Inflation Reduction Act: Lowering Prescription Drug Costs
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The Inflation Reduction Act of 2022 (IRA) considerably altered the landscape of prescription drug pricing in the United States, allowing Medicare to negotiate prices for certain high-expenditure drugs and capping out-of-pocket costs for beneficiaries. This legislation represents a major shift in federal policy regarding pharmaceutical costs, aiming to increase affordability and access to essential medications.
medicare drug Price Negotiation
The Inflation Reduction Act empowers Medicare to directly negotiate prices with pharmaceutical companies for a select number of high-cost drugs covered under Medicare Part B and Part D. This negotiation process began in 2023, with negotiated prices taking effect in 2026.
Prior to the IRA, Medicare was largely prohibited from directly negotiating drug prices, unlike many other developed countries. This limitation contributed to significantly higher drug costs in the U.S. The Inflation Reduction Act changes this by allowing the Centers for Medicare & Medicaid Services (CMS) to select drugs for negotiation based on factors like high Medicare spending and lack of generic or biosimilar competition. Initially, ten drugs were selected for negotiation, increasing to 15 in 2024, 20 in 2025, and 20+ in 2026 and subsequent years.
Example: in February 2024, CMS announced the frist 10 drugs selected for price negotiation, including Eliquis (apixaban) for preventing blood clots, Jardiance (empagliflozin) for diabetes, and Xarelto (rivaroxaban) for preventing blood clots. CMS Press Release
Drugs Eligible for Negotiation
Drugs eligible for negotiation must meet specific criteria outlined in the IRA. Thes include being single-source drugs (no generic or biosimilar competition) that have been on the market for at least nine years (for small molecule drugs) or five years (for biologics). The CMS website provides detailed information on eligibility requirements and the negotiation process.
Out-of-Pocket Cost Caps for Medicare Beneficiaries
the IRA introduces a $2,000 annual out-of-pocket spending cap for Medicare part D beneficiaries, beginning in 2025. This cap applies to covered prescription drugs and includes both the beneficiary’s cost-sharing and the value of manufacturer discounts.
Before the IRA, Medicare beneficiaries faced perhaps unlimited out-of-pocket costs for prescription drugs. This could lead to financial hardship, particularly for individuals with chronic conditions requiring expensive medications. The $2,000 cap provides important financial relief and predictability for millions of seniors and people with disabilities.
Evidence: According to the Kaiser Family Foundation, approximately 3.3 million Medicare Part D beneficiaries spent more then $2,000 out-of-pocket on prescription drugs in 2022, and would directly benefit from the new cap.
Impact on Insulin Costs
The IRA also includes a provision capping the monthly cost of insulin at $35 for Medicare beneficiaries, effective January 1, 2023. this applies to insulin covered under Medicare Part D and Part B. The Internal Revenue Service (IRS) provides information on related tax credits and savings.
Challenges and Legal Challenges
The implementation of the IRA’s drug pricing provisions has faced legal challenges from the pharmaceutical industry. Several pharmaceutical companies and industry groups filed lawsuits arguing that the negotiation process violates the Fifth Amendment’s Takings clause and due Process Clause.
Legal Case: The Supreme Court heard arguments in the case Pharmaceutical Research and Manufacturers of America v. Becerra in April 2024 and upheld the constitutionality of the drug price negotiation provisions in June 2024. This ruling allows the IRA’s provisions to move forward as planned.
Potential Impacts on Pharmaceutical Innovation
A key concern raised by the pharmaceutical industry is that drug price negotiation could reduce incentives for research and progress of new medications. Industry groups argue that lower prices could decrease profitability, leading to cuts in R&D spending. Though, proponents of the IRA contend that the negotiation process will not significantly impact innovation and that pharmaceutical companies will continue to invest in developing new drugs, particularly those that address unmet medical needs. The Pharmaceutical Research and Manufacturers of America (PhRMA) represents the interests of pharmaceutical companies and has been a vocal opponent of the IRA’s drug pricing provisions.
