How the Inflation Reduction Act Will Affect Healthcare Costs—Especially for Medicare Beneficiaries

Yearly out-of-pocket costs caps, extended tax credits, and negotiated drug prices—who will see lower costs, and when?

CVS Pharmacy, pharmacist counter, pick up consultation window. (Photo by: Jeffrey Greenberg/Education Images/Universal Images Group via Getty Images)
Photo: Jeffrey Greenberg/Education Images/Universal Images Group via Getty Images

Fast Facts

  • The Inflation Reduction Act will help ease some of the burden of health care costs in the U.S. within the next few years. 
  • The legislation gives the government the power to negotiate some drug prices, cap monthly insulin costs, and expand Affordable Care Act tax credits.
  • Some argue the bill doesn’t go far enough to actually cut spending on healthcare in the U.S., which topped $4.1 trillion in 2020.

President Joe Biden on Tuesday signed the Inflation Reduction Act (IRA) into law—a piece of legislation that aims to combat the ongoing climate crisis, make the tax system fairer, and reduce healthcare costs for millions of Americans.

Medicare beneficiaries will benefit most from the healthcare provisions in the new law, but people who buy individual coverage through the Affordable Care Act will also see some relief from healthcare costs.

"The IRA's financial protections and structural improvements will be nothing short of lifesaving," the Medicare Rights Center, a nonprofit organization that helps people navigate the Medicare system, said in a statement.

"Every day on Medicare Rights' national helpline, we hear from older adults and people with disabilities who are struggling to pay for care. They may go without, or may cut back on other basic needs, like food or rent, just to fill a prescription," the organization continued. "The IRA will help ensure fewer people face these impossible choices."

Here are the most important healthcare policy changes that will be implemented by the IRA, and how they may impact your healthcare costs.

Federal Government Will Negotiate Some Drug Prices

One of the most talked about new provisions of the new law is Medicare's ability to now negotiate prices for medications with pharmaceutical companies.

"The healthcare provisions in this legislation are unprecedented, especially the government's authority to negotiate drug prices," Larry Levitt, executive vice president for health policy at the Kaiser Family Foundation, said in an online press conference.

High drug prices are a major pain point for many Americans. In 2020, people in the U.S. spent a total of $4.1 trillion on healthcare—that amounts to about $12,500 per person, according to the U.S. Centers for Medicare and Medicaid Services (CMS).

And still, a Gallup and West Health poll found that as many as 18 million Americans can't afford to pay for at least one of their medications—and 10% of Americans have reportedly skipped essential doses to preserve drugs and save money.

It's currently unclear how much money this will save consumers. The U.S. Department of Health and Human Services still has to identify the 100 drugs that Medicare spends the most on, and then narrow that list down to 10 medications that qualify for negotiations—those drugs must not have any direct competitors (no generic equivalents or biosimilar options), and they must have been on the FDA's approved list for about 10 years.

The first negotiated prices will go into effect in 2026—those will be under the Medicare Part D plans and are available at pharmacies. Negotiated prices for Medicare Part D drugs, or those covered under outpatient services, will take effect in 2028. Beginning in 2029, a maximum of 20 drugs will be negotiated annually.

The legislation has faced fierce opposition from pharmaceutical companies, which have historically been much more profitable than other large public companies.

In a statement, Michelle McMurry-Heath, MD, PhD, president and CEO of the Biotechnology Innovation Organization, said "the bill would drastically slow critical investments in future research and development, stalling drug innovation, and ensuring the next generation of groundbreaking therapies remains out of reach for American patients."

But Alan Sager, PhD, professor of health law, policy, and management at the Boston University School of Public Health, doesn't believe the opposition's concerns will be an issue.

"If their profits come down, they'll still innovate. It will still be a highly profitable industry though it may not be the single most profitable one," Sager told Health. "And we'll get good new meds. But what good are safe and effective [medications] if we can't afford them?"

Insulin, Yearly Out-Of-Pocket Expenses Capped for Seniors

Though the drug negotiations won't take effect until 2026, two additional policies to keep drug costs down will be implemented a bit sooner.

The first is a cap on insulin prices that ensures millions of seniors won't have to pay more than $35 each month for their diabetes medication, costs of which have tripled in the past decade.

