacturer Discount Program.

Comment: Many commenters opposed CMS' proposal to codify the inclusion of supplemental coverage provided by enhanced alternative Part D plans in the calculation of TrOOP. Several commenters asserted that Congress's intent in amending the definition of “incurred costs” under section 1860D-2(b)(4)(C)(iii)(II) of the Act was to address the specific and unique situation of EGWP beneficiaries who faced higher out-of-pocket costs and longer stays in the coverage gap due to their supplemental coverage. These commenters asserted that if Congress intended to include supplemental coverage provided by Part D enhanced alternative plans in the definition of “incurred costs,” they would have done so explicitly. Several commenters stated that the use of the term “insurance” to describe costs that are included as incurred costs and the use of the phrase “coverage provided by a prescription drug plan or an MA-PD plan” to describe basic coverage that is not included as incurred costs illustrates Congress's intent that supplemental coverage provided by Part D plans should not be included in TrOOP because Congress typically uses the latter language rather than the term “insurance” to refer to costs incurred by Part D plans, including supplemental coverage. Commenters suggested that the best reading of the statutory text is that only “wrap-around” benefits should be added to the definition of incurred costs, and that the statute's reference to costs “reimbursed” through insurance implies a focus on costs covered through other insurance rather than costs covered directly by the Part D benefit. A commenter asserted that if Congress intended to include basic Part D coverage in the scope of “reimbursed by insurance,” the same logic should apply to enhanced alternative coverage, on the grounds that enhanced alternative coverage is merely a variant design of the same underlying Part D benefit structure.

Response: CMS thanks the commenters for their input. CMS disagrees that enhanced alternative supplemental benefits are not included in the calculation of TrOOP under section 1860D-2(b)(4)(C)(iii) of the Act. The statute does not draw a distinction between non-Part D commercial insurance and coverage under Part D when it uses the term “reimbursed through insurance' in this provision. By excluding “coverage provided by a prescription drug plan or an MA-PD plan that is basic prescription drug coverage” from the definition of costs “reimbursed through insurance,” the plain text of section 1860D-2(b)(4)(C)(iii)(II) indicates that drug coverage provided by Part D plans other than basic prescription drug coverage is included in the definition of costs “reimbursed through insurance.” If the provision only included EGWP supplemental coverage in the definition of costs “reimbursed through insurance,” the statutory text would have done so by explicitly including EGWP supplemental coverage in the definition of “costs reimbursed through insurance” and expanding the exclusion clause to apply to both basic prescription drug coverage and enhanced alternative supplemental coverage. However, the statute does not do so and instead enacted a broader provision for which the plain text requires any costs “reimbursed through insurance” be treated as incurred unless such costs constitute basic prescription drug coverage provided by a prescription drug plan or an MA-PD plan. We disagree with the assertion that if the statute were intended to exclude basic Part D coverage from the scope of “reimbursed through insurance,” the same logic must apply to enhanced alternative coverage, because the statute draws an explicit, meaningful distinction between basic and enhanced alternative coverage. The Part D statute and regulations repeatedly distinguish between basic and enhanced benefits, given that enhanced alternative coverage is optional and sponsor-specific.

Comment: Several commenters expressed concern that the inclusion of supplemental benefits in TrOOP artificially accelerates beneficiaries through benefit phases into catastrophic coverage, increasing plan, federal, and manufacturer liability. These commenters asserted that including supplemental benefits in TrOOP creates distortions in plan design and undermines market stability. Specifically, a few commenters suggested that the inclusion of enhanced alternative supplemental benefits in TrOOP decreases plans' ability to manage beneficiary costs, increases government spending, increases bid pressure, and may cause plans to scale back supplemental benefits or exit the PDP market entirely, ultimately undermining program sustainability.

Response: CMS thanks the commenters for their input. CMS acknowledges that the inclusion of enhanced alternative supplemental benefits in TrOOP may affect the incentives available to beneficiaries enrolled in enhanced alternative plans, including the incentives for beneficiaries to choose higher-cost drugs over lower-cost ones in certain circumstances. When beneficiaries move through the benefit phases more quickly, overall plan liability increases, which may contribute to increased premium costs for enhanced alternative plans and affect sponsors' decisions about enhanced alternative plan offerings. While we cannot definitively attribute these changes to this policy, as other elements of the Part D redesign may also be contributing factors, we have seen a notable decline in standalone Part D-only enhanced alternative plan offerings along with a broader shift from copayments to coinsurance benefit design since the redesign was implemented. CMS recognizes stakeholder concerns that the proposed provision has the potential to increase Part D program costs and government spending and reduce plan offerings. We note that only a statutory change would allow CMS to exclude enhanced alternative supplemental benefits from counting towards TrOOP.

