The Inflation Reduction Act (IRA), signed into law by President Biden in August 2022, is a landmark legislation that aims to lower the cost of prescription drugs for millions of Americans, especially seniors and people with disabilities. The IRA introduces several measures to curb the price gouging of pharmaceutical companies, such as allowing Medicare to negotiate drug prices, imposing an annual cap on out-of-pocket spending for Part D beneficiaries, and penalizing drugmakers that raise prices faster than inflation. The IRA is expected to save the federal government and consumers billions of dollars over the next decade, while improving access and affordability of essential medications.
Medicare Negotiation: A Historic Breakthrough
One of the most significant provisions of the IRA is the authorization of Medicare to directly negotiate the prices of some high-cost prescription drugs with drug manufacturers. This is the first time ever that Medicare, the largest purchaser of prescription drugs in the country, is not accepting the prices set by the industry. Medicare will select a number of drugs each year for negotiation, starting with 10 drugs in 2024, and expanding to 50 drugs by 2028. The negotiated prices will apply not only to Medicare beneficiaries, but also to private insurers and consumers in the commercial market.
The first 10 drugs selected for negotiation in 2024 are:
- Eliquis, a blood thinner used to prevent strokes and blood clots
- Humira, an anti-inflammatory drug used to treat arthritis, psoriasis, and Crohn’s disease
- Januvia, a diabetes drug that lowers blood sugar levels
- Keytruda, a cancer drug that targets tumors with a specific genetic mutation
- Lyrica, a nerve pain drug used to treat fibromyalgia, diabetic neuropathy, and seizures
- Revlimid, a cancer drug used to treat multiple myeloma and other blood disorders
- Rituxan, a cancer drug used to treat lymphoma, leukemia, and rheumatoid arthritis
- Trulicity, a diabetes drug that stimulates insulin production
- Xarelto, a blood thinner used to prevent strokes and blood clots
- Zytiga, a prostate cancer drug that blocks the production of testosterone
These drugs are among the most expensive and widely used drugs in the Medicare program, accounting for an estimated $3.4 billion in out-of-pocket spending by 9 million seniors in 2022. Some of these drugs cost nearly $6,500 per year for a single patient, while the same drugs are sold for a fraction of the price in other countries. By negotiating lower prices for these drugs, and dozens more in the years that follow, the Biden administration is creating a new and better deal for patients.
Out-of-Pocket Cap: A Lifeline for Seniors
Another key provision of the IRA is the establishment of an annual limit on how much Medicare Part D beneficiaries have to pay out of their own pockets for their prescription drugs. Starting in 2023, the out-of-pocket cap will be set at $2,000 per year, and will be adjusted annually for inflation. This means that seniors will no longer have to worry about facing catastrophic drug costs that can wipe out their savings and force them to choose between their medications and other necessities.
Currently, Medicare Part D has a complex and confusing benefit structure that includes four phases: the deductible, the initial coverage, the coverage gap (or donut hole), and the catastrophic coverage. In each phase, beneficiaries pay a different share of their drug costs, ranging from 5% to 25%. In 2022, the deductible was $445, the initial coverage limit was $4,130, and the catastrophic threshold was $6,550. This means that seniors who had high drug costs had to pay up to $6,550 out of pocket before reaching the catastrophic phase, where they still had to pay 5% of their drug costs with no limit.
The IRA simplifies and streamlines the Part D benefit structure by eliminating the coverage gap and the catastrophic phase, and replacing them with a single phase where beneficiaries pay 15% of their drug costs until they reach the out-of-pocket cap of $2,000. After that, they pay nothing for the rest of the year. This will provide significant relief and peace of mind for millions of seniors who struggle to afford their medications.
Inflation Penalty: A Deterrent for Price Hikes
A third major provision of the IRA is the imposition of a tax penalty on drug manufacturers that increase the prices of their drugs faster than the rate of inflation. The penalty applies to drugs covered by both Medicare Part B and Part D, and is calculated as the difference between the actual price increase and the inflation-adjusted price increase. The penalty is paid as a rebate to Medicare, and is used to lower the costs for beneficiaries and the program.
The inflation penalty is designed to discourage drugmakers from raising their prices arbitrarily and excessively, and to align their pricing practices with the economic reality. According to a new report released by the White House, in 2022, Big Pharma charged Americans two to three times more than what they charged people in other OECD countries for the same drugs, even when accounting for rebates and discounts. For example, U.S. gross prices for insulin were on average almost 10 times the price in the United States than in comparison countries. The report also shows that six of the 10 drugs selected for negotiation in 2024 raised their prices in the first month of 2024, after already being priced three to eight times higher in the United States than in other countries.
The inflation penalty is already having an impact on drug prices. In 2023, 43 drugs were subject to the penalty, and Medicare beneficiaries paid lower coinsurance on these drugs, saving between $1 and $449 per average dose. The penalty is expected to generate more savings for consumers and the government in the future, as more drugs are subject to the penalty and as the penalty rate increases over time.
A New Era of Prescription Drug Pricing
The Inflation Reduction Act is a historic achievement that marks a new era of prescription drug pricing in the United States. The IRA is the result of decades of advocacy and activism by consumer groups, patient organizations, senior advocates, and health care experts, who have been calling for reforms to lower the cost of prescription drugs and to ensure access and affordability for all Americans. The IRA is also the culmination of President Biden’s vision and leadership, who has made lowering prescription drug costs a key priority of his administration, and who has delivered on his promise to the American people.
The IRA is not only a win for consumers and taxpayers, but also for innovation and public health. By lowering the cost of prescription drugs, the IRA will encourage more people to adhere to their treatment regimens, improve their health outcomes, and reduce the burden of chronic diseases. By allowing Medicare to negotiate drug prices, the IRA will create a more competitive and transparent market, stimulate more research and development, and foster more breakthroughs and cures. By imposing an inflation penalty on drugmakers, the IRA will curb the excessive profiteering and greed of the pharmaceutical industry, and ensure that the public interest is protected and respected.
The IRA is a game-changer for prescription drug pricing, and a major step forward for health care reform in the United States. The IRA is changing the landscape of prescription drug costs, and making a difference in the lives of millions of Americans.
