President Biden signed the Inflation Reduction Act (IRA), H.R. 5376, into law on August 16, 2022. It is a 10-year plan intended to rein in inflation by lowering the federal deficit and healthcare costs. This article will focus on the impact the IRA could have on Medicare beneficiaries, in particular concerning prescription drug prices. This is the first time Medicare, the largest purchaser of medications in the U.S., can negotiate and cap drug prices.
The IRA directly impacts medication costs and Medicare Part D benefit restructuring.
The Congressional Budget Office estimates $173 billion in healthcare cost savings from the IRA.
The Office of the Assistant Secretary for Planning and Evaluation estimates that there will be approximately $400 in out-of-pocket savings per enrollee for those impacted by the IRA changes.
The first 10 medications selected for drug price negotiations will take effect starting in 2026.
The IRA eliminates Medicare Part D’s Coverage Gap Phase and caps out-of-pocket max spending at $2,000 starting in 2025.
The Congressional Budget Office (CBO) expects an estimated $173 billion in healthcare cost savings from implementing the IRA. This will benefit both Medicare beneficiaries and taxpayers.
What is the impact on Medicare Part D?
The 117th Congress of the United States enacted the Inflation Reduction Act of 2022 after much deliberation and a narrow win in the House. While most of the IRA focuses on tax revisions and energy credits, a section is dedicated to reducing healthcare costs and lowering prescription drug costs for Medicare Parts B and D. The IRA also extends Affordable Care Act subsidies for three years from 2022-2025. The IRA not only provides for negotiating prescription drug prices but also focuses on restructuring some Medicare Part D benefits.
We will see changes in insulin product price caps, eliminating cost sharing for adult vaccines, lowering out-of-pocket costs, implementing rebates to Medicare, and expanding the Medicare Part D Low-Income Subsidy program. This is intended to improve the accessibility and affordability of medications for beneficiaries, many of whom do not take their medications as prescribed because it is too expensive.
"Research shows that nearly 30 percent of adults report not taking their prescription drugs as prescribed for cost-related reasons."Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services.
Monthly cap on insulin products
Effective this year, 2023, the IRA has implemented a monthly cap on insulin cost sharing for Medicare Parts B and D beneficiaries. Plans may not charge a deductible or more than $35 a month in cost sharing. This will provide significant cost savings for insulin users, who accounted for 3.3 million Medicare Part D beneficiaries in 2020. The CBO anticipates saving $5.1 billion from limited cost-sharing on insulin.
No cost sharing for adult vaccines
Most adult vaccines are covered under Medicare Part B and Part D; however, some require cost-sharing under Medicare Part D. The IRA eliminates Medicare Part D cost-sharing for adult vaccines recommended by the Advisory Committee on Immunization Practices. One of the most commonly administered vaccines this will impact is the shingles vaccine, for which most beneficiaries have paid $57 out of pocket. The CBO anticipates spending $7 billion to cover these vaccines.
Cap out-of-pocket costs and eliminate the coverage gap phase
The IRA will reconfigure the cost structure of Medicare Part D benefits. In the current design, prescription drug costs vary for Part D Medicare beneficiaries throughout the year, depending on their coverage phase. There are four coverage phases:
- Initial Coverage Phase
- Coverage Gap
- Catastrophic Phase
The medication cost can change throughout the year as the beneficiary progresses through the four phases' cost structures. To read more about the current four coverage phases, check out the 5 Best Medicare Part D Plans.
Starting in 2025, The IRA plans to set a spending cap for beneficiaries in the last phase, Catastrophic, so that out-of-pocket max costs do not exceed $2,000. This could provide financial relief to those with significant annual drug costs since beneficiaries currently pay 5% of their medication until the end of the year, even if they have reached the threshold. The IRA will also eliminate the third phase, the coverage gap phase. Beneficiaries will move directly from the Initial Coverage Phase to the Catastrophic Phase. The CBO anticipates spending $30 billion to restructure the Part D benefits and limit beneficiaries’ out-of-pocket costs.
The IRA implemented a Medicare rebate requirement. As of 2022, drug manufacturers must pay Medicare a rebate on their drugs if the price increase exceeds the inflation rate. Medicaid has had a similar provision, but this is the first time Medicare will level the playing field regarding rebates. The rebate money will be deposited in the Medicare Supplementary Medical Insurance trust fund. The CBO anticipates saving $56.3 billion from rebates and expects drug manufacturers to raise prices more judiciously.
Expansion of Medicare Part D low-income subsidy (Extra Help)
The IRA is expanding Medicare Part D Low-Income Subsidy (LIS) benefits for many people who currently only qualify for partial LIS benefits. Medicare Part D beneficiaries whose incomes are between 135–150% of poverty receive partial LIS benefits. Starting in 2024, the IRA will allow those beneficiaries to qualify for full LIS benefits. The CBO estimates spending $2.2 billion for this benefit expansion.
The government estimates that the aforementioned IRA provisions will generate $7.4 billion in annual out-of-pocket savings for 18.7 million enrollees in 2025.
How do drug price negotiations work?
Medicare is currently bound by a “noninterference” clause, which does not permit drug price negotiation between Medicare and the drug manufacturers. However, the IRA adds an exception to the clause allowing negotiations on certain drugs covered by Medicare Parts B and D. Although the IRA was enacted in 2022, drug price negotiations will not take effect until 2026 for Medicare Part D drugs and 2028 for Medicare Part B drugs.
However, the Biden Administration has already announced the first ten medications that will be up for price negotiation, which are:
- Fiasp/NovoLog insulin products
The Centers for Medicare and Medicaid Services (CMS) will select more drugs for negotiation each year. The CBO anticipates saving $98.5 billion over ten years from 2022 to 2031 due to the drug price negotiation program.
Drugs with high Medicare spending will be selected for negotiations if certain conditions are met, such as if it doesn’t have any alternatives and if it is included in Medicare Part B or Part D. If the drug manufacturers do not comply with the negotiated drug prices, they can withdraw their price-negotiated drug from CMS or pay a heavy tax penalty. CMS and the manufacturers will have approximately two years to negotiate the prices. After a negotiated drug price is agreed upon and implemented, all Part D plans must include that drug in their formulary.
What out-of-pocket expenses will be impacted?
Since drug price negotiations have not started, it is difficult to determine how much cost savings will be passed on to Medicare beneficiaries. It is assumed that beneficiaries who pay coinsurance (a percentage of the drug’s price) will see savings if their medications are included in the price negotiations. Experts estimate that most future savings seem to be attributable to the restructuring of Medicare Part D. The Office of the Assistant Secretary for Planning and Evaluation estimates that there will be approximately $400 in out-of-pocket savings per enrollee for those impacted by the IRA changes.
The Inflation Reduction Act has the potential to achieve significant results in improving the Medicare Part D benefit and saving costs for its 51 million enrollees. Medicare beneficiaries deserve to have accessible, affordable, high-quality medication therapy.
- Centers for Medicare & Medicaid Services. Drug Price Negotiation Program Guidance June 2023.
- Assistant Secretary For Planning And Evaluation. Inflation Reduction Act Research Series - Medicare Part D Enrollee Out-Of-Pocket Spending: Recent Trends and Projected Impacts of the Inflation Reduction Act.
- KFF. Explaining the Prescription Drug Provisions in the Inflation Reduction Act.
- Centers for Medicare & Medicaid Services. Inflation Reduction Act and Medicare.
- Mckinsey & Company. The Inflation Reduction Act: Here's what's in it.