Comment: A couple of commenters requested that CMS clarify whether manufacturer copayment assistance or patient assistance programs are considered to be “certain other third-party payment arrangements” included as incurred costs for the calculation as TrOOP.

Response: CMS clarifies that manufacturer copayment assistance and

patient assistance programs do not count as incurred costs for purposes of TrOOP accumulation, as these programs operate outside of the Part D benefit.

Comment: Several commenters requested that CMS clarify whether the proposed provision changes the treatment of supplemental benefits provided by Puerto Rico Platino plans for the purposes of calculating TrOOP, and requested that CMS codify current guidance related to the treatment of supplemental benefits provided by Platino plans in regulation.

Response: CMS appreciates commenters' request for clarity regarding the treatment of Puerto Rico Platino wrap-around coverage for purposes of calculating TrOOP. The proposed changes do not alter the longstanding treatment of Platino wrap-around coverage funded by the Commonwealth of Puerto Rico. Platino plans continue to submit Part D bids with only basic benefits. Under section 1860D-42(a) of the Act and Sec. 423.859(c), which permits CMS to waive or modify applicable Part D requirements if CMS determines that waiver or modification is necessary to secure access to qualified prescription drug coverage for Part D eligible individuals residing in the territories, Platino wrap- around coverage count towards the beneficiary's TrOOP. Note that no other Medicaid assistance counts towards TrOOP, only those payments for residents of territories that substitute for low-income cost-sharing subsidies in accordance with the statute. CMS believes that existing statutory provisions and guidance provide sufficient clarity and additional rulemaking to codify current guidance related to supplemental benefits provided by Platino plans is not warranted given the longstanding nature of the section 1860D-42(a) waiver in place for Platino wrap-around coverage.

Comment: A few commenters disagreed with the proposal to codify the exclusion of negative values in the field on the PDE representing supplemental coverage from the calculation of TrOOP. A commenter stated that disregarding negative PDE values overstates the value of supplemental benefits. Another commenter suggested that it could lead to beneficiary confusion.

Response: CMS thanks the commenters for their input. CMS acknowledges that while excluding such negative values from TrOOP can overstate the net value of total supplemental benefits provided to beneficiaries over the course of the year, including negative values in TrOOP would inappropriately disregard any beneficiary cost sharing in excess of the defined standard cost sharing amount when calculating TrOOP. This would particularly disadvantage certain beneficiaries who have patterns of utilization that disproportionately include this situation. For example, if a beneficiary in an enhanced alternative plan has higher cost sharing than the defined standard benefit for a maintenance medication, including the negative values in TrOOP could significantly disadvantage that beneficiary as these negative values would continually offset part of the payments the beneficiary actually paid OOP. This would create some circumstances where certain beneficiaries have a net negative value for their supplemental benefits when they reach the OOP threshold, which could also lead to beneficiary confusion and could potentially violate the statutory requirement for an enrollee to have $0 cost sharing once their incurred costs exceed the OOP threshold.

Comment: Some commenters supported CMS' proposal to codify the inclusion of supplemental coverage provided by enhanced alternative Part D plans in the calculation of TrOOP. These commenters stated that aligning the regulatory definition of incurred costs with the statutory amendments provides needed clarity and consistency for beneficiaries, plans, and other stakeholders.

Response: We thank the commenters for their support.

