The recent passage of the Inflation Reduction Act has the potential to impact some Medicare beneficiaries, particularly individuals that rely on prescription drugs. Elements of the bill, signed into law by President Biden on August 16, 2022, aim to reduce healthcare costs for those aged 65 years or older through a series of targeted measures.
These new initiatives will begin to be implemented in 2023 with the rollout of all provisions scheduled to be complete by 2029. The changes outlined in the Inflation Reduction Act may provide benefits for some Smith and Howard Wealth Management clients. Focusing on the impact on Medicare and prescription drugs, these provisions can be grouped into three distinct categories:
- Negotiated prescription drug pricing
- Out of pocket spending caps
- Inflation rebates
In this overview, we will outline the key provisions in each area and explore how they impact affluent individuals and families.
1. Negotiated Prescription Drug Pricing
One of the most notable headlines from the legislation is the fact that Medicare is now authorized to directly negotiate the cost of certain high-cost prescription drugs directly with pharmaceutical companies. These negotiations will target the most expensive and most widely-used drugs, focusing in particular on prescription medications with little competition and high profits.
Initially, Medicare will negotiate the prices of ten drugs in 2023, expanding to a total of 60 by 2029. If you’re prescribed any of the medications that are scheduled to be negotiated, you may see price reductions from 2026 onwards. The level of these price reductions remains to be seen, but negotiated drugs must be covered by all insurance plans.
2. Out of Pocket Spending Caps
The Inflation Reduction Act also contains a number of provisions that cap out-of-pocket spending for Medicare beneficiaries.
Starting in 2025, Medicare beneficiaries will not have to pay more than $2,000 annually for their share of most outpatient prescription drugs covered under Medicare Part D. Once individuals hit this $2,000 cap, they will not have to pay any additional copays or coinsurance for their medications. The $2,000 cap will increase each subsequent year based on Medicare’s annual spending for covered prescription drugs.
While copays, coinsurance, and out of pocket expenses above $2,000 are eliminated by the Inflation Reduction Act, Medicare beneficiaries will still have to pay Part D Premiums. However, these premiums cannot increase at a rate of more than 6% per year through 2029, affording beneficiaries increased certainty over their healthcare spending.
3. Inflation Rebate
Today, inflation is at its highest level since 1981 and has almost quadrupled in the last two years. That’s created an uncomfortable economic situation for many Americans. In response, the Inflation Reduction Act aims to counter the effects of inflation-based price hikes for Medicare recipients.
The Act contains several provisions structured to achieve this, including:
- Part D prescription drug price increases: if the price of Part D prescription drugs is raised by a rate higher than the annual inflation rate, drugmakers will have to provide Medicare with a rebate covering the amount of the increase above the inflation rate. For example, if inflation is 6%, and the price of a drug is raised by 8%, the drugmaker will have to rebate Medicare the 2% difference. The first rebate would be due for the period October 1, 2022, to September 30, 2023.
- Part B drug price increases: the price of these drugs, such as cancer drugs which are typically infused in a medical facility, have a similar price increase limit tied to annual inflation rates. These rebates would be issued beginning in the first quarter of 2023.
- Insulin price cap: beginning in 2023, monthly out of pocket insulin costs will be capped at $35. Deductibles will not apply to covered insulin products.
Together, these provisions serve to cap out-of-pocket expenses at a significantly lower level than previously while simultaneously protecting Medicare beneficiaries from the worst of inflation-related price increases.
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