After decades of legislative debate over the rising cost of healthcare, changes are coming with the passing of the Inflation Reduction Act of 2022. There is significant impact for the industry and individuals utilizing the healthcare system, as well as those with the responsibility of subsidizing those changes. We’re covering the highlights here and welcome the opportunity to discuss how these changes may affect you, as well as organizational adjustments to consider now and for the future. For assistance, please reach out to your PNC Healthcare representative.

Expanding Medicare Benefits

Medicare Prescription Drug Price Negotiation – The Secretary of Health and Human Services will have the power to negotiate Medicare prescription drug prices with manufacturers, with changes beginning in 2026.

What you need to know:

  • The focus is on drugs that have the greatest Medicare cost, but with caution to preserve incentive for innovation by delaying eligibility until either 7 years after approval by the FDA or 11 years after licensure of the drug, and by ensuring that applicable drugs have no generic or biosimilar substitutes.
  • The Secretary of Health and Human Services is required to negotiate with drug manufacturers and set prices for 10 qualifying single-source drugs in 2026, an additional 15 in 2027 and 2028, and an additional 20 drugs in 2029 and each year following. Drugs that can be included in negotiations for 2026 and 2027 are limited to retail prescription drugs, but starting in 2028 physician administered drugs can be included as well.
  • Establishes a price ceiling for various categories of drugs:[1]
    • 75% of the average manufacturer price for drugs on the market between 9 and 12 yrs.
    • 65% of the average manufacturer price for drugs on the market between 12 and 16 yrs.
    • 40% of the non-federal average price for drugs on the market >16 yrs.
  • Once the negotiated price is set, it will remain in effect until either a biological substitute for the drug becomes available or a generic version of the drug is created.
  • A tax or civil monetary penalty is set against the manufacturer of any such selected drug if they fail to comply with the negotiation rules, at an increasing rate the longer they do not comply.

Medicare Prescription Drug Inflation Rebates – A significant number of Medicare covered drug price increases outpaced inflation from 2019 to 2020. Beginning in 2023, an inflation rebate provision paid by drug manufacturers will be implemented for drugs that fall into this category.

What you need to know:

  • Uses 2021 as base year for determining prices relative to inflation.
  • If a manufacturer does not pay the mandated rebate, the manufacturer is subject to a civil monetary penalty of at least 125% of the rebate amount.[2]
  • The increase in negotiating power for Medicare may have positive ramifications for private insurance plans by increasing their bargaining power through a ripple effect. 
  • While the rebate provisions apply earlier than the Act’s other drug pricing provisions, the government is permitted to delay rebate invoices until 2025, leaving the timing of when manufacturers will first have to pay the rebate unclear.[3]

Maximum Out-of-Pocket Cap for Medicare Part D Beneficiaries – Insurers will have to re-design the benefits for these plans and may initially face difficulty keeping the segment profitable.

What you need to know:

  • Caps out-of-pocket drug costs to an estimated $4,000 or less in 2024 and settling at $2,000 in 2025.[4]
  • Benefits roughly 1.4M people each year, as this amount of enrollees had out of pocket spending greater than $2,000 in 2020.[5]

Expands Eligibility for Full Low-Income Subsidies under Medicare – Beginning in 2024, Medicare beneficiaries with incomes of up to 150% of poverty level will now be eligible for full subsidies whereas incomes of 135-150% poverty level previously only received partial benefits.[6]

What you need to know:

  • Approximately 400,000 enrollees will see out-of-pocket costs decrease by $300, on average.[7]
  • Additional Medicare benefits include free vaccines for people covered by both Medicare and Medicaid (2023) and insulin costs capped at $35 per month beginning in 2023.

Extending Enhanced Subsidies for Affordable Care Act (ACA) Health Insurance Plans

Enhanced premium ACA tax credits are extended through 2025.

What you need to know:

  • Saves the average enrollee $800/year in the ACA marketplace.[8]
  • Insurers estimated that 2-3 million people would have dropped their coverage altogether had this not been extended, positively impacting and allowing for more stable revenue to the carriers who learned to design and manage ACA products. It was noted that the segment’s financial performance showed losses for insurers in the early years of the ACA but has since substantially improved.[9]
  • Hospitals are likely to benefit, as ACA plans tend to reimburse at a higher level than other publicly sponsored coverage like Medicaid.[10]

Not healthcare specific but noteworthy....

15% Minimum Tax on Corporations with Income of more than $1 Billion – Beginning in 2023, a minimum tax of 15% on applicable corporations with income exceeding $1 billion, plus a 1% tax on some stock buybacks will apply.

What you need to know:

  • Many major insurers and Pharmacy Benefit Managers have annual income in excess of $1 billion. New taxes may simply result in passing those new extra costs through to policyholders. [11]
  • “Applicable corporation” refers to a corporation (other than an S Corp, regulated investment company or real estate investment trust) with average applicable financial statement income more than $1 billion for any three-year period ending with 2022 or later.

Additional Observations 

  • Hospitals are disappointed that the bill lacks funding for the hospital workforce (staffing shortages, high labor costs), and infrastructure constraints.[12]
  • Carriers will have to pass most savings to their members, affecting their revenue.[13]
  • Pharmacy benefit administrator businesses may see a decline in fees paid since they are tied to pricing and volume.[14]
  • There is concern that the cost will shift to consumers with private health insurance.[15]
  • The bill marks Congress’s most significant impact on the pharmaceutical industry since the Affordable Care Act in 2010.[16]
  • This Act represents a noteworthy change to the federal policy of the pharmaceutical industry. The price negotiation and price cap mandates contradict with the free market-based system that has been in place for more than 30 years.[17]
  • Medicare drug costs will be cut by an estimated $287 billion over 10 years through lowering prescription drug prices and out-of-pocket costs for Medicare patients.[18]