After considering the comments we received and for the reasons outlined in the Contract Year 2027 proposed rule and our responses to comments, we are finalizing the proposed amendments to Sec. Sec. 423.100 and 423.464 without modification. 5. Policy For Drugs Not Subject to Defined Standard Deductible (Sec. 423.104)

Under sections 1860D-2(b) and (c) of the Act, as amended by section 11201 of the IRA, the coverage gap phase was eliminated in CY 2025. Beginning in CY 2025, a beneficiary leaves the initial coverage phase and enters the catastrophic phase once they incur enough TrOOP-eligible costs to meet the annual OOP threshold. Accordingly, under section 1860D-14A(h) of the Act, as added by section 11201 of the IRA, the Coverage Gap Discount Program sunset effective January 1, 2025. Section 11201 of the IRA added section 1860D-14C of the Act, which created the Manufacturer Discount Program beginning January 1, 2025. Under section 1860D-14C(b)(1)(A) of the Act, manufacturers that enter into a Manufacturer Discount Program agreement will provide discounts on applicable drugs, typically amounting to 10 percent of the negotiated price for enrollees in the initial coverage phase and 20 percent of the negotiated price for enrollees in the catastrophic phase, in CY 2025 and subsequent years.

In the Contract Year 2027 proposed rule, we explained that manufacturer discounts are available under the Manufacturer Discount Program once a beneficiary becomes an “applicable beneficiary.” Section 1860D-14C(g)(1) of the Act defines an applicable beneficiary as an individual who, on the date of dispensing a covered Part D drug, is enrolled in a PDP or MA-PD plan, is not enrolled in a qualified retiree prescription drug plan, and has incurred TrOOP-eligible costs that exceed the defined standard deductible specified in section 1860D- 2(b)(1) of the Act. TrOOP-eligible costs for drugs not subject to the defined standard deductible, specifically covered insulin products, as well as TrOOP-eligible costs for drugs not subject to a non-defined standard plan deductible or drugs subject to a reduced deductible under non-defined standard plans, all count towards a beneficiary's satisfaction of the defined standard deductible.

We described the policy established in the Final CY 2025 Part D Redesign Program Instructions for drugs not subject to the defined standard deductible, which addresses situations where a beneficiary has not satisfied their plan deductible but has incurred sufficient TrOOP- eligible costs to satisfy the defined standard deductible, or situations where a beneficiary incurs sufficient costs to satisfy the plan deductible but has not incurred TrOOP-eligible costs cumulatively across all drugs at or above the defined standard deductible amount. We explained that, as established in the Final CY 2025 Part D Redesign Program Instructions, manufacturer discounts are not available until cumulative TrOOP-eligible costs meet the defined standard deductible. Plans that offer a non-defined standard plan deductible are responsible for the portion of costs that would otherwise be covered by the discount when a beneficiary incurs sufficient costs to satisfy the plan deductible but has not incurred TrOOP-eligible costs cumulatively across all drugs at or above the defined standard deductible amount. Additionally, we noted that in the Final CY 2026 Part D Redesign Program Instructions, we stated that this policy also applied in CY 2026 and established that for CY 2026 the policy for drugs not subject to the defined standard deductible also applies to the selected drug subsidy

with respect to selected drugs during a price applicability period. In the Contract Year 2027 proposed rule, we proposed to codify the policy for drugs not subject to the defined standard deductible that are in effect for 2025 and 2026 without modification. Specifically, we proposed to codify the policy for drugs not subject to defined standard deductible at a new Sec. 423.104(j).

Comment: A commenter supported the proposal to codify the policies outlined in the Final CY 2025 and CY 2026 Part D Redesign Program Instructions regarding the application of the Manufacturer Discount Program to drugs that are not subject to the defined standard deductible. The commenter stated that codifying these policies ensures clarity, consistency, and effective implementation.

Response: We thank the commenter for their support.

Comment: A commenter recommended that CMS use the beneficiary's plan deductible as the threshold for becoming an applicable beneficiary under the Manufacturer Discount Program to alleviate potential beneficiary confusion, stating that the current approach favors some beneficiaries over others and ignores plan terms.

Response: Section 1860D-14C(g)(1)(C) of the Act defines an “applicable beneficiary” as an individual who, on the date of dispensing a covered Part D drug, is enrolled in a Part D or MA-PD plan, is not enrolled in a qualified retiree prescription drug plan, and has incurred TrOOP-eligible costs that exceed the defined standard deductible specified in section 1860D-2(b)(1) of the Act. As such, once a beneficiary has incurred sufficient TrOOP-eligible costs to satisfy the defined standard deductible, they will be an applicable beneficiary under the Discount Program. Because the threshold for when a beneficiary becomes an applicable beneficiary is defined in statute, CMS cannot choose an alternative threshold.

