The Inflation Reduction Act (IRA) that President Biden signed into law Tuesday represents the most important effort in decades to reform how drug prices are set in the U.S. — the nation that spends more per capita on medicine than any other industrialized country.
"This is going to be game-changing," said Rena Conti, an associate professor at Boston University's Questrom School of Business who studies drug pricing.
While the law only addresses how Medicare, the health care program for seniors, sets drug prices, advocates of drug reform hope it will set a roadmap for other payers to lower soaring drug costs.
Read on to learn what the IRA would do for older patients and when various components of the law take effect.
$2,000 limit on out-of-pocket costs
The biggest change for seniors on Medicare is to limit on how much they spend out-of-pocket on medication and on vaccines. Under the IRA, vaccines will be free starting next year. Starting in 2025, out-of-pocket spending on drugs is limited to $2,000 per year. In 2024, a transition year, costs are capped at Medicare's catastrophic drug coverage limit, which this year is $7,050.
That's good news for seniors that take expensive drugs.
"Today's policy basically has unlimited out-of-pocket spending, and that is really bad for people who need expensive drugs," said Stacie Dusetzina, associate professor of health policy at Vanderbilt University Medical Center. "For anyone who needs drugs to treat cancer, multiple sclerosis, rheumatoid arthritis — some of them have bills over $10,000 a year."
In 2019, 1.5 million seniors spent more than $2,000 on prescriptions, according to the Kaiser Family Foundation. But the true number may be higher, said Dusetzina, pointing to research showing that 30% of Medicare beneficiaries who face high prices for cancer treatments don't fill their prescriptions.
Tricia Neuman, director of the Program on Medicare Policy at the Kaiser Family Foundation, noted that half of Medicare recipients live on $30,000 a year or less.
"This is a significant savings for people on relatively modest incomes," she said.
Subsidies for low-income seniors
The bill makes more seniors eligible for low-income subsidies intended to pay for Medicare prescription drugs.
Starting in 2024, the income limit to be eligible for Medicare's Low Income Subsidy rises to 150% of the federal poverty level, from today's limit of 135%. (Using today's income levels, that means a single person could make up to $19,200 to qualify.)
As a result, about 400,000 more Medicare beneficiaries will get subsidies under the new program, according to KFF research.
Insulin price cap
The Inflation Reduction Act caps how much seniors must spend on insulin to $35 a month — a boon for the more than 3 million older Americans who use insulin to control their diabetes. A provision that would have imposed that cap on all patients was stripped from the bill in the Senate, despite bipartisan support.
Since 2007, the number of Medicare beneficiaries using insulin has doubled, but the amount Medicare spends on insulin has increased twice as fast, KFF research has shown. One in 4 diabetes patients has skimped on insulin because of its cost.
A few high-priced drugs will be cheaper
The bill also makes several smaller changes to limit price increases of drugs overall. Most significantly, the measure directs the government to negotiate what Medicare pays for a small group of drugs starting in 2026.
In 2026, the first year that drug pricing will be up for negotiation, the list will include the 10 drugs that Medicare spent the most money on the prior year. By 2029, that list expands to 20 drugs, including medications filled at pharmacies and drugs administered by doctors, such as some chemotherapy treatments.
"The cost — and the savings to the federal government — goes up significantly as more and more drugs are added," said Michael Levesque, lead pharmaceutical analyst at Moody's Investors Service.
The bill limits the government's scope to negotiate to drugs that have been on the market for at least nine or 13 years, depending on the class of medicine, and that don't have a generic or biosimilar equivalent. The bill also directs the U.S. to focus on the medications the government spends the most money on.
"They have to be long-lived, high-spend drugs, and ones that have resisted competition," said Boston University's Conti.
The drugs that Medicare spent the most on in 2020 include the blood-thinner Eliquis ($9.9 billion), cancer treatment Revlimid ($5.4 billion) and the blood thinner Xarelto ($4.7 billion.) However, analysts caution that that list is likely to change year to year, as new drugs age and government spending shifts.
Conti estimated that savings would amount to 40% to 70% of a given drug's price. Over a decade, the government should save over $100 billion from negotiating drug prices, the Congressional Budget Office estimated. That's less than 3% of the profits earned by global biopharmaceutical firms over the next decade, UBS analysts projected.
The bill should also reduce costs directly for patients who take these specific drugs. "Many people pay a coinsurance, which is based on the [medication] price. If the price is lower, and they're paying a 33% coinsurance, they're paying a lower price" out of pocket, said Neuman of the KFF.
Rebates for pricey drugs
The Inflation Reduction Act requires drugmakers to offer rebates to Medicare if they raise the price of medicines faster than inflation. Soaring prescription-drug prices are one reason that Medicare costs have ballooned over the past decade.
According to MedPAC, prices paid by Medicare Part D for brand-name drugs with no generic equivalent have grown by an average of 7.5% a year since 2010. Fully half of the drugs in the program increased their prices faster than inflation, KFF found. The requirement that drugmakers pay back Medicare for rising drug prices should save the government $71 billion over the next decade, CBO estimated.
"The Medicaid program has long used these drug inflation rebates, and they've had huge savings," said Vanderbilt's Dusetzina. "Having those same programs apply to the Medicare population will save a lot of money in the long run, and that saves money for all of us as taxpayers."
Are there benefits for privately insured patients?
Aside from a provision to extend health insurance subsidies for Obamacare plans for three years, the health care aspects of the inflation bill focus narrowly on Medicare patients. Experts are divided on what effect, if any, Medicare drug reform would have on the majority of Americans who get health insurance and drug coverage through their employers.
One camp believes that drugmakers will try to make up for smaller profits in the Medicare market by overcharging the privately insured; another believes that transparency in what Medicare pays would make it easier for private plans to negotiate even better pricing. For instance, more private pharmacy benefit managers could start putting inflation protections into their agreements.
The pharmaceutical industry has said the prospect of negotiating prices on some best-selling drugs would chill innovation and reduce incentives for drugmakers to bring new medicines to market. Pharmaceutical Research and Manufacturers of America, the industry's trade group, called it a "tragic loss for patients" and said the bill would "lead to fewer new cures and treatments for patients battling cancer, Alzheimer's and other diseases."
However, the CBO found that the new law would result in just 10 fewer drugs coming to market in the next decade — about 1% of the total expected to gain FDA approval.
Dusetzina called claims that negotiating drug prices would kill the market for drug development "overblown."
"Every other country negotiates for drug prices," she said. "We pay by far the highest prices, [yet] it's known that these companies make profits in other countries where they're selling these drugs."
Could drugmakers try to game the system?
Experts note that drugmakers could try to evade price controls on their most popular drugs, such as by introducing competing generics that don't offer much in the way of price savings from the brand-name drug, or by hiking prices for new drugs to make up for cost reductions on older ones.
Dusetzina said the bill offers a "toe in the water" to see how the pharmaceutical industry responds to price negotiations on a very limited scale.
She added, "Medicare is something we all pay for, so we should all be concerned if we're not getting a good deal."