Healthcare Provisions of the Inflation Reduction Act

President Biden signed the Inflation Reduction Act into law this week. The bill’s primary focus is climate change and economic issues. However, there are important healthcare issues included, and pundits across the board characterize the healthcare provisions of the bill as the most significant changes in healthcare policy since the passage of the Affordable Care Act. Following is a short rundown on the healthcare provisions of the bill.
 

Rx Pricing Negotiation

The bill empowers the Centers for Medicare Services (CMS) to negotiate drug prices under Medicare. CMS will be able to negotiate prices for ten high-cost drugs starting in 2026 (15 in 2027 and 20 in 2029 and beyond). While considered a modest start, this approach will allow time to see whether price negotiation negatively affects drug development and stifles new drugs coming to the market (the major criticisms from the pharmaceutical industry).
 

$35 Cap on Insulin

The out-of-pocket cost of insulin will be capped at $35 for individuals under Medicare. The bill initially included a cap on the out-of-pocket cost of insulin for all Americans. However, expanding the cap to a greater commercial marketplace was stripped out of the bill by the Senate parliamentarian. In order to pass the bill by a simple majority, all provisions must relate directly to the federal budget, and it was determined the expanded cap did meet that standard, so it could not be part of a reconciliation-eligible (filibuster-proof) bill.
 

$2,000 Hard Cap on Medicare Part D

Redesigning Medicare Part D benefits to cap out-of-pocket costs has received wide support. The cap in the bill contains a $2,000 “hard” cap on out-of-pocket costs for prescription drugs under Medicare Part D. This provision becomes effective in 2025, and the cap will be indexed in future years.
 

Extension of ACA Premium Subsidies

Supplemental ACA premium subsidies for low-income individuals, which were implemented as part of the 2021 American Rescue Plan Act, were set to expire at the end of 2022. This would have increased out-of-pocket premium payments across the board for virtually all 13 million subsidized enrollees. The bill extended the enhanced premium subsidies for three years.
 

Impact on Employer Plans – Higher Costs

The healthcare provisions of the Inflation Reduction Act prompt a key question for employers: How will employer plan costs be impacted?

In short, the cost savings for Medicare and for individuals covered under Medicare will likely be borne by employer health plans (and individual health plans). As Medicare negotiates “savings” in drug costs for Medicare recipients and for the federal government, we can expect a cost shift where that savings will be to be shifted to employer plans, self-funded plans, and individual plans. Drug manufacturers will receive lower revenue on the Medicare side (due to the CMS negotiation power), so we can expect that higher prices will be charged to commercial plans to compensate for the lost revenue.
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