Medicare Advantage

Inflation Reduction Act Makes Big Changes to Medicare

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President Biden signed the Inflation Reduction Act into law on August 16, 2022. The law has several provisions that aim to reduce prescription drug costs for Medicare patients. Among them are limits on price hikes for high-cost drugs and increased transparency on drug pricing.

The Inflation Reduction Act includes some prescription drug provisions that will:

  • Enable price negotiations with manufacturers to reduce prescription drug prices in Medicare
  • Implement changes to the Medicare Part D program
  • Postpone implementation of the drug rebate rule by the Trump Administration

The Federal Government Will Negotiate Prices For Drugs

Right now, Medicare Part D prohibits the U.S. Department of Health and Human Services (HHS) from engaging in price negotiations between Part D plan sponsors and drug manufacturers. As a result, Medicare is required to subsidize the Part D program heavily but can’t set prices or establish a fee schedule. Similarly, Medicare Part B doesn’t have any means of price negotiation.

The Inflation Reduction Act will add an exception that enables the Secretary of Health and Human Services to negotiate prices with drug manufacturers for certain classes of drugs.

These include biosimilar competitors, single-source brand-name, or biologics without generic drugs covered in Medicare Part B (starting in 2028) and Medicare Part D (beginning in 2026).

The Secretary will hold price negotiations with drug manufacturers to determine the Maximum Fair Prices (MFPs) for 10 qualifying drugs for 2026; 15 drugs for 2027 and 2028; and 20 drugs for 2029 and beyond. The program will only apply to Part D drugs in 2026 and 2027.

Drug manufacturers that don’t comply with the requirements of the program could be subject to a civil monetary penalty or an excise tax.

The exercise tax amount will be set as a percentage of the sales price of a selected drug plus the excise tax imposed by the Inflation Reduction Act. That could range from 65% to 95% if a manufacturer were found to be out of compliance for more than 270 days.

The Inflation Reduction Act Will Restructure Medicare Part D

As it stands, Part D plan members cover the full cost of their medications during the deductible phase, unless a plan makes exceptions for lower-tired drugs. Once beneficiaries meet a deductible, they’re subject to the cost sharing of their plans. If they hit the catastrophic limit, they’ll pay about 25% of the cost of both brand name and generic drugs. Beyond this, there’s a 5% coinsurance rate for post-catastrophic threshold medication.

For low-income enrollees, Medicare provides coverage for a more significant share of costs through the Low Income Subsidy. This includes capping out-of-pocket spending at the catastrophic threshold for enrollees with the lowest income and assets.

Manufacturers that sell biologic and brand-name drugs through Part D must pay a 70% discount on sales in the “donut hole” (the time in the standard benefit from the first coverage limit to the catastrophic threshold). The discount applies to non-Low Income Subsidy enrollees, who count the discount as out-of-pocket spending.

The Inflation Reduction Act (IRA) will revamp Medicare Part D by:

  • Adjusting the formula for setting premiums and enrollee cost sharing
  • Reducing the Medicare reinsurance subsidy
  • Establishing a new manufacturer discount program

Beginning in 2024, the IRA will cap out-of-pocket spending at the catastrophic threshold for all enrollees of Medicare Part D. It will also reduce the amount required to reach the catastrophic threshold to $2,000 in 2025.

The IRA will also establish specific Low Income Subsidy programs for low-income enrollees, starting in 2024, and allow enrollees to spread out their cost sharing in capped monthly amounts.

In addition, starting in 2025, enrollees can count certain third-party payments as their out-of-pocket spending, including reimbursement from a group health plan, health insurance or other third parties.

This restructuring will also impact insurers.

The law will reduce their reinsurance subsidies from 80% to 20% for biosimilar drugs and brand-name biologics and 40% for generic drugs starting in 2025. Additionally, a 6% cap will be set on annual increases in the Part D base premium from 2024 to 2029. And in 2030, the IRA will reset the base premium formula based on plan bids.

Implementation of the Drug Rebate Rule by the Trump Administration Will be Further Delayed

In January 2020, the Centers for Medicare & Medicaid Services delayed the effective date of the Trump administration’s new drug rebate rule by six months. The rule would have eliminated drug rebates paid to pharmacy benefit managers (PBMs) and passed those discounts to individual enrollees at the point of sale.

This rule was supposed to take effect on January 1, 2022, but the Biden administration postponed implementation to January 1, 2023. The implementation was further delayed to 2026 by the Infrastructure Investment and Jobs Act.

Additionally, the Bipartisan Safer Communities Act, signed into law in June 2022, further delayed implementation to 2027. The Inflation Reduction Act will further delay the implementation of the rebate rule until 2032.