How the Inflation Reduction Act Could Lower Your Drug Costs

Democrats have passed a sweeping health care achievement that will address one of the country’s most intractable problems: high prescription drug costs.

The House on Friday passed the broad climate, tax, and health care package that the Senate passed over the weekend, delivering key pieces of President Joe Biden’s stalled economic agenda. While the legislation is smaller than Democrats’ original hopes last year, the health care provisions alone are what Biden might call a “big f-cking deal.”

The bill will allow Medicare for the first time to negotiate with drug makers for lower prescription drug prices, something that governments in many other wealthy countries do and a long-held priority for Democrats. This could be life-changing for older Americans who face high costs, saving some thousands of dollars a year. Once signed into law by Biden, the so-called Inflation Reduction Act will be the biggest change to health care since the Affordable Care Act was passed in 2010.

The legislation, which comes after months of negotiations in Congress, marks a huge loss for the pharmaceutical industry. The industry has spent billions of dollars lobbying Washington over the years, and waged a fierce campaign against the effort to let Medicare negotiate drug prices. The bill passed the House 220-207, with the support of every Democrat and no Republicans. The bill passed the Senate on Aug. 7 with a 51-50 vote along party lines, and Vice President Kamala Harris casting the tie-breaking vote. But letting the government negotiate for lower drug prices is extremely popular across the political spectrum, and will give Democrats a political win they can campaign on going into November.

“We have been working for nearly two decades to allow Medicare to negotiate the price it pays for medications,” said AARP CEO Jo Ann Jenkins. “This bill will save Medicare hundreds of billions of dollars and give seniors peace of mind knowing there is an annual limit on what they must pay out-of-pocket for medications.”

In addition to allowing Medicare to negotiate drug prices, the package will cap out-of-pocket costs that seniors pay for medications at $2,000 annually and guarantee they have access to free vaccines. It will also require pharmaceutical companies to pay rebates if their drug prices rise faster than inflation. And it will extend for three years the expanded premium subsidies that 13 million Americans have been getting during the pandemic to buy health insurance under the Affordable Care Act.

Here’s how the health care pieces of the bill would affect Americans.

Drug price negotiation

The package will empower the federal government to negotiate prices for certain expensive medications that seniors get at their doctors’ offices or at pharmacies. Starting in 2026, Medicare could negotiate the prices of 10 drugs. That would increase to 15 drugs in 2027 and 2028, and then 20 drugs in 2029.

House Democrats previously supported a more ambitious drug pricing bill, but progressives hope this will open the door to future reform, and experts say this version will still create meaningful savings.

“This is an idea that has been talked about for decades,” says Tricia Neuman, senior vice president and executive director for the program on Medicare policy at the nonpartisan Kaiser Family Foundation. “It would be a start, and it would be a real statement that policymakers want to do something significant about drug prices.”

While it’s not yet clear which drugs would be negotiated and precisely how many Americans would be helped, the provision would curtail costs and deliver significant savings for Medicare over time, according to the Congressional Budget Office (CBO).

Prescription drug costs are consistently one of voters’ top health care concerns. The average price of brand-name drugs in Medicare Part D, which covers medications at the pharmacy counter, more than tripled between 2009 and 2018, the CBO found. A new survey from West Health and Gallup recently found that nearly 40% of American adults say they have skipped or delayed health care treatment or cut other spending in the last six months because of high health care costs.

Limit out-of-pocket drug costs

Another piece of the bill will prevent older Americans and those with disabilities from paying more than $2,000 a year for medications they buy at the pharmacy. It will also change Medicare’s catastrophic coverage.

Right now, Medicare beneficiaries, who often have fixed incomes, have no out-of-pocket maximum for drug costs. Once they reach $7,050 in a year, they pay 5% of subsequent costs. Paying 5% of drug costs might not sound like a lot, but when paying for expensive drugs, it can add up quickly. Under the new bill, they will not pay any costs for medications once they reach $2,000 in a year.

That’s true for people like 71-year-old George Valentine, a retired IT executive near Dallas, Texas who has chronic lymphocytic leukemia. He lives with his wife on a fixed income and takes 12 different medications every day to manage his leukemia, including a drug that costs about $12,500 each month. “I really feel helpless, as far as being able to predict and support my out-of-pocket drug costs,” he says. Valentine has gotten grants from the PAN Foundation, which helps pay patients’ out-of-pocket costs, but drug prices keep going up.

“We haven’t gotten to the point where we’re taking less drugs or, going to the doctor and saying, what happens if, instead of taking two pills a day, I take one pill a day,” he says, “But I’m one more drug away.”

The new $2,000 maximum will be a massive change for the 1.4 million Medicare beneficiaries who spend more than that every year. The bill will also get rid of cost-sharing for adult vaccines covered under Medicare Part D, another provision that experts say will help seniors get the treatment they need.

“It doesn’t take a lot of money for someone to have to walk away from the pharmacy counter,” says Amy Niles, executive vice president of the PAN Foundation. “If they don’t have the resources to pay for these medications, they are likely not going to fill their prescriptions. And that’s going to have a devastating impact on their health.”

Tackling inflation

The bill will require drug makers to pay rebates if their medication prices increase faster than inflation.

Prescription drug prices have increased sometimes two to three times the rate of inflation, Glen Fewkes, director of health care access and affordability at AARP, said during an Invest in America event last month. While the rebates will be limited to those on Medicare, the CBO previously said it expects the policy to have some spillover effects that would reduce the costs of prescription drug benefits on commercial insurance plans.

“All of this is incredibly life changing,” Rep. Susie Lee, a Democrat from Nevada, said during the event hosted by Invest in America. “It will ensure that drug companies will no longer be able to raise prices faster than the rate of inflation so that families can keep up with those costs.”

The pharmaceutical industry has argued the changes will hurt the development of new drugs. The CBO found that the changes in the bill would lead to 15 fewer drugs reaching the market over the next 30 years, or about 1% of an estimated 1,300 in that time.

Democrats were hoping this provision would also apply to private insurance, but that was struck after the Senate parliamentarian said it did not meet the requirements to be passed through the budget process lawmakers used for this package.

Curbing insulin costs

The bill will cap the price of insulin at $35 per month for Medicare patients, a big help for the 3.3 million beneficiaries who use some common form of insulin, according to the Centers for Medicare and Medicaid Services. The average Medicare patient using insulin spent $54 per prescription in 2020, according to KFF. This was an increase of 40% since 2007.

Democrats and seven Republican Senators had hoped this could also apply to Americans with private insurance. But after a ruling from the Senate parliamentarian said that a private insurance cap wouldn’t comply with the budget reconciliation process, the rest of Senate Republicans were able to strike it from the bill.

Obamacare subsidies

Beyond the Medicare pieces of the Inflation Reduction Act, the bill will extend the beefed up subsidies for low- and middle-income Americans buying insurance under the Affordable Care Act. The American Rescue Plan had expanded these subsidies during the coronavirus pandemic and they were set to expire at the end of this year. Now they will last through the end of 2025.

If those subsidies had expired, Rep. Lee noted that the average middle class family of four would have seen a premium hike of $6,600 dollars. The average middle class couple nearing retirement would have seen an annual premium hike of close to $16,000, she said.