After considering the comments received and for the reasons outlined in the Contract Year 2027 proposed rule and our responses to comments, we are finalizing the proposed amendments to Sec. 423.104 without modification. 6. Annual Indexing of Part D Benefit Parameters Using the Annual Percentage Increase in Drug Expenditures (API) and Consumer Price Index (CPI) (Sec. Sec. 423.104, 423.782)

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Pub. L. 108-173) (MMA) added sections 1860D-2(b) and 1860D- 14(a) of the Act directing the Secretary to index certain Part D benefit parameters each year, which include, but are not limited to, the deductible limit and low-income cost-sharing amounts. The required annual adjustments ensure that the actuarial value of the drug benefit remains consistent with changes in Part D drug expenditures and general inflation. The MMA established two indices for adjusting Part D benefit parameters: (1) the annual percentage increase in average per capita aggregate expenditures for covered Part D drugs in the U.S. for Part D eligible individuals under section 1860D-2(b)(6) of the Act (referred to as the API); and (2) the annual percentage increase in the Consumer Price Index based on all items per a U.S. city average under section 1860D-14(a)(4)(A) of the Act (referred to as the CPI).

In accordance with the statute and corresponding regulation, the following Part D benefit parameters are updated annually using the API: the standard Part D benefit deductible, the initial coverage limit, the OOP threshold, maximum copayments below the OOP threshold for low- income full subsidy eligible enrollees with income less than 150 percent, but greater than 100 percent of Federal Poverty Level (FPL) not including institutionalized individuals, the RDS cost threshold, and the RDS cost limit. The CPI is used to update maximum copayments below the OOP threshold for low-income full subsidy eligible enrollees with income less than 100 percent of FPL.

In the Contract Year 2027 proposed rule, we explained that the current regulations do not describe the specific methods used to calculate the annual percentage increases. Instead, the specific methods for calculating the annual percentage increases in drug expenditures and CPI that are applied to the Part D benefit parameters have been proposed for each CY in the Advance Notice of Methodological Changes for Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies (Advance Notice) and finalized in the Announcement of Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies (Rate Announcement). In the Contract Year 2027 proposed rule, we proposed to codify these methodologies in regulation. Although we proposed to codify the calculation methodology for the API and CPI, we will continue to publish the annual percentage increases in drug expenditures and CPI and updated Part D benefit parameters for each CY through the Advance Notice and Rate Announcement. Calculation of the Annual Percentage Increase in Drug Expenditures

In the Contract Year 2027 proposed rule, we described the calculation of the API for Part D as the product of the annual percentage trend (APT), which is the year-over-year change in total per capita Part D covered drug expenditures based on PDE data, and a multiplicative update (MU) factor that incorporates updated data for prior years into the calculation.

We proposed to revise Sec. 423.104(d)(5)(iv) by adding three paragraphs describing (1) the overall calculation of the annual percentage increase, or the API, in per capita Part D drug expenditures, (2) the calculation of the annual percentage trend, or the APT, and (3) the calculation of the multiplicative update factor, or the MU. We will continue to publish updates to the Part D benefit parameters calculated through these methodologies through the Advance Notice and Rate Announcement process described in section 1853(b) of the Act. Calculation of the Annual Percentage Increase in CPI

In the Contract Year 2027 proposed rule, we described the calculation of the annual percentage increase in the CPI as the product of an annual percentage trend, which is a year-over-year comparison of the CPI-U for all items, ending in September, and a multiplicative update factor that incorporates revisions when estimated CPI values are replaced with actual BLS data. We explained that this CPI-based update applies to copayments for the lowest-income dually eligible beneficiaries (with incomes not exceeding 100 percent of the FPL) to preserve purchasing power relative to general inflation.

To implement the CPI calculation described previously in our regulations, we proposed to revise Sec. 423.782(a)(2)(iii)(A) to include a reference to a new paragraph (d), which we proposed to add at the end of Sec. 423.782. New Sec. 423.782(d) would comprise the general language of the statute, as well as add three subparagraphs describing: (1) the overall calculation of the annual percentage increase in CPI and specify the period ending in “September of such previous year,” (2) the calculation of the annual percentage trend, and (3) the calculation of the multiplicative update factor. We will continue to publish updates to the Part D benefit parameters calculated through these methodologies through the Advance Notice and Rate

Announcement process described in section 1853(b) of the Act. Technical Changes

We also proposed two technical changes to Sec. 423.782(b).

