Inflation Reduction Act a first step toward prescription drug price reform
President Biden signed the Inflation Reduction Act of 2022 into law on Aug. 16. The law covers policy priorities from climate change to corporate taxation and health care. Notably, it aims to reduce the cost of prescription medications for the 64 million seniors covered by Medicare.
Americans spend $350 billion on prescription drugs each year, about half of which comes from Medicare Part D (at home medications) and Part B (outpatient medications administered by doctors, such as chemotherapy infusions). Drugs tend to be more expensive in the U.S. than in other developed countries, so the IRA is a significant step by our government to reign in these prices and lower healthcare spending.
How are the prices of prescription drugs determined now?
Prescription drugs pass through several intermediaries before reaching consumers. The manufacturer (commonly the pharmaceutical company who holds the patent to the drug) sells it to a wholesaler, who in turn, sells to a pharmacy. The pharmacy sets a retail price to include a profit margin on top of what it paid the wholesaler. The consumer obtains the drug from the pharmacy but most of the time only pays for a portion of the retail price, thanks to insurance coverage.
How much the insurance company reimburses the pharmacy is determined by another middleman called the pharmacy benefit manager who leverages the scale of the insurance network to secure discounts from pharmacies and manufactures. Under this traditional model, Medicare Part D is administered by insurance companies that negotiate through PBMs. The Medicare Modernization Act of 2003 explicitly prohibits the government from negotiating directly with drug makers.
How does the new law change that?
The IRA mandates the federal government to negotiate with drug manufacturers to set a “maximum fair price” at which a drug may be sold. The price will be based on the historical price of the drug, considering all existing concessions and discounts. Only single-source brand name drugs that represent the highest spending are eligible for negotiation. The drug must have been on the market for a certain number of years and have no generic available. The U.S. Department of Health and Human Services has a few years to work out the details of the process. Starting with 10 drugs in 2026, eventually over 100 drugs will be negotiated in the next decade.
Drug manufacturers are charged a monetary penalty (up to 95% of the drug’s sales) if they don’t engage in negotiations or fail to offer the agreed-upon price. In addition, manufacturers that raise the price of their drugs faster than the rate of inflation must pay rebates to Medicare.
How does it benefit consumers?
The savings Medicare achieves on prescription drugs will be passed along to the beneficiaries in several ways:
Lower drug prices will directly reduce the 25% share patients are responsible for after the deductible.
The 5% coinsurance for the catastrophic drug coverage will be eliminated in 2024.
The total out-of-pocket medication cost for anyone enrolled in Part D will be capped at $2,000 beginning in 2025; currently there’s no cap.
Considering that insurers will cover a larger share of the costs and may pass the burden to patients as higher premiums, the growth of the Part D premium will be limited to no more than 6% per year for 2024-2030.
Subsidies offered for low-income seniors will be expanded.
These changes won’t affect people with commercial insurance or the uninsured. However, like hospital and provider reimbursements, the drug prices negotiated by the government may become a reference for other insurance plans, reducing overall drug costs in the U.S.
What other health provisions are included?
For Medicare members only, all adult vaccines will be free, and the out-of-pocket cost of insulin will be capped at $35 per month, beginning as soon as next year. The IRA also extends the pandemic premium subsidies for marketplace insurance plans put in place by the American Rescue Plan. Originally set to expire by the end of the year, these subsidies will remain available through 2025.
The full impact of IRA on health care costs will take years to unfold following its phased implementation and reactions from pharmaceutical and insurance companies.
Qing Yang and Kevin Parker are a married couple and live in Springfield. Dr. Yang received her medical degree from Yale University School of Medicine and completed residency training at Massachusetts General Hospital. She is an anesthesiologist at HSHS Medical Group. Parker has helped formulate and administer public policy at various city and state governments around the country. He is formerly the group chief information officer for education with the Illinois Department of Innovation and Technology. This column is not intended to substitute for professional medical advice, diagnosis or treatment. The opinions are those of the writers and do not represent the views of their employers.
This article originally appeared on State Journal-Register: Inflation Reduction Act a step toward prescription drug price reform
