Healthcare Policy December 9, 2023

Beyond Medicare: The Far-Reaching Consequences of the Inflation Reduction Act on Drug Costs

by Barry P Chaiken, MD

The Inflation Reduction Act (IRA) of 2022 broadly impacts prescription drug prices in the United States and changes state Medicaid and employee health plans. The IRA introduces significant modifications to how Medicare pays for prescription drugs. Historically, Medicare acted as a price taker, paying for medications at list prices set by manufacturers. The key reforms in the IRA that directly impact list prices are:

  • Inflation Rebate: Manufacturers must refund Medicare for any increases in drug list prices that exceed the inflation rate.
  • Medicare Price Negotiation: Medicare is now empowered to negotiate prices for certain drugs with manufacturers.

These reforms extend beyond Medicare, influencing drug prices across the U.S. market. The Congressional Budget Office (CBO) anticipates manufacturers may reduce list price growth or even lower prices for many drugs as they no longer profit from Medicare spending surpassing inflation. However, there is also an expectation that new drugs may be introduced at higher initial prices due to the anticipated impact of these reforms.

State-Level Implications

States which bear significant financial responsibility for prescription drug spending are likely to be affected in several ways:

  • Budget Relief: States benefit from lower drug list prices as they oversee health plans for employees, retirees, and Medicaid beneficiaries. Lower list prices reduce out-of-pocket costs for state residents, including the uninsured.
  • Impact on Insurance Premiums: With the slowing of drug price growth, insurance premiums are expected to decrease, benefiting insured individuals and potentially increasing tax revenues due to the tax implications of employer-sponsored health plan premiums.
  • Mixed Effects on Medicaid and Safety-Net Hospitals: Lower list prices can lead to savings, but the reduction in Medicaid rebates resulting from lower prices could diminish these savings. The introduction of new, higher-priced drugs may also continue to challenge affordability.

Prospects for State-Level Health Policy Reforms

The IRA’s pricing reforms could spur additional reforms at the state level. States might explore:

  • Spending Caps: States may implement payment restrictions for certain healthcare services or prescription drugs, particularly those with high initial prices.
  • Reimbursement Legislation: Some states are considering legislation to tie reimbursement limits for commercial health plans to Medicare-negotiated drug prices.
  • Preference for Medicare-Negotiated Prices: States could favor drugs with prices negotiated by Medicare to obtain better Medicaid pricing and seek comparable rebates from other manufacturers.

In summary, the Inflation Reduction Act introduces significant changes to the prescription drug pricing system in the U.S., with notable implications for state budgets and policies. While the act will likely bring some financial relief to states and consumers, it also introduces new complexities, especially for Medicaid programs and safety-net hospitals. These changes may encourage further state-level efforts to control prescription drug spending.

Source: How Drug Price Reforms in the Inflation Reduction Act Could Impact States, Commonwealth Fund, November 29, 2023

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