Comment: A commenter expressed support for CMS' proposal to codify the methodologies for calculating the API and CPI used to update Part D benefit parameters. The commenter stated that the proposal ensures uniform application of Part D parameter updates across plan sponsors and benefit years.

Response: CMS thanks the commenter for their support.

After considering the comments we received, we are finalizing the proposed provisions at Sec. Sec. 423.104 and 423.782 without modification. 7. Changes to GCPDC and Allowable Reinsurance Cost Definitions To Include Costs Paid by the MDP (Sec. 423.308)

Section 1860D-15(b)(3) of the Act defines gross covered prescription drug costs (GCPDC) and allowable reinsurance costs for the purpose of describing the methodology for calculating the reinsurance payment amount. In the Contract Year 2027 proposed rule, we explained that GCPDC is defined as the costs incurred under a Part D plan, excluding administrative costs but including deductible and dispensing- related costs, regardless of payer, while allowable reinsurance costs are limited to amounts actually paid net of discounts and rebates. We further explained that consistent with the statutory and regulatory definition of GCPDC, manufacturer discounts under the Coverage Gap Discount Program were included in GCPDC, but the IRA amended the statute to require inclusion of manufacturer discounts under the new Manufacturer Discount Program in both GCPDC and allowable reinsurance costs beginning in 2025. CMS implemented these statutory changes through the Final CY 2025 Part D Redesign Program Instructions and Final CY 2026 Part D Redesign Program Instructions.

In the Contract Year 2027 proposed rule, we proposed that the regulatory definition of “gross covered prescription drug costs” at Sec. 423.308 be revised to include “all amounts paid by manufacturers under the Manufacturer Discount Program (as defined at Sec. 423.100).” We also proposed to add the phrase “for years prior to 2025” before the phrase “amounts between the initial coverage limit and the out-of-pocket threshold” and the phrase “because the enrollee is between the initial coverage limit and the out-of-pocket threshold” to reflect that the coverage gap phase does not exist for 2025 and subsequent years. Additionally, we proposed to revise the regulatory definition of “allowable reinsurance costs” at Sec. 423.308 to include “the portion of the negotiated price (as defined in section 1860D-14C(g)(6) of the Act) of an applicable drug (as defined at Sec. 423.100) paid by manufacturers under the Manufacturer Discount Program (as defined at Sec. 423.100).”

We received no comments on this proposal and are finalizing the proposed revision at Sec. 423.308 without modification. 8. Reinsurance Methodology (Sec. 423.329)

Section 1860D-15(b) of the Act, originally enacted into law by the MMA, sets forth rules for the calculation and payment of federal reinsurance subsidies for Part D plans. For years preceding CY 2025, the reinsurance amount for a Part D eligible individual was an amount equal to 80 percent of the allowable reinsurance costs attributable to that portion of gross covered prescription drug costs incurred after that individual reached the catastrophic phase of the benefit.

Beginning in 2025, the IRA reduced the reinsurance payment amount for a Part D beneficiary from 80 percent to 20 percent for applicable drugs or 40 percent for drugs that are not applicable drugs. As we explained in the Contract Year 2027 proposed rule, we make reinsurance payments to Part D plan sponsors based on the GCPDC that were actually paid during the coverage year, meaning that the costs must be actually incurred by the Part D sponsor and must be net of any direct and indirect remuneration (DIR). In the Final CY 2025 Part D Redesign Program Instructions, we established a methodology to calculate reinsurance subsidies separately for applicable drugs and non- applicable drugs and allocate the share of DIR for applicable and non- applicable drugs based on their respective gross drug costs that fall in the catastrophic phase. In the Final CY 2026 Part D Redesign Program Instructions we updated the methodology to account for selected drugs, which are grouped with non-applicable drugs for purposes of calculating the reinsurance subsidy. We explained that the Final CY 2026 Part D Redesign Program Instructions established the process for calculating reinsurance separately for applicable and non-applicable or selected drugs, allocating DIR based on each category's share of gross drug costs in the catastrophic phase, and reconciling the adjusted reinsurance amounts against prospective payments using NDC-level drug classifications.

