Medicare Prescription Drug Provisions of Inflation Reduction Act

The reconciliation bill passed by Congress includes several provisions affecting prescription drug costs for Medicare beneficiaries. Democrats and Republicans offer opposing views on how the legislation will affect seniors. We’ll explain what the bill would do.

“We are making the cost of prescription drugs a lot lower,” Senate Majority Leader Chuck Schumer told NPR on Aug. 8, the day after Democrats narrowly passed the bill with a tie-breaking vote by Vice President Kamala Harris. A day before the vote, Senate Minority Leader Mitch McConnell criticized drug price negotiation aspects of the bill, saying: “Their policy would bring about a world where many fewer new drugs and treatments get invented in the first place, as companies cut back on R&D.”

The reconciliation bill, which passed Aug. 12 in the House and now goes to President Joe Biden, would lower at least some Medicare beneficiaries’ prescription costs on Part D, Medicare’s prescription drug program, and on Part B, which covers drugs administered in a doctor’s office, by:

• Requiring the federal government to negotiate prices for some Medicare drugs, 10 medications to start in 2026, rising to 20 in 2029.
• Capping seniors’ out-of-pocket costs at $2,000 a year for Medicare’s prescription drugs.
• Requiring rebates from drug companies if their prices increase faster than inflation.
• Expanding eligibility for prescription drug benefits in the Part D low-income subsidy program.
• Capping monthly insulin copays at $35.
• Making vaccines free, with no out-of-pocket costs.
• Limiting Part D premium increases.

Republicans, like McConnell, have focused on the price negotiation aspect, and the pharmaceutical industry has long fought against attempts to enact such a policy. McConnell points to a biotechnology-funded study to claim more than 100 “major new medicines” might not be introduced over 10 years, but the nonpartisan Congressional Budget Office estimates there would be just two fewer drugs launched over the next decade under the legislation.

Overall, CBO estimated an earlier version of the Medicare prescription drug provisions would save $287.6 billion over 10 years. The bill no longer includes a provision to also require drug-company rebates for prices on the private market that rise faster than inflation.

Update, Aug. 18: Biden signed the Inflation Reduction Act into law on Aug. 16.    

Impact on Beneficiaries

Seniors who spend more than $2,000 a year on prescriptions would clearly benefit. That provision would launch in 2025, and could affect more than 1.4 million beneficiaries, according to Kaiser Family Foundation estimates based on 2020 enrollee data.

Right now, out-of-pocket costs of more than $7,050 for Part D drugs bumps seniors into what’s called the “catastrophic” phase — they pay 5% of their drug costs after that threshold. The reconciliation bill — called the Inflation Reduction Act — would eliminate the 5% copay in 2024, benefiting more than 1.3 million seniors, KFF estimates, as a precursor to implementing the $2,000 out-of-pocket cap the following year.

That out-of-pocket cap may be the easiest provision to understand as a cost benefit to Part D enrollees, but Rachel Sachs, a professor at the Washington University in St. Louis’ School of Law, told us “there’s a whole range of ways in which we are protecting seniors” in the bill. That includes limiting Part D premium increases to 6% per year from 2024 to 2029. The measure means Part D plans can’t take increased costs of reducing out-of-pocket spending and “turn around and put that back on beneficiaries in the form of premiums.”

Sachs — whose expertise includes food and drug regulation, and health law — also cited another provision that allows seniors to spread out the cost of their drugs over the year as beneficial to seniors on fixed incomes.

The cap on insulin copays also could affect millions. In 2020, 3.3 million Medicare Part D enrollees used insulin, KFF found, with average per-prescription, out-of-pocket spending of $54. Some of those enrollees may benefit from a program launched in 2021 in which certain Part D plans capped copays at $35 for some insulin products. But the reconciliation bill would require all plans to cap all insulin products at that price.

About 400,000 Medicare beneficiaries who receive partial benefits under the low-income subsidy program could benefit from an expansion in eligibility for full benefits. The program pays Part D premiums and cost-sharing for seniors with low incomes and assets. Partial benefits now go to those with income between 135% and 150% of poverty; the Democrats’ bill extends full benefits to that income group. “Annual out-of-pocket costs for these beneficiaries could fall by close to $300, on average, based on the difference between average out-of-pocket drug costs for LIS [low-income subsidy] enrollees receiving full benefits versus partial benefits in 2020,” KFF said in its July 27 report.

Seniors who now can’t afford to buy needed medicines also would benefit from the bill. Sachs said in a phone interview that “a lot of seniors don’t even fill these prescriptions,” but the cap on out-of-pocket spending and other cost-lowering provisions will “increase utilization and increase spending because people can now afford their medications.”

