The Impact of the Inflation Reduction Act on Medicare Prescription Coverage

Filed under: Benefits

The Inflation Reduction Act (IRA) was signed into law in 2022. Among its provisions, the IRA made significant changes to Medicare drug plans with the goal of reducing the cost of prescription medications for beneficiaries. Although the drug coverage savings are expected to have a graduated impact, it is estimated that more than 14 million Americans saved an average of $800 in 2023. The following is an overview of the legislation’s provisions related to Medicare prescription coverage.

Out-of-Pocket Spending Capped

For many years Medicare featured a “donut hole” coverage gap for prescription drugs. The IRA simplified that system to the following:

1. Beneficiaries pay 100% of prescription drug costs until they reach their annual plan deductible (maximum $590 in 2025).
2. Once they reach their deductible, beneficiaries pay 25% of prescription drug costs until they reach a total out-of-pocket spending cap of $2,000 (2025) for the year.
3. After that, 100% of prescription drug costs is covered.

The Congressional Budget Office (CBO) estimated that the spending cap would increase federal spending by $30 billion over 10 years. On the flip side, the $2,000 cap generates savings for the average enrollee and is especially beneficial for people with exceptionally high drug costs. To prevent Medicare drug plans from increasing premiums exponentially to compensate for higher drug coverage, the IRA also placed a limit on annual premium increases to no more than 6 percent over the prior year (through 2029).

Drug Price Negotiations

Medicare Part D drug plans were established by the Medicare Modernization Act of 2003 and first went into effect in 2006. However, a controversial provision in the bill prevented the Medicare agency from interfering in drug price negotiations between manufacturers, plan sponsors, and pharmacies. Thanks to the IRA, that ban has now been lifted.

As the largest public payer for prescription drugs in the US, Medicare can now negotiate prices for certain high-cost prescription drugs, enabling the savings to be passed on to its beneficiaries. Only a select number of drugs (10 per year gradually increasing to 20 per year in 2029 and beyond) may be negotiated, and the ones selected are based on the highest total Medicare drug spend (e.g., drugs used to treat common conditions like diabetes, Crohn’s disease, arthritis, blood clots). Some drugs are excluded from the negotiation process, such as those with an available generic or biosimilar, or drugs still within a certain market exclusivity period.

The CBO estimates that this negotiation process will yield more than $98 billion in Medicare savings over 10 years.

Rebates for Inflation

While Medicare has no authority to limit annual price increases for the drugs it covers, the IRA requires drug manufacturers to pay rebates to the government if prices for certain drugs increase faster than the rate of inflation. In its first year (2023), dozens of pharmaceutical companies were required to pay rebates to the Medicare Supplementary Medical Insurance (SMI) trust fund.

The CBO estimated that drug inflation rebates would reduce the federal deficit by more than  $63 billion over 10 years and yield $71.8 billion in savings to Medicare.

Insulin Price Cap

Starting in 2023, the IRA capped the cost of insulin at $35/month for Medicare drug plan  beneficiaries. As a result, the CBO estimated higher additional federal spending of $5.1 billion over 10 years. However, it is estimated that 1.5 million Medicare beneficiaries saved an average of $500 in 2023.

Expanded Low-Income Subsidy

Medicare offers a Low-Income Subsidy (LIS) Program to help beneficiaries with Part D

drug cost sharing based on low income and asset levels. The IRA increased the subsidy program for beneficiaries with incomes up to 150 percent of the federal poverty line in 2024 (from the initial starting level of 135 percent). This expanded coverage for an estimated 400,000 Medicare beneficiaries, reducing their out-of-pocket drug costs by about $300 a year. The CBO estimated the additional coverage would increase federal spending by $2.2 billion over 10 years.

Vaccine Coverage

The IRA mandated the same vaccine coverage for Part D as Part B (Medicare Advantage plans), which means 100 percent coverage with no cost sharing for all vaccines recommended by the Advisory Committee on Immunization Practices (ACIP). The CBO estimated this provision woud increase federal spending by $4.4 billion for Medicare, while seniors with Part D plans saved an average of $70 on vaccines in 2023.

 

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