The Inflation Reduction Act’s drug price-setting provisions have drawn significant rebuke from experts who argue that many clinical programs will ultimately be killed or never get started as a result of the act’s deleterious effects on innovation. What isn’t getting attention is how the law is reshaping Medicare in big ways.
Yes, Democrats have finally achieved their holy grail of being able to have the government set drug prices, and President Biden will certainly campaign on it. However, the law threatens deep cuts to Medicare, which have the potential to cause the collapse of an entire segment of the benefit.
Most seniors who fill prescriptions have their drugs covered under Medicare Part D, created under former President Bush. This program is administered by private insurance companies from which seniors can choose to lower their costs and manage their benefits. The statute establishes a basic benefit and plans offer benefit packages of equivalent value, with an option for seniors to pick plans with enhanced benefits by paying additional premiums. This structure has proven popular with seniors, with 88 percent of seniors responding to a survey stating they are satisfied with their coverage.
The Inflation Reduction Act dramatically changed the structure of the benefit.
Currently, beneficiaries spending more than $7,400 are responsible for only 5 percent of drug costs above this threshold, with plans and Medicare assuming the remaining liabilities. Beginning next year, the 5 percent share is eliminated, with plans assuming full liability for a patient’s drug costs (including Medicare’s subsidy) once patients have spent $8,000. In 2025, plans assume full liability earlier, once a patient spends $2,000, and they will receive a smaller subsidy from Medicare. Additionally, plans are now required to offer first-dollar coverage of recommended vaccines and insulin with no cost sharing.
All of this sounds great for seniors, but nothing in life is free. These changes place additional liabilities on plans, increasing their expenditure significantly. The obvious response for plans will be to increase premiums. Predictably, plans requested a 21.5 percent increase in the basic premium in next year’s bids, yielding an average enrollment weighted premium of $48 per month.
Furthermore, the IRA includes a provision that requires plans to cover negotiated drugs on their formularies. Because these drugs are required to be covered and because they are already being steeply discounted due to negotiations, plans cannot count on receiving the same rebates from these drugs as they do today. The result is lost revenue that plans will need to fund their new liabilities while trying to keep premiums affordable for seniors.
The increase in plan liabilities, coupled with limitations on plan assets, leaves few good options for preserving plan solvency. Plans may withdraw from counties where they incur high expenses, choosing to offer contracts only in counties populated by the healthy and wealthy as opposed to rural and underserved communities.
Evidence of this is already beginning to appear. The average number of standalone Part D plans per county has declined by three compared with last year, and the overall number of plans in the program is the lowest it has been since implementation. The pressure on Part D means beneficiaries who need prescription drug coverage will increasingly be forced into Medicare Advantage, as fewer standalone plans are offered to pair with traditional Medicare.
Alternatively, plans can choose to narrow formularies or impose additional utilization management requirements to limit expenditures. Specifically, where a drug is negotiated, plans may choose not to cover other branded competitors or their generics/biosimilars, unless the drug is a protected class, because they can secure far lower prices for the negotiated drug. As a result, generic/biosimilar manufacturers lack incentives to develop generics for these non-negotiated branded products, reducing competition and preserving high prices for Medicare and commercial enrollees alike.
The IRA threatens to deliver disaster across the entire innovation, financing and distribution system for prescription drugs. This intricate system is the consequence of decades of hard-fought negotiation and compromise encapsulated by the Orphan Drug Act, Hatch-Waxman, the Prescription Drug User Fee Amendments, the Medicare Modernization Act, and other bipartisan initiatives. The IRA’s partisan nature, by contrast, jeopardizes the systems these laws built. It places tremendous liability on plans without allowing them to collect offsetting revenues. The result will be fewer plans with skimpier benefits, leaving some seniors without access to coverage or needed medications.
Having severely disrupted an insurance market once through the ACA, Congress should learn from its mistakes and restore the flexibility of Part D to manage plan benefits and compete.
Joe Grogan is a visiting senior fellow at the USC Schaeffer Center and served as domestic policy adviser to President Trump, 2019-20. He consults for the pharmaceutical industry.