In the Contract Year 2027 proposed rule, we proposed to codify at Sec. 423.329 the policies we established in the Final CY 2025 Part D Redesign Program Instructions for CY 2025 and the Final CY 2026 Part D Redesign Program Instructions for CY 2026 with respect to the reinsurance methodology without modification. Specifically, we proposed to redesignate paragraph (c)(1) as paragraph (c)(1)(i) and revise the introductory language to state “general rule for years preceding 2025” and add a new paragraph (c)(1)(ii) to codify the rules described previously for 2026 and future years.

We received no comments on this proposal and are finalizing the proposed revisions to Sec. 423.329 without modification. 9. Selected Drug Subsidy (Sec. Sec. 423.265, 423.315, 423.329, 423.343)

Section 11201 of the IRA added section 1860D-14D to the Act, creating a new selected drug subsidy program which began in CY 2026. In the Contract Year 2027 proposed rule, we described the selected drug subsidy program, under which the Secretary provides Part D plan sponsors with a subsidy equal to 10 percent of the negotiated price for selected drugs during a price applicability period dispensed to applicable beneficiaries below the annual out-of-pocket threshold after the deductible is met. We further explained that because of the intertwined structure and wording of the Manufacturer Discount Program and selected drug subsidy program provisions in the Act, we proposed to treat claims that are subject to the selected drug subsidy as coterminous with claims that would qualify for applicable discounts under the Manufacturer Discount Program, but for the drug's status as a selected drug during a price applicability period. Finally, we described our proposal to make monthly prospective payments for the selected drug subsidy program, based on Part D plan sponsors' estimates of selected drug subsidy amounts submitted with their annual bids, and reconciled using the actual selected drug subsidy amounts that Part D plan sponsors report on PDE data.

In the Contract Year 2027 proposed rule, we proposed to codify at new Sec. 423.265(d)(2)(vi) a requirement that assumptions regarding selected drug subsidy amounts payable be included in Part D bids submitted to us. We also proposed to codify at new Sec. 423.315(h) that we would provide prospective selected drug subsidy payments on a

monthly basis. We also proposed to codify at new Sec. 423.329(e) the determination of selected drug subsidy payments. Finally, we proposed to codify at Sec. 423.343(e) that we would make final payment for selected drug subsidy payments after a coverage year after obtaining all information necessary to determine the amount of payment.

We received no comments on this proposal and are finalizing the proposed additions at Sec. Sec. 423.265, 423.315, 423.329, and 423.343 without modification. 10. Technical Correction--Retroactive Adjustments and Reconciliations (Sec. Sec. 423.336 and 423.343)

In the Contract Year 2027 proposed rule, we noted the need for a technical correction at Sec. 423.343(d)(2). The final sentence of this paragraph is incorrectly placed in Sec. 423.343 and should instead be placed in Sec. 423.336. Thus, we proposed to revise Sec. 423.343 to remove this sentence and revise Sec. 423.336(c) to add this sentence in its proper context.

We received no comments on this proposal and are finalizing the proposed revisions at Sec. Sec. 423.336 and 423.343 without modification. 11. Base Beneficiary Premium (Sec. 423.286)

Section 1860D-13(a)(2) of the Act, as established by the MMA, describes the statutory formula for calculating plan-specific basic Part D premiums under the Part D program. The national base beneficiary premium (BBP) is the starting point for calculating a plan-specific basic Part D premium. Prior to the enactment of the IRA, the BBP was calculated as the product of the beneficiary premium percentage and the national average monthly bid amount. The beneficiary premium percentage (“applicable percentage”) is a fraction, with a numerator of 25.5 percent and a denominator equal to 100 percent minus a percentage equal to (i) the total reinsurance payments that we estimate will be paid for the coverage year, divided by (ii) that amount plus the total payments that we estimate will be paid to Part D plans based on the standardized bid amount during the year, taking into account amounts paid by both CMS and plan enrollees.

In the Contract Year 2027 proposed rule, we explained that the IRA amended section 1860D-13(a)(2) of the Act such that the statutory formula described in the preceding paragraph would apply subject to a newly added section 1860D-13(a)(8)(A) of the Act, which states that, for a prescription drug plan for a month in 2024 through 2029, the BBP shall be equal to the lesser of the BBP for the preceding year increased by 6 percent or the amount computed under the formula described at section 1860D-13(a)(2) of the Act.

