Webinar: Inflation Reduction Act Will Be Positive for Medicare

The House of Representatives has passed the Inflation Reduction Act, which would allow Medicare to negotiate prices on some drugs, limit Medicare beneficiaries’ out-of-pocket costs, and cap insulin prices at $35 a month. The bill passed in a 220 to 207 vote. The Senate had approved the bill the week before. The bill now heads to President Joseph R. Biden, who is expected to sign the $470 billion legislation.

Related: Senate Passes Bill that Caps Insulin at $35 for Medicare Beneficiaries

The prescription drug features of the Inflation Reduction Act will have positive impact on Medicare and for Medicare beneficiaries, according to those who spoke at a webinar on the day before the House approval. The webinar was hosted by the Council for Informed Drug Spending Analysis (CIDSA) and Patients for Affordable Drugs.

Rena Conti, Ph.D.

Negotiated drugs are expected to save Medicare $102 billion over six years, or about 10% of drug spending annually, said Rena Conti, Ph.D., associate research director of Biopharma & Public Policy at Boston University Institute for Health System Innovation & Policy.

Currently there is a non-interference clause and Medicare is prohibited from negotiating drugs directly with manufacturers. Under the bill, beginning in 2026, the 10 costliest drugs — those on the market for 9 years or 13 years for biologics — without a generic substitute are eligible for negotiation. Negotiated drugs will remain at that price adjusted for inflation until a generic version is available or renegotiated. In 2029, Medicare will negotiate 20 drugs.

“The drugs will be ranked in both the Part D, the pharmacy benefit, and Medicare Part B program, which is the medical benefit,” Conti said. “The targets for negotiations are these drugs that have overstayed their welcome in terms of being the sole monopolies in their market.”

The price targets seen in the legislation mirror what would happen when generics come to the market, Sean Dickson, JD, MPH, chair of CIDSA and director of health policy at West Health Policy Center. “These are the prices that we would expect to see the market arrive at had generic competition come into play.”

Richard Frank, Ph.D.

An additional element of the legislation is to help curb inflation. “Historically, brand name drugs have been growing at an average of 5% per year, and for drugs that have fewer competitors, such as biologic products which are now about half of all spending, the rate of growth has been considerably higher,” said Richard Frank, Ph.D., director at USC Brookings Schaeffer Initiative for Health Policy.

Under the new bill, drug manufacturers will pay a penalty to Medicare for drug prices increases that are high than the rate of inflation. The Congressional Budget Office projects inflation begins to slow in 2023 and 2024, nearing the Federal Reserve’s goal of 2% by end of the 2024.

“The first effect of this is when drug companies have to pay a penalty, that will increase revenues to the federal government and reduces the deficit,” Frank said. “The second effect is an avoidance effect, with some companies constraining their price increases. Together these will save $71 billion over 10 years.”

A third important piece of legislation — limits on out-of-pocket costs — changes the Medicare benefit design and that will have a direct impact on beneficiaries, Dickson said.

Currently, Medicare drug benefit does not have an out-of-pocket limit, but most commercial insurance plans do. The bill, beginning in 2025, will cap out-of-pockets costs to $2,000 annually and eliminates the 5% coinsurance for catastrophic coverage in Medicare Part D. CIDSA estimates the $2,000 cap will save 3.5 million beneficiaries, with each saving about $1,500 annually. To come up with these numbers, CIDSA assessed what the impact of the bill would been on beneficiaries in benefit year 2021.

Additionally, the bill caps insulin at $35 a year. CIDSA projects that beneficiaries will see their annual insulin costs by $850.

“One of the challenges of reforming Medicare is that if you just limit people’s out-of-pocket costs at the pharmacy but don’t address the price of prescription drugs, someone still has to pay for that,” Dickson said. “And under the way that Medicare is financed, that would be taxpayers and seniors themselves through higher premiums. So this bill will have a positive benefit for beneficiaries but it is only possible because of the negotiation and inflation provisions.”

Frank, however, said it’s not entirely clear whether how the pharmaceutical companies are going to respond in terms of drug pricing. “There is some evidence that we might see changes in launch prices. What it is not well understood yet in the case of Part D where the prices are constrained by the average manufacturing costs what the reaction will be to the inflation caps but there could be spillover into the commercial market,” he said.

Dickson suggest there might still be drug price growth above the rate of inflation, but at a slower rate than what would have happened without the inflation protection.

As to whether this legislation could impact future innovation — a refrain often repeated by the pharmaceutical industry lobbying organization Pharmaceutical Research and Manufacturers of America — those who spoke said the impact will be minimal.

This legislation aims to strike a balance now for those who can’t afford their medication today, webinar speakers stressed. A recent poll by the Kaiser Family Foundation found 26% of adults said it was very difficult to afford their prescription drugs, and 29% said they have not taking their medications as directed because of the costs.

“There are many people who can’t afford their medications now,” Conti said. “This is focused on them instead of being worried about forestalled, minor innovation that maybe will happen in the future.”