After many months of negotiation, President Biden finally signed the Democratic Party’s big spending bill into law on August 16, 2022. Albeit much narrowed from its original form. The official name of the legislation is the Inflation Reduction Act of 2022 (“IRA” or “Act”).
The IRA aims to reduce inflation, reduce carbon emissions, allow Medicare to negotiate prescription drug prices, and raise corporate taxes. The Act also includes many additional provisions that will impact Medicare beneficiaries.
This article provides a high-level overview of the Medicare-related provisions and my opinion on how these provisions may affect Medicare beneficiaries. Read on to see how the bill will affect you.
Medicare Prescription Drug Price Negotiations
Before the passage of the IRA, it was illegal for the federal government to negotiate the price of prescription drugs under Medicare. The IRA not only allows the government to negotiate drug prices, but it requires the government to do so.
The Act requires the U.S. health secretary to establish a new “Drug Price Negotiation Program.” The secretary will rank the drugs with the highest expenditures under Medicare. And then negotiate with the manufacturers the prices that Medicare will pay.
However, not all drugs will be eligible to be negotiated as the drugs must meet specific criteria. Most notably, the Act excludes drugs that have not been on the market for a defined number of years.
Further, it will take time for Medicare beneficiaries to see the effects of the price negotiations. The government will negotiate the price of 10 drugs in 2026, 15 in 2027, 15 in 2028, and 20 in 2029.
Impact on Medicare Beneficiaries:
Beneficiaries will likely not see any benefits until at least 2026. In the long run, Medicare beneficiaries will pay much less for expensive drugs. However, beneficiaries may expect to pay more for newly approved drugs (which will not be eligible for price negotiations for several years). The more prominent winner is the federal government. A previous Congressional Budget Office report estimated a $99 billion reduction in Medicare spending through 2031.
Limiting Medicare Drug Price Growth to Rate of Inflation
In the past, prescription drug prices have commonly exceeded the inflation rate. And many times, by a large margin. Thanks to the IRA, Medicare drug price increases will be limited to the inflation rate beginning in 2023. The Act accomplishes this through “inflation rebates.” Drug manufacturers will be required to pay a rebate to the government should their drug prices increase faster than inflation. However, the Act excludes Part D drugs with an average annual cost of less than $100 annually.
Impact on Medicare beneficiaries:
This provision will help prevent Medicare drug prices from rapidly increasing. The federal government will also save significantly. However, experts predict manufacturers will increase the launch price of newly developed drugs. Meaning any new drugs will be priced higher than they would have been absent this bill.
Cap on Out-of-Pocket Spending for Part D
The current Medicare Part D Drug program design is wildly complex, with beneficiaries moving through four stages of coverage. Plus, there is currently no maximum out-of-pocket spending cap for Part D. The IRA reforms Medicare Part D drug coverage and caps beneficiaries’ out-of-pocket costs at $2,000 per year.
Under the current program design, beneficiaries move to the final “catastrophic coverage” stage after spending $7,050 (2022) on prescription drugs. In this stage, beneficiaries pay $3.95 for generic drugs and $9.85 for brand-name drugs, or 5% of the retail costs, whichever is higher. Beginning in 2024, Medicare beneficiaries who reach the “catastrophic coverage” stage will no longer be required to pay any share of costs once they reach this stage.
Beginning in 2025, the $2,000 out-of-pocket maximum spending caps will kick in. Further, beneficiaries can spread out drug costs evenly throughout the year. Thus, beneficiaries will be able to estimate their expenses more accurately.
Impact on Medicare beneficiaries:
The Kaiser Family Foundation estimated that 1.3 million beneficiaries reached the “catastrophic coverage” stage in 2020, and 1.4 million beneficiaries spent more than $2,000 on prescriptions in 2020. These beneficiaries will benefit greatly from the new law.
However, the insurance carriers will be responsible for shouldering a large percentage of the drug costs over the consumers’ $2,000 limit. Thus, the carriers are expected to pass some of those costs back to consumers through increased premiums and cost-sharing. Therefore, Medicare beneficiaries who do not pay high drug prices may experience higher premiums and cost-sharing in the future.
Limit on Medicare Part D Premium Increases
There is currently no limit on Part D annual premium increases; however, premium increases have remained relatively low since the government implemented Part D in 2006. Given the $2,000 Part D cap explained above, many experts foresee future significant Part D premium increases. Therefore, the IRA established a limit on Part D premium growth to no more than 6% for the year for the years 2024 through 2029.
