On August 16, President Biden signed the more than $700 billion Inflation Reduction Act, a sprawling piece of legislation affecting policy related to climate change, taxes and health care. Whatever you think about its other provisions, the parts of the Act that deal with Medicare are indisputably good news for seniors—and even may have positive spillover effects for younger health-care consumers. Here’s a breakdown of the changes this Act will bring to our health-care system over the next decade…
Prescription Drug Changes
Medicare will be required to negotiate drug prices. In 2003, when Congress passed the Medicare Prescription Drug, Improvement and Modernization Act and established Medicare Part D for handling prescription-drug coverage, it prohibited Medicare from negotiating with pharmaceutical companies on pricing. Seniors would enroll in a Medicare Part D program through a private insurance company such as Humana or Blue Cross Blue Shield. Those individual insurers (or their intermediaries, known as Pharmacy Benefit Managers, or PBMs) would negotiate prices with the drug companies—but Medicare as a whole did not have a seat at the table.
Good news: The Inflation Reduction Act changes that. The Medicare system now will be negotiating with pharma, flexing its heft as an 800-pound gorilla to arrive at a “lowest maximum fair price.” Result: Significantly lower prices across the board for seniors on Part D programs.
Even better: This may result in lower drug prices for consumers outside of Medicare. What happens in Medicare and Medicaid often spills over into the rest of the health-care market, and some observers expect that to happen. Others, however, anticipate that pharmaceutical companies might raise prices outside of Medicare to make up for the shortfall. It’s impossible to say who’s right—but certainly Medicare patients should expect to see lower drug prices thanks to the system’s new negotiating power.
This provision won’t kick in until 2026, when Medicare will begin negotiating prices on 10 of the highest-spending Medicare-covered drugs. Fifteen more drugs will follow in 2027…another 15 in 2028…and finally 20 more in 2029. Which drugs will comprise the first batch of 10 (or subsequent batches) has not yet been determined. The Centers for Medicare and Medicaid Services (CMS) has until September of 2023 to select them.
Out-of-pocket drug expenses will be curbed, then capped, for Medicare beneficiaries. Until now, a few unlucky seniors—often the most vulnerable, with serious medical conditions such as cancer or multiple sclerosis—were hit with astronomical out-of-pocket drug costs.
Good news: The Inflation Reduction Act contains a provision that sets an annual cap of $2,000. This is a very big deal. Although most seniors will not reach the cap, it will be a game-changer for those who must take multiple expensive meds. The $2,000-cap provision will take effect in 2025.
Even sooner, in 2024, the Act will curb out-of-pocket medication costs by eliminating the 5% co-insurance fee enrollees are forced to pay if they exceed the catastrophic coverage amount of $7,050. More than one million patients likely will save about $2,700 per year, on average, on brand-name drugs.
Price hikes can’t outpace inflation.
Good news: Starting in 2023, pharma companies that decide to raise prices on their drugs at a rate higher than inflation will be forced to pay rebates to Medicare. The specifics differ according to whether the drugs fall under Medicare Part B or Part D, but generally speaking, they’ll be based on how many units are sold at a cost that puts the rate of the price increase higher than a 2021 benchmark figure adjusted for inflation. Oversimplified example: If a drug company sold 10 units of a heart medication at a cost that was $2 higher than its 2021 price when adjusted for inflation, it would have to pay 10 x $2 = $20 to the trust fund.
Also: This provision includes language indicating that, for certain drugs, seniors on Medicare won’t have to pay more than 20% of a drug company’s price increase adjusted for inflation. So if the company increases its drug cost from $200 to $250 but the inflation-adjusted price is $225, a senior would pay only 20% of that $225, or $45—and the company would pay Medicare a $25 rebate for each sale. Because prices that go into these formulas are not limited to what Medicare pays but rather what’s charged in commercial markets, this provision will likely rein in excessive price hikes across the board.
The out-of-pocket cost of insulin will be capped for Medicare enrollees. On average, the roughly 3.3 million seniors who use Medicare Parts B or D to obtain insulin have been paying about $54 per month. That’s just the average—some are coughing up more than $100…or going without because they can’t afford the medication.
Good news: As of 2023, Medicare enrollees’ out-of-pocket monthly insulin cost will be capped at $35. Even if the manufacturer increases the cost of insulin, Medicare patients will continue paying their locked-in rate of $35 a month.
Adult vaccines will cost seniors nothing. Most vaccines already are relatively inexpensive—but the Inflation Reduction Act improves even on that.
Good news: This provision, set to take effect in 2023, removes all cost for any adult vaccine, including COVID, shingles, influenza and monkeypox. It extends to Medicare enrollees as well as those on Medicaid and the Children’s Health Insurance Program (CHIP).
This is good news not just for the millions of direct beneficiaries of the policy but for public health in general. The removal of any disincentive to get vaccinated means fewer people getting sick, lowering the overall health-care burden.
Overall result: Taking all of the prescription-drug provisions together, the Congressional Budget Office estimates that the federal deficit would be lowered by $288 billion over 10 years.
Medicare subsidies will become more accessible. In the past, seniors whose incomes fell between 135% and 150% of the federal poverty line received only partially subsidized Part D benefits.
Good news: The Inflation Reduction Act not only raises the income level for Medicare subsidies to 150% of the poverty line but also eliminates partial benefits. In other words, eligible seniors will pay no Part D premiums and no deductibles and only modest copayments up to the catastrophic threshold, after which they will pay nothing. This provision, which starts in 2024, will save financially fragile seniors about $300, on average, in annual payments—a meaningful amount for those hovering just above the poverty level.
ACA subsidies will be extended. This provision does not relate to Medicare but rather to people who receive federal subsidies on private insurance plans under the Affordable Care Act and subsequent legislation—many of whom are not yet retirees but approaching retirement age and who can pay up to three times more for insurance than younger people.
The ACA, of course, established subsidies to help low-income Americans purchase insurance over “the Marketplace” (either Healthcare.gov or a state Health Insurance Marketplace). The cutoff for receiving such subsidies was 400% or less of the federal poverty line, which would amount to $54,360 in 2022. If you earned even $1 more than that—$54,361—you were on your own.
During the pandemic, it became clear that many Americans needed even more help obtaining insurance, so, through the American Rescue Plan Act (ARPA), Congress authorized temporary changes to the income requirements. Instead of using an absolute income figure with a hard cutoff (400% of the poverty line), ARPA temporarily re-established eligibility according to the percentage of one’s income spent on insurance. No one would be required to pay more than 8.5% of their annual income on insurance purchased on the Marketplace.
That piece of legislation was set to expire at the end of this year, which would have left an estimated 13 million Americans either paying up to 50% more for insurance or losing coverage. Such a scenario would have been nothing less than catastrophic for millions of families and for the country’s health-care burden.
Good news: The Inflation Reduction Act contains a provision extending those ACA subsidies for another three years. They are set to expire in 2025. Congress will need to vote to extend them again or pass legislation making the subsidies permanent. Thanks to the extension, many struggling preretirees could save about $2,000 on their premiums annually.