Filling the need for trusted information on national health issues

Filling the need for trusted information on national health issues

Juliette Cubanski Follow @jcubanski on Twitter , Tricia Neuman Follow @tricia_neuman on Twitter , Meredith Freed Follow @meredith_freed on Twitter , and Anthony Damico Published: Aug 18, 2022

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which includes a broad package of health, tax, and climate change provisions. The law includes several provisions to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government. These provisions will take effect beginning in 2023 (Figure 1). This brief examines the potential impact of these provisions for Medicare beneficiaries nationally and by state.

Figure 1: Implementation Timeline of the Prescription Drug Provisions in the Inflation Reduction Act

The Inflation Reduction Act includes two policies that are designed to have a direct impact on drug prices:

The Inflation Reduction Act includes several provisions that will reduce out-of-pocket spending for Medicare beneficiaries:

The Inflation Reduction Act also includes a provision to further delay implementation of the Trump Administration’s drug rebate rule until 2032, rather than take effect in 2027. The rebate rule would 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. This rule was estimated to increase Medicare spending and premiums paid by beneficiaries.

High and rising drug prices are a top health care affordability concern among the general public, with large majorities of Democrats and Republicans favoring policy actions to lower drug costs. Provisions in the Inflation Reduction Act are expected to lower out-of-pocket spending by people with Medicare and lower drug spending by the federal government. Prior to consideration by the Senate, CBO estimated the prescription drug provisions would reduce the federal deficit by $288 billion over 10 years (2022-2031). CBO has not yet released a final estimate of budget effects that reflect changes made to the legislation before final passage, such as the $35 per month limit on cost sharing for insulin for people with Medicare and the removal of the provision that applied the inflation rebate to prescription drug use by people with private insurance.

The prohibition against the federal government negotiating drug prices was a contentious provision of the Medicare Modernization Act of 2003, the law that established the Medicare Part D program, and lifting this prohibition has been a longstanding goal for many Democratic policymakers. The pharmaceutical industry has argued that allowing the government to negotiate drug prices would stifle innovation. CBO has estimated that 15 out of 1,300 drugs, or 1%, would not come to market over the next 30 years as a result of the drug provisions in the reconciliation legislation.

The requirement for drug companies to pay rebates for price increases faster than inflation will help to limit annual increases in drug prices for people with Medicare and possibly also those with private insurance. While it is possible that drug manufacturers may respond to the inflation rebates by increasing launch prices, overall, this provision is expected to limit out-of-pocket drug spending growth and put downward pressure on premiums by discouraging drug companies from increasing prices faster than inflation.

Capping Medicare beneficiaries’ out-of-pocket spending under the Medicare Part D benefit – first by eliminating coinsurance above the catastrophic threshold in 2024 and then by adding a $2,000 cap on spending in 2025 – will be the first major change to the Medicare Part D benefit since 2010, when lawmakers included a provision in the Affordable Care Act to close the so-called Part D “donut hole.” A cap on out-of-pocket drug spending for Medicare Part D enrollees will provide substantial financial protection to people on Medicare with high out-of-pocket drug costs. This includes Medicare beneficiaries who take just one very high-priced specialty drug for medical conditions such as cancer, hepatitis C, or multiple sclerosis and beneficiaries who take a handful of relatively costly brand or specialty drugs to manage their medical conditions.

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Filling the need for trusted information on national health issues, the Kaiser Family Foundation is a nonprofit organization based in San Francisco, California.