The Limitations of the Inflation Reduction Act’s Healthcare Provisions
Medicare savings will cost patients in the long run.
The Inflation Reduction Act’s healthcare provisions are expected to result in savings to Medicare, but those savings will likely lead to higher health insurance premiums.
Capping drug price increases will raise the launch prices of future drugs.
The IRA also caps insulin copayments, but the private market has already promised to deliver $30 insulin vials and $55 boxes of five insulin pens by 2024. Expediting the FDA review of new, affordable biosimilars may be a more effective way of cutting insulin prices than adding new layers of regulation.
While numerous parts of the Inflation Reduction Act (IRA) were stripped out during its slow trek through Congress, many provisions regarding healthcare remained in the final bill signed into law in August. These changes to Medicare will likely cut Medicare’s costs but, as with all regulations, come with other potential consequences and loopholes that may limit their effectiveness.
As laid out by the Congressional Research Service and the Kaiser Family Foundation (KFF), the IRA has several healthcare-related components, all of which are limited to Medicare. It includes federal drug price negotiation, limits on price increases for drugs, restructuring of the benefit formula for Medicare Part D, a cap on Medicare Part D out-of-pocket spending, and caps on insulin co-payments. It also eliminates cost sharing for adults for vaccines in Medicare Part D and expands eligibility for Medicare Part D low-income subsidies. The Congressional Budget Office (CBO) projects savings to Medicare of $238 billion over 10 years.
Some of the provisions are relatively simple, such as the limit to price increases for prescription drugs to the rate of inflation. The out-of-pocket spending cap for Medicare Part D is set at $2,000 and indexed to rise with the costs of Medicare Part D, and the cap on insulin copayments is $35 per month. The two more complex changes are the direct negotiations on drug prices and the restructuring of the Medicare Part D benefit formula.
The Secretary of the U.S. Department of Health and Human Services is empowered to negotiate the prices of a limited number of high-cost drugs, beginning at 10 in 2026 and increasing to 20 medications by 2029. The drugs must be single-source brand names without generic or biosimilar competition. Small-molecule drugs must have been on the market for at least nine years and biological products for at least 13 to be eligible for inclusion. The IRA caps the maximum negotiated payment based on the amount of time the drug has been on the market at 75% of the average market manufacturer price for drugs only nine years old and lowering to only 40% for drugs that are 16 or more years on the market. This would be enforced with an excise tax of 65% of all sales of the drug on any drug company refusing to accept the negotiated price, rising by 10% each quarter until it reaches 95%.
The restructuring of Medicare Part D’s benefit formula shifts more healthcare costs from patients and Medicare to insurers. The KFF article linked above includes a graphical breakdown of how the balance of costs will change in the coming years change (see below). Patient payment for non-catastrophic care will remain at 25%, but the out-of-pocket spending threshold for care to be considered catastrophic will drop from $3,100 to $2,000 by 2025. Much of the current burden on drug manufacturers and Medicare will be shifted onto insurance companies, drastically reducing Medicare’s financial responsibility. For catastrophic care, Medicare’s responsibility for prescription drugs will drop from 80% of the costs to 20%. Insurance companies are left to pick up a larger burden of payments.
While the IRA has the potential to lower costs for Medicare and patients in the short term, it also creates incentives that will limit its effectiveness due to the complexity of the provisions for negotiation and restructuring of the benefit formula for Part D provisions. With a risk that any expensive drug may have its price cut when selling to Medicare, manufacturers have an incentive to price lower for Medicare to avoid negotiations, but also to price higher in private markets to make up for the decreased Medicare revenue and to make sure the negotiated price is higher if their drug is selected by Medicare. Higher private market costs imply that at least part of Medicare’s savings will be borne by other patients outside the Medicare system.
The increased costs for insurers are likely to drive up insurance premiums to make up for their increased costs. This may have the effect of increasing total individual spending on healthcare in the long-run by shifting much of Medicare’s burden for paying for prescription drugs after the out-of-pocket spending threshold has been reached onto patients via increased insurance premiums. While this may show up on the books as savings for Medicare, it would be achieved through increased total individual healthcare spending.
While this incentive only applies to expensive drugs, the limit on cost increases on all prescription drugs incentivizes setting prices higher on initial release of the drug, according to the CBO. The potential cost to the drug manufacturers cannot be included in current drugs due to the provision to limit price increases to inflation, however new drugs will likely be priced higher on release. There is an incentive for future drugs to have increased initial prices due to their lack of future flexibility, limiting or negating the potential savings in the long term.
The limit on out-of-pocket insulin costs will lower the price at the counter. But the reduction in price may be offset by an increase in premiums in response. Though, one can hope that this provision will not matter for long given the work by Civica Rx to start selling biosimilar (generic) insulin at $30 per vial and $55 for five pens in 2024. Two of these insulins would be rapid-acting, aspart and lispro, as well as long-acting glargine. Prices on each of these can vary, but currently glargine can cost as much as $343 per vial or $938.22 for five pens. The prices of aspart and lispro also can reach into the hundreds of dollars as well. Even Walmart’s insulin is more expensive than what Civica Rx has announced, with vials costing $72.88 each and $85.88 for five pens. It may be more effective to expedite the FDA review of the three generic insulins Civica Rx has developed than to take a heavy-handed regulatory approach. It is likely that this provision will only influence a limited portion of the market, with most companies about to face a competitor with a far lower price.
One final problem is that the choice of which high-cost drugs to negotiate over must be insulated against potential political and corporate lobbying, or its effectiveness decreases. Pressures will exist to target certain drugs for political campaign reasons, and manufacturers will always prefer their drugs not to be on the list. To the degree this lobbying achieves influence, the negotiation process will not yield the expected savings or be targeted in a productive manner.
Ultimately, any savings from this bill are likely to be less than anticipated given the incentives and options of manufacturers and insurers, and savings to the Medicare program may be passed on to some degree to patients through higher insurance costs.