The Inflation Reduction Act’s Impact on Drug Prices

The House is set to vote Friday on the Inflation Reduction Act, which passed in the Senate on Sunday. Democrats have been touting the $430 billion climate, tax and healthcare bill as "life changing legislation," but with Republicans having voted to strip out any healthcare provisions not covered under Medicare, the question becomes whether the bill will have a ripple effect on drug prices for the general population.

August 11, 2022

drug prices Photo by Towfiqu barbhuiya on Unsplash

The House is set to vote Friday on the Inflation Reduction Act, which passed in the Senate on Sunday. Democrats have been touting the $430 billion climate, tax and healthcare bill as “life changing legislation,” but with Republicans having voted to strip out any healthcare provisions not covered under Medicare, the question becomes whether the bill will have a ripple effect on drug prices for the general population.

“Game-changing” Legislation for Seniors

According to Rena Conti, Associate Professor at Boston University’s Questrom School of Business, for seniors, the bill “is going to be game-changing.”

First, the legislation would grant Medicare the authority to negotiate prescription drug prices. It’ll work incrementally, putting Medicare at the bargaining table to negotiate the price of up to 10 retail drugs starting in 2026. By 2029, Medicare will be able to bargain for the cost of 20 retail and 20 doctor-administered drugs.

Next, it will cap out-of-pocket Medicare Part D costs at $2,000 per beneficiary per year. That is set to begin in 2025.

Ahead of Sunday’s vote, AARP Chief Executive Officer Jo Ann C. Jenkins wrote in a letter to the Senate that the organization shared with Political IQ, this cap will “give peace of mind to millions of seniors with high drug costs” because currently, “for people with high-priced drugs, it can mean being forced to choose between their medications and other important needs like food or rent.”

Further, the bill would establish Medicare Part B and Medicare Part D inflation rebates. It works like this: if drug manufacturers increase prices faster than the rate of inflation, they’ll have to pay rebates to the Medicare trust fund—with a few exceptions for low-cost drugs. Penalties for not complying could be as high as 125% of the applicable rebate.

Finally, the bill would require that manufacturers cover the cost of certain adult vaccinations under Medicare and Medicaid while eliminating some cost sharing. That would begin after January 1, 2023.

AARP notes that some vaccines, like the one for shingles, can have a list price of around $350. Jenkins wrote in her letter to the Senate, “Approximately 4.1 million Medicare beneficiaries received a vaccine covered under Part D in 2020.”

Jury Still Out on Impact for Other Consumers

Several provisions proposed by Senate Democrats were removed prior to Sunday’s passage because the Senate Parliamentarian deemed they couldn’t be considered under the rules governing reconciliation. These included a provision that penalized pharmaceutical manufacturers who increased drug costs above inflation across the commercial market, not just under Medicare.

Democrats were also hoping that a $35 per month cap on insulin, which will apply to Medicare, could be applied universally. Again, the Senate Parliamentarian ruled this could not be voted on through reconciliation, and 43 Republicans voted against a universal insulin price cap.

The Wall Street Journal’s Editorial Board argued, “If drug makers must give Medicare steep discounts on certain drugs, they will compensate by increasing prices in the commercial market.” The op-ed punctuated its reasoning with a quote from Sen. Chris Murphy (D-CT), “You can’t untangle the private sector from the public sector—one doesn’t work without the other,” and went on to note that hospitals and doctors charge private insurance plans to compensate for Medicare’s longtime practice of paying them below cost.

Others, however, don’t necessarily see this happening with drug prices.

“I don’t think we have any reason to believe that the policies that will change in Medicare are going to raise prices outside of Medicare,” said Dr. Benjamin Rome, a health policy researcher at Brigham and Women’s Hospital and Harvard Medical School.

The Congressional Budget Office (CBO) did look into this just a few years ago, in fact, when the Senate Finance Committee introduced a bill in 2019 that would have included an inflation cap only on Medicare.

The CBO projected that the provision would also reduce the pharmaceutical costs by private insurance plans—somewhat. According to Loren Adler, Associate Director of the USC-Brookings Schaeffer Initiative for Health Policy, the savings were more modest than the CBO had estimated for legislation that would have specifically included the private market.

Senator: We’ll Be Watching Big Pharma

Just ahead of the Inflation Reduction Act’s passage in the Senate on Sunday morning, Sen. Chris Van Hollen (D-MD) was asked why the general public shouldn’t expect Big Pharma to raise prices to compensate for Medicare restrictions. Van Hollen responded, “We will be watching the pharmaceutical industry like a hawk, and hopefully, if they made that kind of move, we would have enough votes to respond.”

Currently, election handicapper FiveThirtyEight forecasts Democrats as “slightly favored” to win the Senate majority in the upcoming November midterm elections  with Republicans “favored” to win the House majority. If this happens, we could be looking at two years, at least, of a deeply stalemated Congress and very little legislation getting passed.

In the meantime, while the Inflation Reduction Act is being touted as a game-changer for seniors, the non-partisan CBO estimates its Medicare provisions will save the Federal government $288 billion over the next decade.

That’s American tax dollars. Put another way, Stacie Dusetzina, Associate Professor of Health Policy at Vanderbilt University Medical Center, said, “Medicare is something we all pay for, so we should all be concerned if we’re not getting a good deal.”

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