The climate and healthcare bill that President Joe Biden signed into law this week marks the most significant changes to Medicare since the Part D prescription drug benefit was enacted in 2003.
Mark Miller of Morningstar has a great breakdown of the changes here. But the major implication is that the Inflation Reduction Act of 2022 aims, in part, to address the skyrocketing cost of prescription drugs—and in some respects, it is a do-over that fixes the flaws in the Medicare Modernization Act of 2003.
That law contained a controversial provision that prohibited Medicare from using its huge purchasing clout to negotiate drug prices with pharmaceutical makers. It’s therefore no surprise that the big headline on the Inflation Reduction Act is that it will finally empower Medicare to negotiate with pharmaceutical companies on the prices of a shortlist of the most expensive drugs, starting in 2026.
But for me, and a fair number of my clients, the biggest impact is this: Starting in 2025, the maximum Part D out-of-pocket liability will be $2,000. That's the change that may contribute even more to protecting enrollees from soaring costs.
To paraphrase Donald Rumsfeld, healthcare costs are one of the "known unknowns" of retirement planning. We know that there will be expenses, but the range of outcomes from one person to the next can be astronomical. The new generation of drugs for conditions such as cancer, multiple sclerosis, or rheumatoid arthritis have put tremendous cost pressures on the Part D program.
Parts of the Inflation Reduction Act aims to tackle drug costs along several fronts—and several important provisions would take effect in 2023:
Halt the soaring cost of insulin: The new law caps monthly costs for Medicare enrollees at $35 per month.
Drugmakers 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. This provision gives drugmakers a powerful disincentive to raise prices sharply.
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 the Kaiser Family Foundation.
A core problem in Medicare Part D is that there has been no total cap on the amounts beneficiaries pay out of pocket after deductibles are met.
The Inflation Reduction Act addresses out-of-pocket costs in two phases.
In 2024, Medicare’s current requirement that enrollees pay a 5 percent coinsurance above the Part D “catastrophic threshold” will be eliminated. This will provide critical help to beneficiaries who now pay 5 percent of the cost of very expensive drugs.
And then in 2025, the maximum Part D out-of-pocket liability will be $2,000.
According to the New York Times, the new law will save many Medicare beneficiaries hundreds, if not thousands of dollars a year. Its best-known provision would empower Medicare to negotiate prices with drug makers with the goal of driving down costs — a move the pharmaceutical industry has fought for years, and one that experts said would help lower costs for beneficiaries.
Nearly 49 million people, most of them older Americans, get prescription drug coverage through Medicare. Low-income people qualify for government subsidies, so those in the middle class are hit hardest by high drug costs.