By Kirsten Axelsen

Drug price inflation in the last five years ranged from plus or minus 2 percent each year, with new drugs driving price growth and rebates and generics driving costs down. The Inflation Reduction Act includes some major departures from the US policy on drug pricing intended to reduce drug costs in Medicare, with benefits for older and disabled people accounting for nearly one-third of all US drug spending. The four major components include:

• A cap on the total amount a patient may be asked to pay out-of-pocket in part D (pharmacy drugs), lower coinsurance for high-cost patients, and less co-pay for insulin and vaccines;
• Less financial responsibility for the government for high-cost patients in part D and greater cost liability from drug companies and insurers;
• Requiring drug manufacturers to pay back the government when the drug price increases faster than inflation in Medicare (pharmacy and physician-administered drugs); and
• Price setting for certain big-selling drugs in Medicare (pharmacy and physician-administered drugs).

As a result, Medicare patients who take a lot of medicines have the most to gain in the near-term cost reduction. People with poor or no insurance coverage are most likely to experience higher costs in the relatively near term as drug prices will likely increase for new medicines.

First, in part D there will be a $2000 cap on beneficiary out-of-pocket expenses and there will no longer be 5 percent coinsurance when a person takes enough drugs to spend an amount often referred to as “catastrophic.” As people will be less likely to forgo needed care due to unbearable expense, this policy change will likely increase demand for certain drugs typically used by beneficiaries with high medical needs, such as specialty medicines for diseases including cancer and for the immune system. Cost sharing for vaccines is also eliminated, and there will be a cap on insulin cost sharing at $35. In both cases, consumer demand would be expected to increase to a certain degree with lower out-of-pocket costs. All else equal, this would create an incentive to increase prices for the affected drugs.

Second, under current law, the federal government pays 80 percent of the catastrophic costs in part D. The act would reduce this to 20 percent, and require drug manufacturers to pay 20 percent and 60 percent from the part D health insurer, which they will recover through the premiums they charge. Insurers prefer to keep premiums low, as this is what attracts beneficiaries, particularly healthier, lower-cost beneficiaries, to their plan. Furthermore, the act also limits allowable premium growth. So, this change will likely increase the amount of cost control insurers apply to drugs typically used by high-cost patients including with step edits or prior authorization. Patients may experience lower costs but may experience more non-financial barriers to treatment. This will put offsetting pressure on those drug prices or companies may offer additional discounts to remove those hurdles.

Third, the inflation penalty would require drug manufacturers to pay the federal government an amount equal to any increase in the price exceeding consumer inflation starting in 2023. This does not consider private discounts to insurers. New drugs will likely launch at a higher list price since there is a lower gain from price increases, and then companies will likely selectively offer discounts to insurers and pharmacy benefit managers for formulary placement. If this occurs consumers who pay cash, those who have deductibles in any insurance program, or those with insurance from smaller insurers who don’t have the leverage to get the discounts may experience the greatest impact from higher list prices.

Finally, the government will set the price of certain drugs each year in Medicare starting in 2026. This will bring down the prices of existing drugs and some of that will be passed on to beneficiaries. Investment is expected to change immediately with investors anticipating future market conditions and would be expected to put more into developing drugs that are less likely to be impacted by the price control policy such as drugs that are not the biggest selling in the Medicare benefit or drugs for a smaller population. Or they may limit spending on post-market studies. This impact will be longer term but will likely result in more small-population drugs which tend to have higher prices.

I’ve written previously about the likely impact on formulary placement and generic entry and drug development. All in, the act offers a sizeable benefit to millions in Medicare with currently high out-of-pocket spending but likely fuels drug price inflation. This may be a particular burden for people with poor insurance coverage.

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