The Inflation Reduction Act of 2022 was signed into law on August 16, 2022, and includes provisions designed to lower prescription drug costs for Medicare beneficiaries. It also reduces drug spending by the federal government. The Inflation Reduction Act (IRA) can be tricky to understand, so we’ve defined some key points for you below. Read more to see how you may be affected by these changes.
Table of Contents
What is the Medicare Prescription Drug Price Cap?
The Medicare prescription price cap is a new yearly cap or limit on out-of-pocket prescription drug costs for beneficiaries with Medicare Part D, or Medicare prescription drug coverage. This cap will go into effect in 2025 and limits your out-of-pocket expenses—money you spend on medical care that is not covered by Medicare—to $2,000 per year.
You will also have the option to pay your out-of-pocket expenses in monthly increments spread out over the year rather than all at once. This can significantly help people with limited budgets who face high prescription costs.
Current Medicare Prescription Drug Prices and Coverage
Currently, Medicare Part D is optional. That means it’s not an automatic benefit like Original Medicare (Medicare Parts A and B). If you want Part D added to your Medicare, you must sign up for it and pay an additional premium for this coverage.
If you didn’t sign up for Part D when you were first eligible, there might be a late enrollment penalty. The late enrollment penalty adds 1% for each month you delayed. Monthly premiums for Part D are determined based on your income and change slightly from year to year. The average monthly premium for standard Part D coverage in 2022 was $32.08 and is projected to be $31.50 in 2023.
Why is this Happening Now?
Medicare is a federally funded and regulated program, and lawmakers felt it was time to lower the price of prescription drugs for people with Medicare. For the first time, Medicare will be able to negotiate prescription drug prices—allowing for more affordable medications and easier access to necessary healthcare.
However, these changes are not happening immediately. CMS has announced it will release a list of the first 10 drugs selected for the Medicare Drug Price Negotiation Program by September 1, 2023. The negotiated prices are scheduled to be released in 2024, and the prices will go into effect in January 2026. More drugs selected for price negotiation will be introduced each year in the future.
How Does the Price Cap Work?
Currently, there is no limit to how much a Medicare Part D beneficiary can pay out-of-pocket for prescription drugs. After the individual reaches a catastrophic threshold—currently defined as $7,050 out-of-pocket—they are expected to pay only 5% of their prescription costs. Medicare pays approximately 80% of total costs above the catastrophic threshold, and insurance plans pay about 15%.
The Inflation Reduction Act will cap the Part D benefit, starting in 2024, eliminating the 5% fee once the individual has hit that threshold. It also reduces the Medicare-paid portion from 80% to 20% for brand-name drugs and 40% for generics. Part D insurance plans will pick up more expenses, going from the current 15% to 60%. Additionally, the drug manufacturers will be required to provide a 20% discount on brand-name drugs.
Further changes, such as the $2,000 cap on out-of-pocket drug spending, will go into effect in 2025.
What Categories of Drugs Are Affected by the New Law?
The 50 drugs with the highest total Medicare Part D costs will be the focus of the rollout, beginning with ten drugs selected in 2023. The price adjustment will go into effect in 2026.
A key part of the new provisions is that Medicare will be able to negotiate drug prices for the first time, specifically high-priced drugs and name-brand prescriptions without competitors. This has not been allowed in the past due to a noninterference clause. With the new law, the noninterference clause is amended to allow for price negotiations for a small number of brand-name drugs and biologics without generic or biosimilar competition.
What Categories of Drugs are not Affected by the New Law?
The negotiation part of the IRA does have some exclusions, which include the following drug categories:
- Drugs that have generic competition or a biosimilar available
- Small-molecule drugs that are less than nine years from FDA approval or licensure
- Biological products that are less than 13 years away from FDA approval or licensure
- Small biotech drugs, which account for 1% or less of Part D or Part B spending and account for 80% or more of expenditures under each part of that manufacturer’s drugs
- Drugs with Medicare spending of less than $200 million in 2021 (will be increased in future years)
- Drugs with an orphan designation (medication developed to treat certain rare medical conditions) as their only FDA-approved indication
- All plasma-derived products
Medicare Prescription Drug Cost Changes in 2023
The Medicare provisions in the Inflation Reduction Act will be rolling out over several years. Most of the larger changes will be seen in future years, but there are a few significant things happening in 2023:
- Out-of-pocket costs for insulin is now capped at $35 a month for Medicare Part D enrollees
- Part D deductibles cannot be more than $505
- 100% coverage for recommended vaccines
Medicare Prescription Drug Cost Changes in 2024 and Beyond
More changes to Medicare prescription drug prices will be implemented starting in 2024. The first being that individuals with drug costs that reach the catastrophic threshold will no longer have to pay the 5% charge.
In 2025, the yearly cap of $2,000 out-of-pocket expenses for all Medicare prescription drug coverage will go into effect. Along with this change, individuals will be allowed to pay their out-of-pocket fees in monthly payments, as opposed to when those fees are incurred.
While Medicare will be announcing the first 10 drugs selected for drug negotiation in 2023, those changes will not go into effect until 2026. Medicare will choose additional drugs every year after.
Will the Law Change How Much I Pay for My Current Medication?
The cap on out-of-pocket expenses passed in the Inflation Reduction Act will likely mean lower annual costs of your medications. The extent of these changes will depend on your specific health care and prescription needs.
Insulin users are currently seeing meaningful change in their expenses for insulin and insulin-related products due to the $35 monthly cap for Medicare recipients. There is also no deductible for covered insulin products.
When Will I See a Price Change?
Some individuals with Part D plans will start to see significant changes this year—and others will experience cost reduction in the near future.
If you take insulin, you will have already started seeing a price change. Other Medicare recipients will experience reduced fees starting in 2024, and may continue to experience further reductions in subsequent years.