The Inflation Reduction Act’s drug-pricing provisions are largely focused on Medicare–but people with employer-sponsored health coverage and others buying drugs in the commercial market also stand to benefit from the reforms, policy experts say.
The legislation, passed by House Democrats last week and signed by President Joe Biden on Tuesday, makes a slew of changes to the federal health program for seniors, including requiring for the first time that the federal government negotiate prices for a limited set of drugs covered by Medicare, requiring pharmaceutical companies to pay rebates to Medicare when drug prices rise faster than inflation, and capping out-of-pocket costs in Medicare’s Part D prescription-drug benefit.
While the changes are particularly significant for seniors taking pricey drugs, they’re also consequential for others struggling to afford prescriptions, experts say. Prices drug companies charge in the commercial market, for example, factor into the inflationary rebates the companies may owe Medicare under the new law–giving drugmakers an incentive to keep those prices in check. And public availability of drug prices negotiated by Medicare may add transparency that helps other market players also haggle for better prices, experts say. “This is definitely a big change to the status quo,” said Dr. Benjamin Rome, a physician and researcher at Harvard Medical School. “The effect of this law will resonate throughout the entire prescription-drug market.”
The law’s passage comes at a time when more than 80% of adults think the cost of prescription drugs is unreasonable, according to the Kaiser Family Foundation. Nearly 30% of adults say they haven’t taken prescriptions as directed in the last year because of costs, and more than one in four say it’s very difficult for them to afford their drugs, KFF found.
“Medicare is a leader in health policy and payment models, and what they do really trickles out,” influencing other segments of the market, said Sarah Kaminer Bourland, legislative director at Patients for Affordable Drugs, a nonprofit patient organization. The federal government is also the nation’s largest purchaser of prescription drugs. Details on how the government approaches price negotiations, for example, “are all beneficial for other payers to see,” Bourland said.
As the law makes unprecedented drug-pricing changes, there remains plenty of uncertainty about the implications of the reforms, and some groups see negative consequences for patients. Stephen J. Ubl, president and CEO of industry group Pharmaceutical Research and Manufacturers of America, said in a statement that the bill is a “tragic loss for patients,” adding that it will lead to fewer new treatments for serious diseases. Business Group on Health, a nonprofit representing large employers, said in a statement that the bill “creates extraordinary risk for American employees and their families,” who largely get drug coverage through employer-sponsored plans, saying that employer plans could be expected “to shoulder additional costs and make up for any perceived shortfall in prescription revenues by drug manufacturers.”
Health policy researchers, however, point to several provisions in the new law that may benefit people buying prescription drugs in the commercial market. One such provision takes effect next year, requiring drug companies to pay rebates if drug prices rise faster than inflation. The rebates will be based on the number of units of the drug sold in Medicare multiplied by any price increase exceeding inflation. Although the number of units sold in the commercial market doesn’t factor into the rebate amount, commercial price changes will affect the rebate owed. “Certainly there will be some spillover effect from the inflation penalties that are assessed on the Medicare program, and that will reduce prices for all purchasers of drugs,” said Sean Dickson, director of health policy at West Health Policy Center, a nonprofit research organization.
Several experts illustrated the point by citing Dickson’s 2020 study, published in JAMA, of the 340B program, which requires drugmakers to sell drugs at lower prices to safety-net health care organizations and mandates an additional discount if a drug’s price rises faster than inflation. Looking at more than 600 drugs used in Part D between 2013 and 2017, Dickson found that drugs with a higher percentage of sales subject to the inflation penalties had lower annual price increases. Although some drugmakers have said they’d have to increase prices of drugs exposed to inflationary rebates, “the evidence is clearly the opposite,” Dickson said.
In a 2019 analysis of a similar inflation-rebate provision included in a previous bill, the Congressional Budget Office also found that the provision would trim costs for prescription drug benefits offered by commercial plans. Half of all Part D-covered drugs had price increases exceeding inflation in the year ending July 2020, according to the Kaiser Family Foundation. But because the new law’s rebate formula is based on the number of units sold in Medicare, it may have little impact on prices of drugs not widely used in Medicare, experts said.
Some experts also see benefits for the private market as implementation of government-negotiated prices for certain Medicare drugs starts in 2026. Non-government payers such as private insurers “could use those prices to negotiate as well,” Rome said. Others say the impact remains to be seen. “Maybe that transparency will help,” but private payers don’t have the same heft as the federal government, said Garrett Hohimer, vice president for policy and advocacy at Business Group on Health.
The CBO projected that the Inflation Reduction Act’s inflationary rebates and negotiation provisions could increase launch prices for new drugs as drugmakers seek to offset slower growth in prices over time, but the agency noted that the commercial market and Part D would likely be less affected. “It’s really unclear that we’ll see growth in launch prices, because that indicates manufacturers are underpricing now, compared to what the market can support,” Dickson said.
The new law’s redesign of the Medicare Part D prescription-drug benefit could also affect drug pricing, Rome said. Traditionally, higher drug prices would propel Part D enrollees more quickly into the “catastrophic” coverage phase, where Medicare pays 80% of the tab. Under the Inflation Reduction Act, starting in 2025 Medicare will pay only 20% of the costs for brand-name drugs in the catastrophic phase, with Part D plans and drugmakers responsible for the remaining costs. That puts new pressure on drug prices “that could also affect pricing behavior in the commercial market,” Rome said.