How Will the Prescription Drug Provisions in the Inflation Reduction Act Affect Medicare Beneficiaries?
The Inflation Reduction Act of 2022 was signed into law by President Joe Biden on August 16, 2022. This law includes a broad package of provisions concerning healthcare, taxes, and climate change. In particular, the law includes several provisions to reduce drug spending by the federal government. It also has provisions to lower prescription drug prices for people with Medicare. With these provisions due to take effect starting in 2023, I examine their potential impact on prescription drug costs for Medicare beneficiaries.
The federal government will negotiate prices for certain high-cost drugs covered under Medicare
A small number of drugs covered under Medicare Part D and Part B are responsible for a large percentage of the federal government spending. These are mainly drugs for which generic or biosimilar competitors are not available. The Inflation Reduction Act will allow the government to negotiate lower prescription drug costs for some of the highest-priced, covered drugs between 2026 and 2029 and beyond.
The hope is that this historic bill greatly reduces the cost of certain medications for Medicare Part D beneficiaries. However, which specific drugs will benefit with lower out-of-pocket costs and the magnitude of the price reductions achieved remains to be seen.
Drug manufacturers will pay rebates to Medicare if they increase costs faster than inflation
In recent years, approximately half of all drugs covered by Medicare have had price hikes over the inflation rate. Among these drugs with price increases over inflation, one-third had a 7.5% or more price increase.
Once the Inflation Reduction Act takes effect in 2023, the government will use 2021 as the base year to determine price changes relative to inflation. Interestingly, this provision could have a spillover effect on out of pocket costs for people with private health insurance if there’s a slower price growth in prescription drugs covered by private insurance.
There will be a cap on the out-of-pocket spending under the Medicare Part D benefit
In 2024, the Inflation Reduction Act will eliminate coinsurance above the catastrophic threshold. Then, in 2025 the law will add a $2,000 cap on spending. It will also limit the annual increases in Part D premiums for the years 2024 to 2030, plus make other changes to Part D benefits.
At present, in 2022, the catastrophic threshold is $7,050. Beneficiaries have to pay around $3,000 out of pocket for brand-name drugs before they reach the catastrophic threshold. Thereafter, they pay 5% coinsurance on drugs until the end of the year. According to current estimates, beneficiary out-of-pocket spending under the catastrophic threshold is going to increase to approximately $3,100 in 2023 and $3,250 in 2024.
The capping of out-of-pocket drug spending under Medicare Part D will be especially beneficial for people who are on expensive drugs for conditions like multiple sclerosis or cancer. For instance, in 2020, Part D enrollees without low-income subsidies (LIS) had an average annual out-of-pocket spending of over $4,000 for the MS drug Avonex and over $5,000-$6,000 for the cancer drugs Imbruvica and Revlimid.
The Inflation Reduction Act limits Insulin cost sharing to $35 per month for people with Medicare
Starting in 2023, the government will help in controlling health care costs of people with diabetes. The cost of insulin products covered by Medicare Part D and insulin obtained through durable medical equipment under Medicare Part B will be limited to $35 per month. Approximately 3.3 million Medicare Part D enrollees currently spend $54 on average for each insulin prescription (this is a 2020 figure). Medicare beneficiaries will pay less out of pocket for insulin from 2023 onwards when selected insulin products will be capped at monthly insulin copays of $35.
Cost sharing for adult vaccines covered by Medicare Part D will be eliminated
In 2020, more than 4 million Medicare beneficiaries received a vaccine covered under Part D, including 3.6 million who received the shingles vaccine. In 2018-2019, 25 states did not cover all the vaccines recommended by the Advisory Committee on Immunization Practices (ACIP). Also, 15 states out of 44 that responded to a survey said they required beneficiaries to share the cost of adult vaccines. Beginning in 2023, the Inflation Reduction Act will help to improve access to adult vaccines for Medicaid-enrolled adults and CHIP-enrolled children and families.
There will be expanded eligibility for full Part D Low-Income Subsidies (LIS)
Currently, there is a partial LIS benefit for individuals with incomes between 135% and 150% of the federal poverty level. Such beneficiaries are required to pay some portion of the Part D premium, standard deductible, coinsurance, and copayments for drug coverage above the catastrophic threshold. Starting in 2024, low-income beneficiaries with incomes up to 150% of poverty will have expanded eligibility for full Part D LIS. They will pay no Part D premium or deductible and only modest copayments for prescription drugs until they reach the catastrophic threshold, after which they will not be subject to any cost sharing. This could lower drug prices by $300 per year on average.
The Trump Administration’s drug rebate rule will be delayed until 2032
The Inflation Reduction Act includes a provision to delay the implementation of the Trump administration’s drug rebate rule from 2027 to 2032. This rule is designed to eliminate the anti-kickback safe harbor protections for prescription drug rebates negotiated between drug manufacturers and pharmacy benefit managers (PBMs) or health plan sponsors in Medicare Part D. Once implemented, the rule may increase Medicare spending and premiums paid by many Medicare beneficiaries.
My thoughts…
Both Democrats and Republicans are aware of the pressing need for affordable coverage of life-saving, high-priced drugs in the US. The Inflation Reduction Act signed by President Joe Biden will help to lower out-of-pocket spending by millions of Medicare patients. It will also allow the government to negotiate prices for critical drugs and lower overall spending on drugs.
The Congressional Budget Office (CBO) estimates that the new law will reduce the federal deficit by $288 billion over the next 10 years. In particular, allowing the federal government to negotiate drug prices with pharmaceutical manufacturers is a key achievement of these future reforms.
The pharmaceutical industry has argued that making prescription drugs subject to a negotiation process relative to the current scenario will stifle drug innovation. However, this argument does not hold water. Per CBO estimates, only 1% (15 out of 1,300 drugs) would be prevented from coming to market over the next three decades as a result of the new provisions.
A key feature of the Act in my opinion is the requirement for drug companies to pay rebates or enhanced subsidies if drug prices increase faster than inflation. This will benefit people with Medicare health care coverage and potentially also those with private health insurance. However, the provision may encourage drug manufacturers to launch drugs at higher prices in anticipation of the inflation rebates. Overall, however, I think this provision for premium subsidies will reduce out-of-pocket spending.
The capping of insulin costs will bring relief to millions of Americans with diabetes. Another major change for controlling health care costs is the capping of Medicare beneficiaries’ out-of-pocket spending. This will include eliminating coinsurance above the catastrophic threshold in 2024, followed by the addition of a $2,000 cap on spending in 2025. The provision will provide substantial benefit to Medicare Part D enrollees with high out-of-pocket drug costs, such as those taking a handful of high-priced specialty drugs for medical conditions such as hepatitis C, cancer, or multiple sclerosis.
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