Medicare Prescription Drug Price Controls Come with Strings Attached

The Schumer-Manchin Inflation Reduction Act (IRA) includes provisions that will change the market for Medicare prescription drugs and boost the federal government’s role in setting prices for pharmaceuticals.

The IRA’s supporters point to the savings to seniors resulting from the new law’s Medicare provisions, but many of them won’t take effect for years and will come with trade-offs.

People enrolled in the Medicare Part D prescription drug program, for example, will see their share of prescription drug costs capped at $2,000 per year, a change that will go into effect in 2025. The new law also ends the 5 percent coinsurance payment requirement for Medicare Part D recipients with catastrophic prescription drug costs, beginning in 2024.

Savings Less Than They Seem

Kansas state Rep. Beverly Gossage (R), president of HSA Benefits Consulting and health policy fellow with Physicians for Reform, says eliminating the 5 percent coinsurance payment will benefit fewer patients than it might first appear.

“A senior does not pay that 5 percent of medication costs until his out-of-pocket expenses for prescription drugs reach $7,050 that year,” said Gossage. “I can’t see anyone doing handsprings over that.”

The new law also allows the U.S. Department of Health and Human Services (HHS) to “negotiate” prices for high-cost drugs with manufacturers, with price controls on the first 10 drugs under Medicare Part D going into effect in 2026, Drugs covered under Medicare Part B, which are administered by a physician, in 2028. By 2029, a total of 60 drugs will be subject to price negotiation, a fraction of the thousands of drugs Medicare covers.

‘Produces Negative Results’

It is doubtful the new Medicare prescription drug benefits will yield the results its supporters trumpet, says Doug Badger, senior fellow for health care policy at the Heritage Foundation

“The goal of restructuring the Part D benefit is to shift the costs in the catastrophic tier from taxpayers (who now bear 80 percent) to plans and manufacturers,” said Badger. “Under the current system, neither manufacturers nor plans have strong incentives to negotiate aggressively over prices for the most expensive products. Done correctly, restructuring the benefit will reorder those incentives. Specifically, the government share would drop to 20 percent, with manufacturers and plans picking up 80 percent. That should save taxpayers money.”

Unlike the IRA drug provisions, when the Congressional Budget Office (CBO) analyzed the Prescription Drug Pricing Reduction Act of 2019, it projected $35 billion in reduced federal spending over 10 years, says Badger.

“Unfortunately, CBO estimates the restructuring of Part D in the Inflation Reduction Act will increase federal spending by $25 billion over 10 years,” said Badger. “Thus, even one of the most promising provisions of the IRA produces negative results.”

Benefits Higher Income Households

The IRA will not provide real savings to Medicare while allowing people with high incomes to pay lower premiums, says John C. Goodman, president of The Goodman Institute for Public Policy Research and co-publisher of Health Care News.

“Medicare is already spending more than it is receiving in the form of payroll taxes,” said Goodman. “So, anything that reduces Medicare spending doesn’t ‘save’ Medicare dollars. It just reduces the amount of deficit spending that is already going on.”

The IRA uses this accounting trick to “pay for” the subsidized premiums of people who purchase Obamacare plans, says Goodman.

“Where does the new spending go?” Goodman asked. “It goes to insurance companies so they can lower premiums for high-income buyers. Meanwhile, several million low-income households with no health insurance get no help under the bill.”