Today, the Centers for Medicare & Medicaid Services (CMS) released the Final Calendar Year (CY) 2026 Part D Redesign Program Instructions (the Final CY 2026 Program Instructions) concurrently with the Announcement of CY 2026 Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies (the CY 2026 Rate Announcement).
The purpose of the Final CY 2026 Program Instructions is to provide interested parties with guidance for CY 2026 regarding the implementation of the Inflation Reduction Act of 2022’s (IRA) changes to the structure of the defined standard Part D drug benefit. The Final CY 2026 Program Instructions also provide guidance on the successor regulation exception to the IRA’s formulary inclusion requirement for selected drugs, a topic relevant to the Medicare Part D program that also relates to the Medicare Drug Price Negotiation Program (Negotiation Program) and implementation of sections 11001 and 11002 of the IRA.
The Final CY 2026 Program Instructions contain a detailed description of, and guidance related to, IRA-related changes to the Part D benefit newly in place for CY 2026. Changes to the Part D benefit for CY 2025 are discussed in the Final CY 2025 Part D Redesign Program Instructions (the Final CY 2025 Program Instructions), and the policies described in the Final CY 2025 Program Instructions also apply in CY 2026 unless otherwise stated in the Final CY 2026 Program Instructions. The Final CY 2026 Program Instructions are being published concurrently with the CY 2026 Rate Announcement that, among other things, announces updates to Part D parameters, some of which are impacted by provisions in the Final CY 2026 Program Instructions.
Overview of Changes to the Part D Benefit:
In CY 2026, the structure of the Part D benefit will be updated to reflect provisions of the IRA that become effective on January 1, 2026. The CY 2026 updates include the following:
- The CY 2026 annual out-of-pocket (OOP) threshold of $2,100, which is the original 2025 out-of-pocket cap of $2,000, adjusted based on the annual percentage increase in average expenditures for covered Part D drugs in the U.S. for Part D eligible individuals in the previous year (API).
- Changes to the liability of enrollees, sponsors, manufacturers, and CMS in the new standard Part D benefit design, specifically to account for the start of negotiated prices taking effect with respect to selected drugs for initial price applicability year 2026 under the Negotiation Program; and
- The establishment of the selected drug subsidy program.
Summary of Key Policies in the Final Guidance:
Creditable Coverage
Medicare beneficiaries who are not enrolled in Medicare Part D may incur a late enrollment penalty if there is a continuous period of 63 days or more at any time after the end of the individual’s Part D initial enrollment period during which the individual was eligible for Part D but was not enrolled in a Part D plan and was not covered under any creditable prescription drug coverage. Creditable coverage must have an actuarial value that equals or exceeds the actuarial value of the defined standard Part D coverage. Since the start of the Part D program, CMS has permitted entities offering group health plans that are not applying for the retiree drug subsidy (RDS) to make the creditable coverage determination through actuarial equivalence testing or a simplified determination methodology provided by CMS. With the enhancements to the Part D benefit under the IRA, the current simplified determination methodology no longer reflects actuarial equivalence with defined standard Part D coverage. Accordingly, CMS has developed a revised simplified determination methodology that better reflects actuarial equivalence with the richer Part D defined standard benefit under the IRA. For CY 2026 only, non-RDS group health plans are permitted to use either the existing simplified determination methodology or the revised simplified determination methodology to determine whether their prescription drug coverage is creditable. Under the revised simplified determination methodology, the group health plan coverage must be designed to pay at least 72% of participants’ prescription drug expenses, versus 60% under the existing methodology.
Selected Drug Subsidy
Under the selected drug subsidy program created by the IRA, Part D sponsors will receive a government subsidy for selected drugs equal to 10% of the drug’s negotiated price. The selected drug subsidy applies to a covered Part D drug that would be an applicable drug with respect to the Manufacturer Discount Program but for being a selected drug during a price applicability period. The subsidy applies to selected drugs dispensed to an applicable beneficiary who is enrolled in a prescription drug plan (PDP) or a Medicare Advantage prescription drug (MA-PD) plan and has not incurred costs that are equal to or exceed the annual out-of-pocket (OOP) threshold. Under the selected drug subsidy program, once an enrollee incurs costs exceeding the annual deductible under the defined standard benefit, the selected drug subsidy is available in the initial coverage phase of the benefit. The selected drug subsidy lowers Part D sponsor liability on the negotiated price of the selected drug. The Final CY 2026 Program Instructions address several topics related to the selected drug subsidy, including the policy for drugs not subject to the defined standard deductible; selected drug subsidy prospective payments; medical loss ratio; and reinsurance methodology.
Successor Regulation Exception Permitting Formulary Substitutions of Selected Drugs
The IRA requires Part D sponsors to include on their formularies selected drugs for which a maximum fair price is in effect, starting in 2026. The IRA also provides an exception for Part D sponsors to remove a selected drug if such removal would be permitted under § 423.120(b)(5)(iv) or “any successor regulation.” At the time the IRA was enacted, then-current § 423.120(b)(5)(iv) permitted a plan to immediately substitute on the formulary a newly available generic drug for its brand name drug if certain notice and timing requirements were met. However, due to changes made to the regulations in the CY 2025 Parts C & D Final Rule (CMS-4201-F3 and 4205-F), there is no longer a § 423.120(b)(5)(iv) in the current Part D regulations. Under the current Part D regulations, the approval requirements for immediate substitutions, which were revised to provide for the substitution of additional types of products, are now codified at § 423.120(e)(2)(i), and the corresponding notice requirements for such formulary changes are now codified at § 423.120(f)(2), (3), and (4). In the Final CY 2026 Program Instructions, we are identifying the updated, immediate substitution regulatory provisions at § 423.120(e)(2)(i), (f)(2), (3), and (4) as the “successor regulation.”
For more details on the updated structure of the defined standard Part D drug benefit, please see the notes below:
- Annual deductible. The enrollee pays 100% of their gross covered prescription drug costs (GCPDC) until the deductible of $615 for CY 2026 is met.
- Initial coverage. The enrollee pays 25% coinsurance for covered Part D drugs. The sponsor typically pays 65% of the cost of applicable drugs and selected drugs and 75% of the cost of all other covered Part D drugs. The manufacturer, through the Manufacturer Discount Program (Discount Program), typically covers 10% of the cost of applicable drugs. CMS pays a 10% subsidy for selected drugs during a price applicability period. This phase ends when the enrollee has reached the annual OOP spending threshold of $2,100, for CY 2026.
- Catastrophic. The enrollee pays no cost sharing for covered Part D drugs. Sponsors typically pay 60% of the costs of all covered Part D drugs. The manufacturer pays a discount, typically equal to 20%, for applicable drugs. CMS pays a reinsurance subsidy equal to 20% of the costs of applicable drugs and 40% of the costs of all other covered Part D drugs that are not applicable drugs, including selected drugs, during a price applicability period.
For more information about topics related to the Part D Benefit Redesign, please go to:
- Medicare Prescription Payment Plan – https://www.cms.gov/inflation-reduction-act-and-medicare/part-d-improvements/medicare-prescription-payment-plan
- Manufacturer Discount Program – https://www.cms.gov/medicare/coverage/prescription-drug-coverage/part-d-information-pharmaceutical-manufacturers
- Medicare Drug Price Negotiation Program – https://www.cms.gov/inflation-reduction-act-and-medicare/medicare-drug-price-negotiation
Policies established in the Final CY 2026 Program Instructions are for CY 2026 and are subject to change in subsequent years.