The Inflation Reduction Act of 2022, which President Biden signed into law on Aug. 16, has important implications for Medicare beneficiaries, but the new benefits don’t all hit at once. Here’s a look at what to expect—and when.
Drug price negotiations
For the first time, the federal government can now negotiate prices for some drugs under Medicare. When the Medicare Modernization Act of 2003 was passed, it established Medicare Part D (prescription drug coverage), but it also included a controversial provision that forbade the government from negotiating with drug makers for the best prices. (Medicaid and the Department of Veterans Affairs are permitted to negotiate prices.)
The “noninterference clause,” which was heavily written by the pharmaceutical industry, was a bargaining chip used to attract “market-oriented Republican votes” for the bill, according to a report in Health Affairs. In short, “the drug lobby worked hard to ensure Medicare wouldn’t be allowed to cut into the profits which would flow to big Pharma thanks to millions of new customers delivered to them by Part D,” noted the National Committee to Preserve Social Security & Medicare.
This new bill allows some negotiation, but it isn’t going to be simple or quick. The law says that Medicare can negotiate the prices of just 10 drugs in 2026. Those must be brand name or biologic drugs that do not have generic or biosimilar competitors. Further, the drugs must have already been on the market for at least seven to 13 years (small-molecule drugs and biologics, respectively.) Medicare will be able to negotiate the prices for 15 more drugs in 2027, another 15 in 2028 (the first year it can negotiate for drugs that are covered under Part B Medicare instead of Part D), and then 20 per year starting in 2029.
Critics argue that allowing the federal government to negotiate prices will stifle innovation, but the nonpartisan Congressional Budget Office estimates that the new regulations will result in a decrease of just 1 percent of new drugs over the next 30 years. The pharmaceutical industry is not the only source of new drug development: Universities develop about one-third of new drugs.
Rebates for prices that exceed inflation
Drug makers increase their prices every January, but in 2023, they’ll be facing a new restriction: If those price increases exceed the rate of inflation, the drug manufacturers will have to pay rebates to Medicare. This regulation will affect about half of the drugs that Medicare covers. This is a win for Medicare, but not a loss for the drug makers, who will likely shift any lost profits onto people with private insurance or no insurance.
The Medicare Part D inflation rebate goes into effect on Oct. 1, 2022, and the Part B goes into effect in the first quarter of 2023. (Part B covers drugs that are administered by a health-care provider or through medical equipment at home. Part D covers the prescriptions you fill at the pharmacy.)
Cap on out-of-pocket spending
In perhaps the biggest win for Medicare beneficiaries, the law caps yearly out-of-pocket spending on prescription drugs. It does so in two steps. In 2024, it will eliminate coinsurance above the catastrophic threshold. (In 2022, Medicare beneficiaries pay 5 percent of all costs after they spend $7,050.)
But the real change comes in 2025, when all out-of-pocket drug spending will be capped at $2,000 per year. No one on Medicare will have to spend more than $2,000 per year on covered medications. This change will be particularly beneficial for people who take high-cost medications for conditions such as autoimmune diseases, cancer, hepatitis C, or multiple sclerosis. That cost can be broken into monthly payments.
Capped insulin, vaccine costs
Under the new law, starting in 2023, insulin will cost no more than $35 a month for Medicare beneficiaries. (The provision to cap the cost of insulin for all insured Americans was stripped from the bill.) The law also removes any costs for vaccinations for Medicare beneficiaries.
Delays drug rebate rule
The Act delays implementation of the drug rebate rule that was scheduled to go into effect in 2026. The rule eliminates the anti-kickback safe harbor protections for prescription drug rebates negotiated between drug manufacturers and pharmacy benefit managers or health plan sponsors in Medicare Part D. This rule, which is expected to increase Medicare spending and premiums paid by beneficiaries, is now pushed back to 2032. The nonpartisan Congressional Budget Office reported in 2019 that the rule would increase federal spending by $177 billion through 2029 as a result of “an increase in premiums and drugmakers implementing a chargeback system where they withhold some of the discounts they previously negotiated with payers.”
Winners and losers
For those on Medicare, this new law will help—in some cases dramatically. For Americans who are privately insured, expect the cost of your prescription drugs to increase as the pharmaceutical companies pass the costs on to you.