In the Contract Year 2027 proposed rule, we proposed to codify the statutory amendments to section 1860D-13(a) of the Act. Specifically, we proposed to redesignate Sec. 423.286(b) as Sec. 423.286(b)(1) and codify the BBP formula for 2024 through 2029 at new Sec. 423.286(b)(2).

We received no comments on this proposal and are finalizing the proposed changes to Sec. 423.286 without modification. 12. Low-Income Cost-sharing Subsidy (Sec. 423.782)

The Part D low-income subsidy (LIS) helps individuals with Medicare who meet certain statutory income and resource criteria pay for prescription drugs and lowers the costs of prescription drug coverage. Prior to the enactment of the IRA, individuals who qualified for the full LIS received assistance to pay their full premiums and deductibles (in certain Part D plans) and have reduced cost sharing. Individuals who qualified for the partial LIS paid reduced premiums (on a sliding scale based on their income) and also had reduced deductibles and cost sharing. Section 11404 of the IRA amended section 1860D-14 of the Act to expand eligibility for the full LIS to individuals who are determined to have incomes below 150 percent of the FPL and who meet either the resource standard in paragraph (3)(D) or paragraph (3)(E) of section 1860D-14(a) of the Act, with respect to plan years beginning on or after January 1, 2024. Thus, beginning in CY 2024, individuals who previously would have qualified for the partial subsidy now receive the full LIS.

In the Contract Year 2027 proposed rule, we proposed to amend the eligibility criteria for LIS cost sharing reductions at Sec. 423.782 to align with the IRA's amendments to section 1860D-14(a)(1) of the Act and the changes to Sec. Sec. 423.773 and 423.780. Specifically, we proposed to update the FPL limit specified in Sec. 423.782(a)(2)(i)(B) to 150 percent for plan years beginning on or after January 1, 2024.

In addition, we proposed to amend paragraph (a)(2) of Sec. 423.782 to state that for years preceding 2025, LIS cost sharing reductions applied to covered Part D drugs obtained after the initial coverage limit and below the OOP limit.

Comment: A commenter expressed support for CMS's proposal to align LIS eligibility criteria with the IRA by updating the FPL limit to 150 percent for plan years beginning January 1, 2024.

Response: CMS thanks the commenter for their support.

After considering the comments we received, we are finalizing the proposed revisions to Sec. 423.782 without modification. 13. Retiree Drug Subsidy Parameters (Sec. Sec. 423.882 and 423.884)

Section 1860D-22 of the Act provides for subsidy payments to sponsors of qualified retiree prescription drug plans, provided that the employment-based retiree health coverage is at least actuarially equivalent to the standard prescription drug coverage under Medicare Part D. In the Contract Year 2027 proposed rule, we explained that, although the IRA amended the parameters of the standard prescription drug coverage and makes other changes to the Part D benefit, it did not change the requirements for qualified retiree prescription drug plans.

Although the majority of the IRA policies in effect for CY 2027 and subsequent years do not require updates to Subpart R, we explained in the Contract Year 2027 proposed rule that there are certain conforming edits required. Specifically, we proposed to revise the definitions of “gross covered retiree plan-related prescription drug costs” and “allowable retiree costs” at Sec. 423.882 to reflect the proposed revisions to the definitions of “gross covered prescription drug costs” and “allowable reinsurance costs” at Sec. 423.308. We also proposed to replace all references in Sec. 423.884(d) to “not taking into account the value of any discount or coverage provided during the coverage gap” with the statement “for years prior to 2025, not taking into account the value of any discount or coverage provided during the coverage gap and for 2025 and subsequent years, not taking into account the value of any discount provided under the Manufacturer Discount Program.”

We received no comments on this proposal and are finalizing the proposed revisions to Sec. Sec. 423.882 and 423.884 without modification. 14. Medical Loss Ratio (Sec. 423.2420)

In the Contract Year 2027 proposed rule, we explained that the medical loss ratio (MLR) requirements established under section 1857(e) of the Act require Part D contracts to report the percentage of revenue received under the contract spent on incurred claims for all enrollees for Part D prescription drugs and on quality initiatives that meet the requirements at Sec. 423.2430. The percentage of revenue that is used for

other items such as administration, marketing, and profit is excluded from the numerator of the MLR. We described longstanding policy that pass-through payments for which plans retain no liability, such as low- income cost-sharing subsidies and Coverage Gap Discount Program payments, are excluded from both the numerator and denominator of the MLR. We further explained that new federal payments created by the IRA, including Manufacturer Discount Program payments, the Inflation Reduction Act Subsidy Amount (IRASA), and the selected drug subsidy, are treated similarly as pass-through amounts and therefore excluded from the MLR calculation. This was established in the Final CY 2025 Part D Redesign Program Instructions and applied in CY 2026 through the Final CY 2026 Part D Redesign Program Instructions.

