Inflation Reduction Act Deep Dive

WithMe Team

The Inflation Reduction Act of 2022, which President Biden signed into law Aug. 16, is historic. One reason amongst many is its stance on drug-pricing reform: the law empowers the government to negotiate drug prices and limit increases for the first time.

The law’s provisions are expected to significantly lower prescription drug costs for more than 50 million Americans enrolled in Medicare programs. The government is projected to save roughly $287 billion in Medicare over the next 10 years.

But how will the law affect the roughly 180 million Americans who receive their prescription drugs through private insurance, including self-insured plans? Analysts foresee a mix of potential risks and benefits.

Let’s take a closer look.

Key provisions in the law with the potential to impact private sector drug pricing include:

  • Medicare price negotiation: The government will be authorized to negotiate prices of certain high-cost drugs under Medicare, starting with 10 drugs in 2026, 15 drugs in 2027, and 20 drugs each year from 2029

  • Medicare drug price hike limits: Drug manufacturers will be required to limit price increases to the rate of inflation or otherwise to pay inflation rebates to Medicare

Potential Benefits: Greater Negotiating Leverage

A key unknown is: will the government’s ability to negotiate certain drug prices and limit others’ impact private insurance pricing?

Some analysts anticipate the spillover effect from the public sector to the private. “Medicare is a leader in health policy and payment models, and what they do really trickles out,” said Sarah Kaminer Bourland, legislative director at Patients for Affordable Drug, told MarketWatch. Other experts agree that the Centers for Medicare and Medicaid Services oftens set precedents that become standard in the private insurance sector.

Two pricing measures that have a potential to have a spillover impact on private sector insurance are the provisions for price negotiations and limiting price increases. Starting in 2023, if prices for certain drugs rise faster than inflation, manufacturers will be required to pay an inflation rebate to Medicare. And beginning in 2026, Medicare’s ability to re-negotiate the prices of the ten most expensive drugs will take effect.

“Bottom line: these inflationary rebates will still disincentivize manufacturers from raising prices,” writes Benjamin Rome, MD, a drug pricing expert at Harvard University. “And those differences will spill over to [the] commercial market.”

And for pharmacy benefit managers (PBMs) who have visibility into Medicare pricing, the new negotiated prices may provide them better leverage to negotiate on behalf of their privately-insured population.

Potential Risks: Cost shifting to the private sector and higher launch prices

While the potential benefits are clear, so are the risks. Some advocates warn the law’s new provisions could result in manufacturers trying to shift costs to the private sector as they seek to recoup lost Medicare revenues. Another concern is that, anticipating price increase caps, manufacturers could launch new drugs at much higher prices.

In an Aug. 9 statement, the Business Group on Health said, “We are alarmed that employer plan cross-subsidization will be expected once again to shoulder additional costs and make up for any perceived shortfall in prescription revenues by drug manufacturers.”

Ceci Connolly, president and CEO of Alliance of Community Health Plans (ACHP), also raised a red flag on cost shifting. “The drug pricing reforms within this package are a step in the right direction for holding pharmaceutical companies accountable for their egregious pricing practices. However, without provisions to penalize pharmaceutical companies for shifting costs to consumers with private health insurance, pharma has a chance to exploit this loophole and further strain Americans’ wallets,” she said in a statement.

Moreover, negotiated Medicare drug prices (“maximum fair price”) will be capped at a percentage of non-Federal average manufacturer price, putting greater pressure on this price threshold.

Another way in which pharmaceutical companies could offset limits on price increases is to launch new drugs at higher prices. But according to Sean Dickson, director of health policy at West Health Policy Center, “it’s really unclear that we’ll see growth in launch prices, because that indicates that manufacturers are underpricing now compared to what the market can support.”

The Wild Card: What states can do

Once the IRA’s drug pricing provisions are implemented, states have a potentially powerful opportunity to impose new cost constraints on drug prices in markets they regulate. And they can expand this regulation from public insurance to include private insurance, says The National Academy for State Health Policy (NASHP).

NASHP offers some examples: States could use federally negotiated Medicare prices as reference rates for their own established upper payment limits. This would allow states to extend the benefits of federal negotiations to state-regulated markets, including the individual insurance market and the state employee health plans, NASHP says. And states could establish penalties for drug manufacturers that raise prices faster than inflation, extending IRA pricing protections to state-regulated markets.

Final Thoughts

As with any expansive new healthcare legislation, the implications, benefits, risks, and unintended consequences (for good and not so good) will become evident in the months ahead.

We will look carefully for opportunities to leverage the law’s pricing provisions to further lower costs for our members. We also will remain vigilant for any attempt by manufacturers to shift costs to our plans.

Overall, we welcome thoughtful reforms to make medications more affordable for all Americans.