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What's In the Inflation Reduction Act For Healthcare? Part 1 - Negotiated Drug Prices

The Inflation Reduction Act of 2022 (IRA) is expected to be signed into law this week. It includes provisions for historic climate, tax, and healthcare. Part 1 of this post will look at how it how the IRA will affect prescription drug costs. 

Prescription Drug Cost Reduction

Capping the cost of insulin at $35/month for everyone did not make it to the final bill, just for Medicare patients. Neither did allowing all health insurance to negotiate the cost of prescription drugs. Again, only Medicare will be able to do this, and only in a limited fashion. By leaving out almost everyone under age 65, the stripped down version is either a very important first step forward or a recipe for eventual disaster, depending upon who you ask. 

Insulin's rapid price rise is blamed on the fact that there are only three insulin manufacturers in the U.S. and they have all been raising prices against each other simply because they can. Of note was the recent announcement by California's Governor Gavin Newsome that California is responding to this crisis by manufacturing its own insulin, to be sold at close to cost. 

Under the IRA, the Medicare Program, by the Secretary of the Department of Health and Human Services (DHHS), will be allowed to cap insulin costs at $35 for Medicare recipients, cap Medicare out of pocket drug maximums at $2,000 per year, and negotiate some Medicare drug prices. These powers are estimated to save U.S. taxpayers over $100 billion in its first years. 

The DHHS Secretary will start negotiations by choosing 10 prescription drugs that Medicare Part D spends, "the most money on and have been on the market for years without any generic or other competitors," said Andrew Mulch of RAND. Those negotiated prices will go into effect in 2026. The Secretary will then choose 15 Part D drugs to negotiate, prices taking effect in 2027, and 15 Part B or D prices to take effect in 2028. The Secretary can then negotiate 20 drugs in all subsequent years from 2029 and after. 

It is not yet known which drugs the Secretary will target first. The criteria that the drug have been on the market for years is meant to suggest the pharmaceutical manufacturer had time to recoup much of their innovation R&D costs, and to develop some off label uses enough to have expanded their FDA approval for multiple indications. The criteria that the drug have no generic form, and have no other competitors are meant to target those drugs over which insurance has no replacement alternative to offer on their formulary lists to covered patients. 

Critics note that drug companies may allow a generic, or allow an alternative source for their drug to enter the market, changes small enough not to threaten their own market share, but enough to disqualify their drug from the Secretary's list.

Commercial insurance companies were cut out of the bill, and it never addressed Pharmacy Benefits Managers (PBMs), the middlemen corporations that often double as the wholesale suppliers, with no incentives to reduce costs. Industry experts say PBM's can profit more than the pharmaceutical company that developed, manufactured, and sold the drug. This has led to concerns that there may be a backlash against commercial insurance as pharmaceutical companies seek to make up their Medicare losses through increases in their drug prices for everyone else.

The IRA also prohibits pharmaceutical companies for raising Medicare drug price faster than the rates of inflation. If the price hike is in excess of inflation, the drug company must pay back the difference in all Medicare sales of that drug. Data has shown a consistent rise in drug prices that outpace inflation according to the Kaiser Family Foundation (KFF). 

The Act does have other enforcement teeth as well, in the form of extremely high costs to any drug manufacturer that refuses to come to the table, does not abide by the terms of the negotiation, or provides false information to the DHHS Secretary. 

Pharmaceutical companies have argued they need to charge rates high enough to cover their innovation costs, though it is also noted that U.S. consumers pay at least twice the cost for the same drugs as other high-income nations, according to KFF and the Peterson Institute on Healthcare. 

The ultimate success of the Act in reducing consumer costs will depend upon how aggressively the Secretary negotiates prices for the drugs on the list for each year, how determined lawmakers are to revive portions of the law that were removed on parliamentarian objection, and how aggressively industry watchdogs seek amendment to expand the law to address any backlash pricing the drug companies and the PBMs may seek to charge everyone under age 65. 

“If anybody thinks that as a result of this bill we’re suddenly going to see lower prices for Medicare you are mistaken. If you’re under 65, this bill will not impact you at all and the drug companies will be able to continue on their merry way and raise prices to any level they want.” Bernie Sanders I-VT