In the Contract Year 2027 proposed rule, we proposed to codify for CY 2027 and subsequent years the policies established in the Final CY 2025 Part D Redesign Program Instructions and Final CY 2026 Part D Redesign Program Instructions with respect to the treatment of the Manufacturer Discount Program payments, IRASA, and selected drug subsidy program payments for MLR purposes. These policies are currently in effect. Specifically, we proposed to codify the exclusion of the Manufacturer Discount Program payments, IRASA, and selected drug subsidy program payments at Sec. 423.2420(b)(4)(iii), (iv), and (v) respectively.

We received no comments on this proposal and are finalizing the proposed revisions at Sec. 423.2420 without modification. 15. Severability

We proposed that the Medicare Part D redesign provisions finalized herein would be separate and severable from one another. Further, we proposed that if any of these provisions is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, it is our intention that such provision shall be severable from this rule and not affect the remainder thereof, or the application of such provision to other persons not similarly situated or to other, dissimilar circumstances.

We received no comments on this proposal and are finalizing without modification.

Section 1860D-14A of the Act established the Medicare Coverage Gap Discount Program, which began on January 1, 2011. Coverage Gap Discount Program requirements were codified in the “Medicare Program; Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs for Contract Year 2013 and Other Changes” final rule (77 FR 22072) under subpart W of 42 CFR part 423.

The Inflation Reduction Act of 2022 (Pub. L. 117-169) (IRA) added section (h) to section 1860D-14A of the Act, which sunset the Coverage Gap Discount Program and terminated all Coverage Gap Discount Program agreements, effective January 1, 2025. Section 1860D-14A(h)(2) of the Act further specifies that the provisions of section 1860D-14A of the Act, including all responsibilities and duties under such agreements continue to apply with respect to applicable drugs dispensed prior to January 1, 2025. Accordingly, we proposed to amend Sec. 423.2300 by adding a new paragraph to specify that the requirements of subpart W apply before January 1, 2025 and, with respect to applicable drugs dispensed prior to that date, continue to apply on and after January 1, 2025. To make this change, we proposed to redesignate the existing text of Sec. 423.2300 as paragraph (a) and redesignate existing paragraphs (a) through (h) as Sec. 423.2300(a)(1) through (8), respectively. We proposed to add the new text at Sec. 423.2300(b). We also proposed to revise Sec. 423.2315(c)(2) to reflect the sunset of the Coverage Gap Discount Program by specifying the effective date of a Coverage Gap Discount Program agreement to 2012 and subsequent years prior to 2025. Finally, in accordance with section 1860D-14A(h)(1) of the Act, we proposed to amend Sec. 423.2345 by adding a new paragraph (f) to specify that, subject to Sec. 423.2300(b), as redesignated, all Coverage Gap Discount Program agreements under this subpart are terminated as of January 1, 2025.

To address programmatic differences between the Coverage Gap Discount Program and the Manufacturer Discount Program, which are discussed in more detail in section II.C. of this final rule, we proposed to revise Sec. 423.2305 to clarify that the definitions at Sec. 423.2305 apply only for purposes of the Coverage Gap Discount Program. Further, we proposed to revise the definition of “applicable discount” at Sec. 423.2305 to specify that it refers to 50 percent of the negotiated price with respect to a plan year before 2019 and 70 percent of the negotiated price with respect to plan year 2019 through plan year 2024. Lastly, we proposed technical changes throughout subpart W to replace the shorthand term “Discount Program” with “Coverage Gap Discount Program.”

Comment: A few commenters were in support of the proposed changes. Commenters acknowledged the proposals as important and consistent with statutory requirements.

Response: We thank the commenters for their support and are finalizing the changes to the subpart that were proposed.