Rena Conti, a health economist at Boston University’s Questrom School of Business, told us the reduction in out-of-pocket costs “is actually going to be huge boon to the industry,” because use of prescription drugs will increase. “Drugs don’t work if people can’t access them,” she said in a phone interview. “What this bill is trying to address is a fundamental problem in access to these drugs that are supposed to provide real relief to people right now.”

The legislation also repeals a Trump administration drug rebate rule, which had not yet taken effect because it had been delayed until 2027. The rule would have stopped negotiated rebates in Medicare Part D between pharmaceutical manufacturers and either pharmacy benefit managers or health plan sponsors.

Price Negotiation

The benefits of price negotiation to seniors are more difficult to anticipate — it depends on which drugs are affected.

In KFF’s late July analysis, it didn’t say how many seniors could directly benefit from the provision. “The number of Medicare beneficiaries who would see lower out-of-pocket drug costs in any given year under this provision, and the magnitude of savings, would depend on which drugs were subject to negotiation under the legislation and the price reductions achieved through the negotiation process relative to current prices,” KFF said.

As we’ve written before, under current law, the federal government cannot negotiate prices with drug manufacturers for Medicare. Part D is made up of many privately run plans that conduct their own negotiations. Many politicians, particularly Democrats, have long said the government should be allowed to negotiate drug prices in order to lower the high cost of medications.

The reconciliation bill requires the secretary of the Department of Health and Human Services to negotiate prices for some high-cost drugs that lack competition from generics or biosimilars, which are drugs without meaningful clinical differences from an existing product. The drugs subject to negotiation also have to have been on the market for a while: nine years for small-molecule drugs and 13 years for biologicals. Ten Part D drugs could be negotiated in 2026, increasing to 15 drugs the next year. In 2028, Part B drugs (those administered in a doctor’s office) are included, and by 2029 and beyond, up to 20 drugs can be negotiated.

CBO estimated about $100 billion in savings for Medicare from this provision over 10 years.

Sachs said limiting negotiation to drugs that had been on the market for nine or 13 years was “to make sure companies could recoup their investments” in drug development.

But critics have said any drug negotiation by Medicare would negatively affect pharmaceutical companies’ revenues and, therefore, lead to less investment in research and development, and fewer new drugs being introduced to the market.

McConnell cited a study funded by BIO, a trade association for biotechnology companies and related groups, when he said that “104 of 110 major new medicines released in the past decade may never have made it to market” under the drug negotiation plan. That study, by a consulting firm called Vital Transformation, projects a 55% revenue reduction for 12 firms compared with 2022 net earnings and says under such a revenue drop “only 6 of 110 approved therapies would be considered ‘not at risk’ of cancelled development.” The study was based on the Build Back Better legislation’s negotiation provisions, which are similar to the reconciliation bill.

The CBO, meanwhile, estimated the legislation would lead to 15 fewer drugs being introduced over 30 years, out of 1,300 total.

Conti told us the CBO’s 10-year estimate is the right one to focus on because “30-year estimates on anything are highly uncertain.” Over the next 10 years, CBO said two fewer drugs would be introduced.

“The amounts in this estimate are in the middle of the distribution of possible outcomes, by CBO’s assessment, and they are subject to uncertainty,” the analysis said, adding that “CBO did not predict what kind of drugs would be affected.”

Conti was critical of the BIO-funded report, particularly its comparisons of the U.S. proposal to policies in the European Union on drug negotiation. The CBO also estimated all of the prescription drug provisions, not the drug negotiation provision on its own, as the industry-funded study did. Since it’s expected prescription use will increase due to the cap on out-of-pocket costs, she said, “net-net it’s not obvious that negotiation is actually going to do much” to impact the industry.

Conti also noted that the CBO analysis doesn’t account for the quality of the two drugs potentially lost over the next decade. Around 30 to 50 drugs are approved by the Food and Drug Administration every year, she said. “The vast majority are not transformative in any way,” but rather are tweaks on existing products.

The CBO said the negotiation and inflation-rebate provisions of the bill would lead to higher launch prices for new drugs, “relative to what such prices would be otherwise.” Drug companies would start with higher prices because of these price-constraint measures. But CBO said the inflation-rebate program would be the primary driver of the effect, because it applies to drug prices a year after launch. The negotiation program doesn’t begin for several years after drugs are introduced.

“Over time, slower price growth would attenuate the effect of higher launch prices,” CBO said.

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