Impact on Medicare beneficiaries:
The limit on Part D premium increases will benefit Medicare beneficiaries significantly through 2029. This provision of the law will help stabilize Part D premiums as the insurance carriers adjust to the new rules. However, since the limit is only in place through 2029, there is concern about premium growth in 2030 and beyond. By that time, hopefully, the government’s price negotiations will help lower costs for the insurance carriers–and the carriers will not feel the need to pass on increased costs to consumers.
Limit on Insulin Prices for Medicare Beneficiaries
Insulin for many Medicare beneficiaries is still expensive under some Medicare plans. The IRA limits the cost of insulin for Medicare beneficiaries to $35 per month beginning in 2023.
Impact on Medicare beneficiaries:
The Kaiser Family Foundation estimated that 3.3 million Medicare Part D enrollees used an insulin product in 2020, but 1.6 million of these enrollees received assistance through low-income subsidies. The 1.7 million beneficiaries that did not receive assistance were found to pay an average of $54 per insulin prescription. This provision will help those 1.7 million lower their monthly expenses.
Expansion of Prescription Assistance for Low-Income Individuals
The Low-Income Subsidy (LIS), also called “Extra Help,” is a federal program that helps low-income individuals pay for Part D prescription drugs. Individuals may qualify for a full or partial subsidy depending on their income levels and the number of assets they own.
The IRA increases the income limit for the full subsidy amount from 135% to 150% of the federal poverty level beginning in 2024. The asset limits will remain unchanged.
Impact on Medicare beneficiaries:
Approximately 400,000 Medicare beneficiaries will benefit from this change. It is a much-needed saving for those affected and will help them immensely.
Free Vaccinees for Medicare Beneficiaries
Part D Drug Plans do not currently cover all adult vaccines. Starting in 2023, Part D Plan will be required to cover all adult vaccines that are recommended by the Advisory Committee on Immunization Practices. And without any cost to the beneficiaries.
Impact on Medicare beneficiaries:
Many beneficiaries already receive vaccines at no cost. And for those who had to pay, the costs were not unreasonable. However, this provision will hopefully result in more Medicare beneficiaries obtaining vaccines.
Repeal of the Trump-Era Drug Rebate Rule
In 2019, the Trump Administration released a proposed rule to eliminate rebates from pharmaceutical companies to pharmacy benefit managers. The purpose of the proposed rule was to reduce out-of-pocket drug expenses for Medicare beneficiaries. However, many experts believe that while cost-sharing for beneficiaries may decrease, premiums would increase. Further, most experts believed government spending under Medicare would increase.
The IRA delays the rule until 2032. According to CBO estimates, repealing the Trump-Era Drug Rebate Rule would save the government $122 billion by 2031. The impact on Medicare beneficiaries is hard to be determined due to varying expert opinions.
Impact on Medicare beneficiaries:
Undetermined.
Conclusion
The Inflation Reduction Act will significantly lower government expenditures on Medicare and should result in more affordable drug coverage for Medicare beneficiaries.
The $2,000 Part D spending cap will substantially benefit the estimated 1.4 million beneficiaries who spent more than $2,000 on drug costs in 2020. As well as those who would have spent over that threshold in future years. However, the effect on the remaining 46.6 million Medicare beneficiaries who would not reach the $2,000 threshold remains to be seen. In my opinion, these beneficiaries could see slightly increased costs as the insurance carriers may pass their increased costs on to their plan members.
The price negotiations and inflation rebates will put significant downward pressure on costs for Medicare beneficiaries. However, the $2,000 Part D spending cap and the carrier and manufacture reactions may result in an opposing upward pressure on costs. In time, I believe downward cost pressures should outweigh upward cost pressures, and Medicare beneficiaries, as a whole, will experience lower drug expenditures due to this Act. However, keep in mind that the price negotiations will take time. Results will not be immediate.
References:
https://www.crfb.org/blogs/cbo-estimates-drug-savings-reconciliation. Accessed 8/17/2022.
https://www.kff.org/medicare/issue-brief/how-will-the-prescription-drug-provisions-in-the-inflation-reduction-act-affect-medicare-beneficiaries/. Accessed 8/17/2022.