What impact will the Inflation Reduction Act have on health plans?

Plan sponsors should be aware of the effects the law will have on Medicare Part D over the coming years.

The Inflation Reduction Act (IRA) is a sweeping law passed in 2022 that touches on clean energy, the tax code, reducing the federal deficit and much more—including changes to Medicare Part D and drug spending. In that realm, the law is intended to reduce government liability and reduce members’ out-of-pocket costs by lowering the cost of drugs, implementing cost-share caps on insulin and vaccines, eliminating the “donut hole” or coverage gap phase of the Part D benefit and requiring drug companies to pay rebates if they raise prices faster than the rate of inflation.

How does the IRA shift liability for Medicare Part D?

The IRA restructures Medicare Part D, reducing the government’s and beneficiaries' liability for drug spending, shifting costs to health plans and drug manufacturers. This redesign entails:

  • Creating a hard cap or maximum out-of-pocket (MOOP), after which beneficiaries will have zero cost share.
  • Removing the coverage gap phase of the benefit, shifting low-income members’ liabilities to plans and the Manufacturer Discount Program.
  • Increasing plans’ share of costs from 15% to 60% for both brand names and generics above the cap. 
  • Requiring pharmaceutical companies to provide a 10% discount on brand-name drugs in the initial coverage phase of the benefit and a 20% discount after the cap. 
  • Expanding the low-income subsidy program to cover beneficiaries whose gross income is up to 150% of the federal poverty line.
  • Increasing plan liability for members with specific high-spend conditions (e.g., psoriatic arthritissystemic sclerosis or atrial arrhythmia).

Plans might manage this increased liability by implementing formulary and utilization management strategies, but will need to focus on care management strategies for high utilizers regardless.

What is the Medicare Prescription Payment Plan? 

Beginning in 2025, Medicare beneficiaries will have the option of deferring payment of their Part D cost share as part of the Medicare Prescription Payment Plan (MPPP). If the beneficiary opts into the program, they will pay $0 out-of-pocket at the pharmacy, but instead will have monthly payments throughout the plan year. 

The first month’s maximum payment will be determined by calculating the out-of-pocket maximum (capped at $2,000 for 2025) minus out-of-pocket costs incurred already, divided by the number of months left in the plan year. The beneficiary will be invoiced for their total cost share incurred in January or the maximum payment, whichever is lower. ​​Subsequent months’ payments are determined by calculating the remaining beneficiary cost share incurred plus any new cost share, divided by the number of months left in the plan year.

  • If a beneficiary enrolls in the MPPP in January and also incurs $2,000 of cost share in January, their monthly out-of-pocket cost would be $2,000 divided by 12 months, or $167 per month. 
  • If they enroll at the beginning of September and also incur $2,000 of cost share in September, their monthly payments would be $500, assuming no prior out-of-pocket expenses in the year.
  • For beneficiaries with prior out-of-pocket expenses, the total already paid would be subtracted from the initial total out-of-pocket used to calculate the first month’s maximum payment. 

This provision is cause for uncertainty in the industry, as beneficiaries’ deferred payments will mean health plans are not sure how much bad debt they will need to account for yearly.

The IRA and Medicare drug price negotiation 

While many other countries set price controls for prescription drugs, the U.S. does not—not even for federal programs like Medicare. The 2003 law that created Medicare Part D includes a Noninterference Clause, which states that the federal government “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors; and may not require a particular formulary or institute a price structure for the reimbursement of covered Part D drugs.” 

The IRA amends this clause, requiring that the Secretary of Health and Human Services negotiate some of the most expensive single-source brand-name drugs covered under Medicare Part D with prices effective 2026 and expanding to Medicare Part B in 2028. 

The first ten drugs that are open to negotiation have been announced by the Centers for Medicare & Medicaid Services (CMS): 

These drugs account for $50.5 billion, approximately 20%, of the total Part D gross covered prescription drug costs. The new prices, once negotiated, will be implemented in 2026 with more drugs to follow in the coming years. To dissuade health plans from wrongly targeting these drugs, CMS will monitor utilization management of these drugs as well as their placement on non-preferred formulary tiers. Ultimately, these changes may result in greater affordability and increased access to beneficiaries.

How the IRA affects specialty drugs

The drug price negotiation aspect of the IRA includes a so-called “small molecule penalty” that exempts synthetic drugs from negotiation for nine years after they hit the market while more complex biologics have 13 years. This means that investment money will—and in some cases already has—flow from synthetics to biologics. It is also likely that some pharmaceutical companies may “front load” their price increases due to the inflation rebates. It will be noteworthy to see how this provision affects long-term investment in costly specialty drugs.

Legal challenges to the negotiated drug price provision of the IRA

While the law was signed over a year ago, nothing is set in stone. There have been at least four lawsuits filed against the U.S. government challenging constitutionality of the IRA’s negotiated drug prices:

  • Pharmaceutical lobbying group PhRMA is suing over the program to lower prescription drug prices for seniors, claiming that the IRA’s excise tax, imposed on any drugmaker that doesn’t comply with Medicare’s price-setting negotiations, violates the Eighth Amendment’s Excessive Fines Clause.
  • Merck, which makes diabetes and cancer drugs, claims that the drug negotiation violates the First and Fifth Amendments. 
  • Bristol Myers Squibb, which makes blood thinner Eliquis, also claims that the drug negotiation violates the First and Fifth Amendments. 
  • The U.S. Chamber of Commerce (whose members include AbbVie and Eli Lilly), claims the drug negotiation violates the Constitution’s “requirements of limited government, property rights, the rule of law, and the separation of powers.”

Similar to the Affordable Care Act at the beginning of last decade, the IRA may face years of lawsuits and legislative attempts to block or alter its implementation. These legal challenges are contributing to the overall uncertainty of what this means for the marketplace. 

What can we anticipate in the next few years?

As implementation of the IRA continues, here are a few things to keep an eye on through 2026:

  • 2024 – Beginning of Medicare Part D redesign with the elimination of cost share in the catastrophic phase and expansion of low-income subsidy
  • 2025 – Medicare Redesign and Prescription Payment Plan begins; CMS will invoice manufacturers for inflation rebates
  • 2026 – Negotiated drug prices go into effect for first ten Part D Drugs

The IRA’s impact will continue to be felt for years to come, and with numerous changes to Medicare Part D on the horizon—and some already in motion—it’s important for plans to stay informed and prepared.

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