Inflation Reduction Act Includes Historic Measures to Lower Prescription Drug Prices

By Nancy A. LeaMond
At a time when so many Americans are struggling with rising costs of everyday essentials like groceries and gas, the Inflation Reduction Act of 2022 recently passed by the Senate is historic legislation that will lower the prices of prescription drugs and put money back in the pockets of seniors.

Millions of American seniors will see lower prices as a result of this bill, which requires Medicare to start negotiating the price of certain drugs, penalizes drug companies that increase their prices faster than inflation, caps seniors' annual out-of-pocket costs for prescription drugs in Medicare Part D, limits cost-sharing for insulin in Medicare drug plans and extends financial assistance to help people afford health insurance.

The legislation will help revolutionize the prescription drug market and finally hold drug companies accountable for their prices. Some policies will take effect almost immediately this year while others will be phased in. Here's a quick rundown of what consumers can expect and when, if the bill is enacted.

2022
Drug companies start to pay penalties for big price increases. Starting later this year, drug companies that increase the prices of their products faster than inflation must pay the higher-than-inflation amount back to the government. For example, if inflation were 5%, and a drug price increased by 6%, the drug company would have to pay the 1% difference for all Medicare sales of that drug back to the government. This provision will address brand name drug companies' long-standing practice of increasing their prices year after year—often at more than twice the rate of inflation—and help reduce the amount seniors pay for their drug plan premiums and cost sharing.

2023
Free vaccines for Medicare beneficiaries. Starting on January 1, 2023, if you’re on Medicare, you will no longer have to pay any co-payment for a vaccine that is recommended for adults by the Advisory Committee on Immunization Practices (ACIP). The policy already applies to a lot of types of health coverage, but Medicare beneficiaries have still had to pay some level of cost-sharing for Medicare Part D-covered vaccines depending on their plan coverage. This will be important relief for Medicare Part D-covered vaccines that currently require cost-sharing, such as shingles. 

Insulin co-pays capped at $35/month. Beginning in 2023, co-pays for a 30-day supply of any plan-covered insulin will be capped in Medicare Part D. From 2023 to 2025, the maximum monthly co-pay will be $35 and for 2026 and after it will be $35 or 25% of the drug’s negotiated price, whichever is lower. Part D plans will be required to offer this co-pay amount even before the enrollee meets their deductible for the year.

2024
No cost sharing for catastrophic coverage in Part D. Under the current Part D benefit, once your out-of-pocket costs reach $7,050 in 2022, you enter “catastrophic” coverage but are still responsible for 5% of your prescription drug costs, with no limit. In 2024, people with Part D coverage will not be responsible for any out-of-pocket drug costs once they enter catastrophic coverage.  This change is the first step of even bigger changes discussed below that will limit out-of-pocket costs starting in 2025.

Part D premiums cannot grow faster than 6% per year. From 2024 through 2029, Medicare Part D premium increases will be capped at 6% per year. The head of the Department of Health and Human Services will also have an opportunity to slow premium growth in 2030 and beyond.  

Expanded eligibility for Medicare Part D Extra Help. Medicare pays some or all of the out-of-pocket prescription drug costs for people with limited incomes and resources through the Extra Help program. Starting in 2024, the income threshold for the full Extra Help benefit will increase from 135 percent to 150 percent of the federal poverty level (roughly $20,000 for a single person or $27,000 for a couple in 2022). Right now, around 500,000 people on Medicare have incomes between 135 and 150 percent of the poverty level and receive a partial benefit; under this bill, they would receive the full benefit if they meet the other eligibility criteria.

2025
Cap on annual out-of-pocket drug costs and Part D benefit changes to encourage competition and reduce costs.  Medicare Part D covers most of the prescription drugs that you pick up at the pharmacy. In 2025, the program will undergo several changes that will help reduce out-of-pocket costs  ̶  most importantly you will not have to pay any out-of-pocket costs for your prescriptions once you hit an annual cap ($2,000 in 2025).  There was previously no limit on how much a person on Part D could have to pay in a given year, and 1.2 million enrollees spent more than $2,000 in 2019. Design changes to the Part D program are also expected to encourage Part D plans to negotiate more aggressively with drug manufacturers.

*Note: The new Medicare Part D out-of-pocket limit will increase annually based on Medicare Part D per capita spending along with the other parts of the benefit.   

Monthly cost-sharing limits for people on Part D. Medicare Part D plans must offer people the option of “smoothed” cost-sharing, which will allow them to spread their out-of-pocket costs over the course of the plan year. This mechanism will help protect people from large out-of-pocket payments that may arise in one particular month and potentially improve their ability to afford their prescription medications.

2026
People with Medicare begin to benefit from Medicare’s price negotiation with drug companies. The Department of Health and Human Services (HHS) will identify the 100 drugs Medicare spends the most money on and choose a subset of drugs for price negotiation. Negotiations will start in 2023, and the new program will begin to provide the negotiated prices for selected Medicare Part D drugs (typically those you fill at a pharmacy) in 2026 and Medicare Part B drugs (typically those that can only be administered in a hospital or doctor’s office) in 2028. All of the selected drugs must be single source, meaning there is no generic or biosimilar competitor on the market, and the newest drugs on the market will not be eligible for negotiation. Drugs will only be eligible for the two-year negotiation process if it has been at least 7 years (for small molecule drugs – typical drugs that are usually taken orally) or 11 years (for biologic drugs) since they were approved by the US Food & Drug Administration (FDA). Some high-spend drugs that currently do not meet these thresholds but might meet them by the time negotiated prices become available include Imbruvica (cancer), Jardiance (diabetes), and Eylea (age-related macular degeneration). Medicare will negotiate prices for no more than 10 drugs in 2026, no more than 15 drugs in 2027 and 2028, and no more than 20 drugs in 2029 and beyond. This means that as many as 60 drugs total could be selected and negotiated by 2029. The negotiation process also includes a ceiling for drug prices to ensure that Medicare does not pay more than the prices that private insurers negotiate already. Overall, this process will create substantial savings for seniors and taxpayers by reducing the prices of a growing number of expensive and/or widely used prescription drugs.

Examples of prescription drugs that would currently qualify for negotiation

Keeping Health Insurance Affordable for Millions.  In addition to the prescription drug-related provisions, the Inflation Reduction Act will also help adults under age 65 to purchase affordable health insurance. The legislation would continue current financial assistance for low-income adults who purchase health insurance through state and federal exchanges. This assistance completely covers the costs of premiums for people with the lowest incomes and ensures that no one buying coverage on the exchanges pays more than 8.5 percent of their income towards premiums. Without this support, more than 3 million Americans might lose their health coverage because they could no longer afford it – especially those who are 50 and older, who pay the highest rates (up to three times more) for their coverage. This financial assistance would have expired at the end of 2022 but will now be available through 2025.

Overall, the Inflation Reduction Act includes numerous provisions to make historic improvements in the health and wellbeing of older Americans, particularly when it comes to affording prescription drugs. AARP worked for years supporting these provisions and helping to push them across the finish line, and we will continue to work to ensure that this law benefits older Americans for decades to come.

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AUTHOR
Nancy A. LeaMond

Nancy LeaMond is the chief advocacy and engagement officer for AARP, widely seen as one of the most powerful advocacy organizations. Leading its government affairs and legislative campaigns, she has the responsibility of driving the organization’s social mission on behalf of Americans 50-plus and their families. She also manages public education, volunteerism, multicultural outreach and engagement, and she directs major AARP initiatives that include supporting family caregivers through advocacy, education and innovative programs, and expanding AARP’s local footprint in communities across the country.