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Inflation Reduction Act: Lowering Prescription Drug Costs
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The Inflation Reduction Act of 2022 (H.R.5376) included meaningful provisions aimed at lowering prescription drug costs for Medicare beneficiaries, marking a substantial shift in federal drug pricing policy. These changes allow Medicare to negotiate prices for certain high-cost drugs and cap out-of-pocket costs for seniors.
Medicare Drug Price Negotiation
The inflation Reduction Act empowers Centers for Medicare & Medicaid services (CMS) to directly negotiate prices for a limited number of high-expenditure, single-source brand-name drugs covered under Medicare Part B and Part D. This negotiation process began in 2023, with negotiated prices taking effect in 2026.
The law phases in the number of drugs eligible for negotiation over time. In 2026, CMS can negotiate the prices of 10 drugs. This number increases to 15 drugs in 2027, 20 drugs in 2028, and 25 drugs in 2029 and beyond. Drugs are selected based on their high Medicare spending and lack of generic or biosimilar competition.Drugs with sales below a certain threshold are exempt from negotiation. CMS Fact Sheet details the selection criteria.
Example: On august 29, 2023, CMS announced the first 10 drugs selected for price negotiation, including Eliquis (apixaban), Jardiance (empagliflozin), and Xarelto (rivaroxaban). Negotiated prices for these drugs will be implemented starting January 1, 2026.
Negotiation process and Restrictions
The negotiation process is structured with specific timelines and requirements. Drug manufacturers are required to participate in negotiations, and failure to do so can result in significant excise taxes. The final rule outlining the negotiation process was published by CMS in May 2023. The law includes provisions to prevent interference from pharmaceutical companies, including limitations on legal challenges.
Medicare Part D Redesign and Out-of-Pocket Caps
Beyond direct price negotiation, the Inflation Reduction act considerably redesigns Medicare Part D, the prescription drug benefit, to lower costs for beneficiaries. A key component is the introduction of an out-of-pocket spending cap for Part D enrollees.
Starting in 2025, Medicare beneficiaries enrolled in Part D plans will have a maximum out-of-pocket cost of $2,000 per year for covered drugs. This cap applies to both brand-name and generic drugs and includes cost-sharing amounts like deductibles, copayments, and coinsurance. Prior to this change,beneficiaries faced perhaps unlimited out-of-pocket costs.
Evidence: According to a Kaiser Family Foundation (KFF) analysis,approximately 1.4 million Medicare beneficiaries spent more than $2,000 out-of-pocket on prescription drugs in 2020,and would directly benefit from the new cap.
Additional Part D Changes
The Inflation Reduction Act also includes other changes to Part D, such as eliminating the 5% cost-sharing requirement for catastrophic coverage, further reducing beneficiary costs in the highest drug spending tiers. Moreover, the law expands access to the full Part D benefit by eliminating the “donut hole” - the coverage gap where beneficiaries previously faced higher cost-sharing. The Social Security Administration provides a detailed overview of these changes.
Impact and Ongoing Debate
The inflation Reduction Act’s prescription drug provisions have sparked considerable debate. Supporters,including the Biden Administration, argue that the law will significantly lower costs for seniors and improve access to essential medications. Opponents, primarily Pharmaceutical Research and Manufacturers of America (PhRMA), contend that the law will stifle innovation and reduce investment in the development of new drugs.