COLUMN-Landmark U.S. healthcare bill sets stage for lower Medicare prescription drug costs

Credit: REUTERS/Yves Herman

By Mark Miller

Aug 9 (Reuters) - The climate and healthcare legislation that Congress is set to approve later this week includes the most important improvements to the Medicare program in nearly two decades. The changes aim to address one of the biggest concerns of seniors: the fast-rising cost of prescription drugs.

The U.S. Senate passed the sweeping $430 billion bill on Sunday. The U.S. House of Representatives will likely vote on it on Friday and it will then head to U.S. President Joe Biden for his signature.

The Inflation Reduction Act of 2022 empowers Medicare to negotiate the price of a small number of high-cost drugs with pharmaceutical companies for the first time, starting in 2026. That is a step toward fixing one of the most egregious flaws in the legislation that created the Part D prescription drug program in 2003 - a provision that specifically forbids Medicare from negotiating prices.

As big as negotiating drug prices may turn out to be over the long haul, the bill makes other important changes to prescription drug coverage that will impact the pocketbooks of seniors, starting next year.

Reducing healthcare costs is especially critical for middle- and low-income seniors. Enrollees in traditional Medicare spent $6,639 out of pocket on average in 2019 for healthcare premiums and services, according to the Kaiser Family Foundation (KFF).

The bill includes reforms that should begin to reduce Medicare drug costs, starting next year, and phases in additional important changes in following years. Here is a breakdown of the changes to expect in Medicare - and when they will roll out.


The legislation addresses the skyrocketing price of insulin by capping monthly costs for Medicare enrollees at $35 per month, starting next year (a cap for people enrolled in private health insurance did not make it into the final bill). For enrollees in Medicare Part D who do not receive low-income subsidies to offset costs, average annual out-of-pocket spending on insulin soared by 76% between 2007 and 2020, from $324 to $572, according to KFF.

Also starting next year, drug makers will be penalized in the form of “rebates” that they would be forced to pay to the government if they impose price increases that exceed general inflation.

“It might be a difficult thing for consumers to notice, since they won’t know how large the increases might have otherwise been,” said Tricia Neuman, senior vice president at KFF. “But it will be a strong disincentive for drug companies to raise prices faster than inflation.”

Starting next year, cost sharing will be eliminated for adult vaccines covered under Medicare Part D. That will help more than 4 million Medicare beneficiaries annually, according to KFF, who received a vaccine covered under Part D in 2020.


The legislation caps total annual out-of-pocket costs for enrollees in two stages. In 2024, Medicare’s requirement that enrollees pay 5% coinsurance above the Part D “catastrophic threshold” will be eliminated. This will provide critical help to beneficiaries who now pay 5% of the cost of very expensive drugs, especially for conditions such as cancer or multiple sclerosis.

One recent study found that a disturbingly high share of Part D enrollees do not fill expensive prescriptions due to the cost-sharing features - for example, 30% of anticancer drugs were not filled.

Also in 2024, eligibility for Part D Low Income Subsidies (LIS) will be expanded. This program helps people on Medicare with very low incomes to pay premiums and deductibles. This is a critical reform for seniors with very low incomes. KFF reports that half of enrollees had income below $29,650 in 2019 - and one in four was living on less than $17,000.


The second out-of-pocket cost control takes effect in 2025 - and it is a really big deal: starting that year, no enrollee will be required to pay more than $2,000 out-of-pocket per year. This reform gets at one of the core problems with drug costs.

KFF estimates this change would have assisted 1.4 million Medicare Part D enrollees in 2020 who shouldered costs higher than $2,000 - and the actual number who will be helped by the cap in 2025 will be higher due to rising costs in the Part D program since 2020.

“Pharmaceutical companies, and even Medicare officials like to focus on the stability of Part D premiums but we haven't had stability in out of pocket spending,” said Philip Moeller, author of the book "Get What's Yours for Medicare: Maximize Your Coverage, Minimize Your Costs." “This will create stability in out of pocket drug spending," he said.


When the Part D program was enacted in 2003, wording that specifically forbids Medicare from negotiating drug prices was one of the most controversial provisions.

Under the Inflation Act of 2022, Medicare is empowered to begin negotiating drug prices, starting in 2026 with a list of ten drugs of the most expensive drugs covered under Part D. Those powers expand to 15 Part D drugs in 2027, and drugs covered under Part D are added in 2028 and beyond.

The long-range effects of this provision remain to be seen - but negotiation has worked well for years in the Medicaid program. One government study found that Part D pays 32% more for high-utilization drugs than does the Medicaid program.

The opinions expressed here are those of the author, a columnist for Reuters.

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(Writing by Mark Miller in Chicago Editing by Matthew Lewis)


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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