In August 2022, President Biden signed into law the Inflation Reduction Act of 2022. It includes a number of health, climate, and tax reforms. In health, two of the major provisions related to Medicare pharmaceutical pricing and spending. For the first time Medicare will be permitted to negotiate drug prices with manufacturers. Second, there will be a $2,000 annual out-of-pocket (OOP) maximum for pharmaceutical copayments. The negotiations will be effective in 2026, and the OOP maximum, in 2025.
Part D of Medicare, the major source of the program’s drug coverage, was implemented in 2006. Unlike Parts A (hospital) and Part B (outpatient and physician), which were government administered, Part D relied on competing private insurers to administer the benefit. One of their tasks was to negotiate directly with pharmaceutical manufacturers. Since then, many policy analysts and beneficiaries have complained that brand name drug prices are far too high and have suggested that Medicare take advantage of its strong bargaining power to negotiate more favourable terms for the 48 million seniors and disabled persons who have purchased drug coverage.
The new legislation allows the Secretary of the Department of Health and Human Services to negotiate the prices of up to 10 drugs in 2026 and more thereafter for Medicare’s 100 most expensive drugs. The negotiated prices apply only to Medicare beneficiaries, not to Americans who have private insurance coverage. Negotiations will apply only to brand name drugs or biologics that do not have approved generics or biosimilars. It is estimated that drug price negotiation will save Medicare about $100 billion over 10 years.
The OOP maximum for drug copayments is estimated to affect 1.5 million beneficiaries who currently spend more than $2,000 per year. Those who currently exceed these maximums typically are those with expensive chronic diseases for which only specialty brand name drugs are available, such as cancer, multiple sclerosis, or HIV/AIDS. A third health-related component of the legislation is extending premium subsidies for individual insurance plans sold through the Affordable Care Plan’s state-based marketplaces through the year 2025.