In an earlier iteration of the bill, that $35 cap would've also applied to those with private insurance, but Senate Republicans forced it out of the bill. The policy should kick in next year for Medicare beneficiaries.

A second provision that applies for those with Medicare is a $2000 yearly cap on out-of-pocket expenses for prescription drugs. This will go into effect in 2025.

"A $2,000-a-year cap is going to mean that people who use more meds because they have chronic illnesses of various kinds and they're taking expensive prescriptions every month, hundreds or even thousands of dollars, will get relief," said Sager.

For years, there's been a coverage gap in Medicare drug plans called a "donut hole," Sager explained, which means that some people experience a temporary loss of coverage once they reach a certain spending amount. People will then pay 25% of the cost of a drug plus its processing fee out-of-pocket.

"The average person receiving Social Security has a total income per year of under $25,000," Sager said. "They were going to be exposed to thousands and thousands of dollars out of pocket cost. So lowering that now to $2,000 is certainly going to help lower income people."

But, Sager added, even $2,000 a year is steep for people with lower incomes—if a person gets $25,000 each year from Social Security, $2,000 out-of-pocket for drugs is still 8% of their income, which certainly takes a toll.

The bill does not address costs for Medicare parts A and B, which cover hospital stays and medical visits.

Expansion of Affordable Care Act Tax Credits

One additional provision that should help Americans lower healthcare costs is an expansion of a tax credit originally passed in the American Rescue Plan.

"The Inflation Reduction Act locks in place lower healthcare premiums for millions of families who get their coverage under the Affordable Care Act," Biden said during a speech at the bill's signing. "Last year, a family of four saved on average $2,400 through the American Rescue Plan."

This American Rescue Plan expanded subsidies for individuals who made around $52,000 and families who made around $106,000 if they were enrolled in the Affordable Care Act plans. These lower costs were set to expire at the end of 2022.

If these tax credits weren't continued, the Department of Health and Human Services estimated that 3 million Americans would've lost their health insurance, and an additional 10 million would've seen their premiums go up.

"The [Affordable Care Act] (ACA) subsidies have increased, making health insurance more affordable for more people," Sager said. "So that's tax money to subsidize the private ACA insurance plans—like Blue Cross, and United Health, and all the others. That's good for individuals and families because more people can afford health insurance."

Small Changes in the Face of an Expensive System

Between the large scope of the bill and the months of political debate that preempted its passing, the IRA is certainly being hailed as a big deal.

Democrats have been trying to get some legislation passed to allow drug negotiation for over 30 years, but this is the first time the idea has made it into law.

The Biden Administration says that 13 million Americans will save an average of $800 annually on health insurance premiums, and that 3 million people will have health insurance than would have otherwise if the IRA had not been passed.

But some are worried that the bill is just providing a band-aid to cover up a more deeply entrenched problem. Even though it spends an incredibly large amount of money on healthcare each year, the U.S. does not rank among top nations in terms of health access and quality.

"It doesn't lower spending on healthcare, which is rapidly becoming unaffordable for more and more people in the United States. And also the more we spend on healthcare, the less we have to spend on housing, job training, environment, criminal justice, family security," Sager said. "There's really nothing in this law that slows the increase in spending."

The addition of these yearly out-of-pocket spending caps and drug price negotiations may also mean higher premiums for those who have Medicare, Sager said. He also noted concerns that the small scale and long timeline of the drug negotiation policy means it won't be doing enough to actually lower costs.

"The provision to negotiate the prices of 10 meds—it's pathetic progress. It's like a snail running a marathon. Doesn't make a lot of movement forward," Sager added.

Even though it may not be the healthcare overhaul that Sager thinks is necessary, the IRA is certainly a step in the right direction.

"Affordable, high quality healthcare for all, medical security for everyone, is the easiest problem to fix in the U.S. because it's the only one we spend enough money on," Sager said. "For four and a half trillion [dollars] we should at least have medical security, which is you're covered, you don't have to worry about surprise bills. There are doctors and hospitals and nursing homes and mental health workers available to help you, and quality is good. That's why I'm such an optimist—because the money's there."

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