Drug Inflation Reduction Act

The Inflation Reduction Act was signed into law by Biden on August 16, 2022 (The Inflation, 2022). It includes several provisions to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government (Cubanski et al., 2022). The act aims to lower the out-of-pocket spending for people on Medicare and lower medication costs like Insulin by capping the amount of money individuals must pay out of pocket; allowing the federal government to negotiate drug prices; and requiring drugmakers to pay rebates to Medicare if they raise prices (Lovelace, 2022). The Congressional Budget Office estimates that the drug pricing provisions in the law will reduce the federal deficit by $237 billion by 2031 (Cubanski et al., 2022). 

The National Committee has worked for two decades to establish these reforms after the ban on drug negotiation set by the Medicare Modernization Act of 2003 (The Inflation, 2022). It is a result of strong, bipartisan, public support for the government to address high and rising drug prices (Cubanski et al., 2022). A recent survey by the Kaiser Family Foundation asserts that 80% of adults say that prescription drug costs are unreasonable (Lovelace, 2022). Around 1.4 million Medicare beneficiaries spend over $2,000 on out-of-pocket drug costs each year, and, in 2020, the average, annual out-of-pocket cost for insulin was $572 for 3.2 million Medicare beneficiaries. The Inflation Reduction Act aims to provide relief to seniors and people with disabilities, particularly those who rely on very expensive medications (The Inflation, 2022). 

The provisions of the Inflation Reduction Act will gradually be put into effect over the next four years. The first priority is insulin price caps and rebates in 2023, followed by out-of-pocket spending caps in 2025, and drug negotiation in 2026 (Lovelace, 2022). Under the Inflation Reduction Act, the Secretary of Health and Human Services is required to negotiate the prices of the most expensive drugs covered by Medicare – drugs are eligible for negotiation if they have been on the market for at least nine years for small molecule drugs and 13 years for biologics. The number of negotiated drugs will increase each year. The law establishes a maximum fair price that Medicare will pay for Part B drugs (medication administered in the doctor’s office) that is the lowest available price, whichever is least out of the negotiated price, the average sales price, or the average wholesale price paid by non-federal purchasers. Failing to meet the maximum fair price results in penalties for the drug companies. The Inflation Rebate in the law requires manufacturers to pay the federal government a rebate on any drug if the price rises faster than inflation. Out-of-pocket caps limit patient costs to $2,000 under Medicare and to $35 for approved insulin products. The act also addresses low-income subsidy eligibility and vaccine cost-sharing (The Inflation, 2022).   

Since the Inflation Reduction Act was signed in 2022, but will not be fully implemented until 2026, this gap may give pharmaceutical companies the opportunity to fight the implementation of the law in court or find ways around the provisions to maintain profits. Drug companies can refuse to negotiate but would be forced to pay taxes on all sales of the drug, or they could withdraw the drug from coverage under Medicare/Medicaid to avoid the negotiation and tax, which would effectively cut them off form a huge proportion of the market (Lovelace, 2022).  

Experts expect to see more generic versions of medications released by pharmaceutical companies which would allow them to bypass the law’s provision of price negotiation by the federal government. Specifically, in 2026, the law will allow the government to negotiate prescription drug prices covered by Medicare, but only for medications that have been on the market within the specific time window, and only if the drug does not have a comparable alternative generic version. Therefore, if companies make the generic version themselves or allow another manufacturer to do so, the prices of the expensive brand name version will no longer qualify for negotiations because a comparable generic version exists. Further, less-costly generics generally reduce the cost of more expensive brand name versions through competition, but if pharmaceutical companies create both the generic and brand-name versions, they will be able to keep the profits of both and maintain the high prices of the brand-name version (Lovelace, 2022).  

Another way that pharmaceutical companies avoid negotiation is something referred to as “product hopping.” A manufacturer can withdraw their drug from the market and reintroduce a reformulated version, which is usually treated as a new product by US law, allowing the drug to avoid the negotiation time frame. Tactics like these could be challenged in court, but it would require lots of time and money (Lovelace, 2022).  

An additional concern is that companies will abuse the inflation rebate rule in the health law, beginning in 2023, that imposes a rebate on drug manufacturers for raising medication prices faster than inflation. This means that drug manufacturers would have to pay a rebate to Medicare equal to the difference between the initial and current drug price multiplied by the volume of sales to Medicare (Lovelace, 2022). This may encourage drug companies to set higher initial prices to make up for the money they would have made by steadily increasing the price each year. Fortunately, the cap for out-of-pocket costs for people on Medicare would remain at $2,000 as set by the Inflation Reduction Act, so the increase in drug prices will not influence them, but this means there will be no backlash from the public on Medicare (Lovelace, 2022).  

The Inflation Reduction Act may have a much larger impact on the entire insurance market. Higher list prices for drugs could cause premiums for Medicare and the private insurance market to increase. Drug companies may try to make up for losses in Medicare by increasing costs of medication for private insurers and renegotiating deals. Therefore, privately insured and uninsured individuals will be affected the most by the higher price lists (Lovelace, 2022). While the Inflation Reduction Act aims to benefit all by making medication more affordable, it is difficult to combat pharmaceutical companies motivated by profits.  

References

Cubanski, J., Neuman, T., & Freed, M. (2022, September 22). Explaining the Prescription Drug Provisions in the Inflation Reduction Act. KFF. Retrieved October 24, 2022, from https://www.kff.org/medicare/issue-brief/explaining-the-prescription-drug-provisions-in-the-inflation-reduction-act/

The Inflation Reduction Act: Drug Pricing Provisions. (2022, August 25). National Committee to Preserve Social Security and Medicare. Retrieved October 22, 2022, from https://www.ncpssm.org/documents/medicare-policy-papers/the-inflation-reduction-act-drug-pricing-provisions/

Lovelace, B., Jr. (2022, September 20). The Inflation Reduction Act aims to lower drug costs — but here's how Big Pharma could get around it. NBC News. Retrieved October 24, 2022, from https://www.nbcnews.com/health/health-news/inflation-reduction-act-aims-lower-drug-costs-s-big-pharma-get-rcna48341