WASHINGTON, DC – AUGUST 16: U.S. President Joe Biden (C) signs The Inflation Reduction Act with … [+] Senate Majority Leader Charles Schumer (D-NY) (L) and House Majority Whip James Clyburn (D-SC) in the State Dining Room of the White House August 16, 2022 in Washington, DC. The $737 billion bill focuses on climate change, creating clean energy jobs and lowering prescription drug prices.(Photo by Drew Angerer/Getty Images)
President Biden signed the Inflation Reduction Act into law on August 16th, 2022. The IRA is the nation’s largest climate investment in history. It contains numerous provisions aimed at combating climate change and creating clean energy jobs.
But it’s the healthcare measures contained in the law that have garnered a disproportionate amount of the media’s attention.
According to recent polls conducted by the Kaiser Family Foundation the public strongly supports the IRA’s prescription drug pricing provisions. And in the year since its enactment, the legislation has capped out-of-pocket costs for covered insulin products in Medicare at $35 for each monthly prescription, eliminated enrollee cost sharing for adult vaccines recommended by the Centers for Disease Control and Prevention’s Advisory Committee on Immunization Practices, and calculated rebates which it will require that drug companies pay for raising list prices of prescription drugs above the rate of inflation.
However, on the one-year anniversary of the IRA’s signing, most of the bill’s impact on drug prices and Medicare beneficiary out-of-pocket spending has yet to be determined.
Several of the more consequential changes will occur beginning next year when Medicare beneficiaries will no longer be charged a 5% co-insurance (co-payment calculated as a percentage of the list price of a prescription drug) in the so-called catastrophic phase of Medicare’s outpatient (Part D) drug benefit program. This is a phase a beneficiary enters once they and their plan have already spent a pre-determined amount on prescription drugs. Ostensibly, it is designed to protect beneficiaries from having to pay very high out-of-pocket costs as it lowers co-insurance from 25% to 5%. But there is currently no cap on out-of-pocket expenses. And, 5% of the cost of medications that are often priced at more than $100,000 on an annual basis is a lot of money for most people on Medicare.
In 2025 there will be a $2,000 annual cap on out-of-pocket spending by Medicare beneficiaries in Part D. Integral to this very significant change is a a redesign of Part D, with a complete overhaul of the catastrophic phase of the benefit.
At present, beneficiaries enter the catastrophic phase after they’ve spent thousands of dollars out-of-pocket on their medicines. The federal government steps in to cover 80% of costs in the catastrophic phase while plans are responsible for 15%.
In 2025, the restructuring of Part D shifts the cost liability away from the federal government and to payers or pharmacy benefit managers and drug makers. Medicare will no longer be the reinsurer it is today, as its cost burden goes from 80% to 20%. Meanwhile, payers and drug companies pick up the tab, as they will be responsible for 60% and 20% of the cost, respectively.
As part of the third major pillar in the IRA’s drug pricing provisions, by September 1st of this year the Centers for Medicare and Medicaid Services will reveal the list of the first batch of 10 drugs it has selected for price negotiation. Negotiations won’t be completed until roughly a year later when a final net price will be publicly posted. This price will ultimately go into effect in 2026.
For certain drugs Medicare selects for price negotiation, specifically those in robustly competitive therapeutic classes, it may be difficult to achieve deeper discounts than the rebates these pharmaceuticals currently face in negotiations with PBMs. As such, the fears of the IRA leading to a crippling of revenue streams in the later stages of these drugs’ lifecycles may be exaggerated. At the same time, the cost savings to Medicare beneficiaries from drug price negotiations could be less than anticipated.
For Medicare beneficiaries, the redesign of Part D, which encompasses all outpatient drugs, will have a substantial impact. Changes in Part D will save 19 million Medicare beneficiaries an average of $400 annually.
Similarly comprehensive, the measure which penalizes manufacturers who raise the price of their drugs above the inflation rate by forcing them to rebate that excess cost, will save Medicare beneficiaries a modest amount of money as the list price growth is probably tempered somewhat. The provision includes most Part B (physician-administered) branded products and practically all outpatient drugs.
But for Medicare beneficiaries, drug price negotiations won’t be nearly as comprehensive or impactful as they affect a narrow subset of drugs: 10 will have their negotiated prices implemented in 2026; 15 in 2027; 15 in 2028; and possibly as many as 20 in 2029. It’s not certain if CMS will be able to select 20 drugs for negotiated price implementation in 2029 since a limit on the aggregated number of selected drugs will likely be reached somewhere between 55 and 60 by virtue of the criteria used to determine what qualifies a drug as negotiation-eligible.
The downward pressure on prices of drugs chosen for negotiation will lead to limited cost savings for Medicare beneficiaries, particularly as it applies to the beneficiary’s deductible and co-insurance or cost-sharing.
The name of the bill, Inflation Reduction Act, is perhaps a misnomer. President Biden has even hinted at that. And when the IRA was proposed, the Congressional Budget Office stated that its impact on inflation would be “negligible.”
However negligible the estimated overall impact of the IRA, the healthcare-related provisions—especially Part D redesign—will help lower Medicare beneficiaries’ out-of-pocket costs.
