How Prescription Drug Negotiations Will Impact Medicare Beneficiaries

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Updated October 25, 2023

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Key Takeaways

The Inflation Reduction Act (IRA) of 2022 allows Medicare to negotiate drug prices for the first time in history.
Medicare will follow a phased plan to negotiate 10 to 20 high-cost drugs per year starting in 2026.
Drugs will meet a maximum fair price. Only those using Medicare Part D will be eligible for the reduced prices.

What Is the Inflation Reduction Act (IRA) of 2022?

The Inflation Reduction Act (IRA) of 2022 is legislation that was signed into law by President Biden on Aug. 16, 2022. It is a scaled-down version of the Build Back Better Act. While there were significant cuts to the Build Back Better Act, many of the proposed issues were addressed, including investing in clean energy, eliminating tax loopholes, reducing the deficit, and lowering healthcare costs, including prescription drug costs.

How Does the IRA Reduce Prescription Drug Costs?

Prescription drug coverage is only included in Medicare Part D or some Medicare Advantage plans. Medicare Part D was first introduced as part of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA). The programs were intended to lower drug costs by providing coverage for certain prescriptions. However, the original bill included a provision that prohibited the federal government from negotiating drug prices with pharmaceutical companies.

The Inflation Reduction Act changes that. Now, the U.S. Secretary of Health and Human Services (HHS) will have the authority and obligation to negotiate prices on a set number of medications. Starting in 2026, 10 Medicare Part D drugs will have their price negotiated. An additional 15 will be renegotiated in 2027. In 2028, they will choose 15 Part B and Part D drugs, followed by another 20 in 2029.

The drugs up for price negotiation will be high-cost medications with no generic or biosimilar available. They also must be at least nine years past U.S. Food and Drug Administration (FDA) approval for small-molecule drugs or 13 years for biologics. The U.S. Secretary of Health and Human Services will work from a list of the 50 most expensive drugs that meet the requirements. Those medications are most often used to treat cancer, rheumatoid arthritis, and diabetes.

The negotiated price will be subject to a specific formula to determine the maximum fair price (MFP). Most drug prices are expected to fall by 25% to 65%. The White House estimates that negotiating with drug companies could significantly reduce prescription drug costs for 5 million to 7 million people.

Important

Medicare Part D is optional, but if you don’t opt in, then you won’t be eligible for reduced pricing that may be negotiated by Medicare for some high-cost drugs.

Other Prescription Cost Reduction Measures

In addition to the ability to negotiate prices, the IRA also requires any pharmaceutical company that raises prices faster than the rate of inflation to pay rebates to Medicare. Another provision will cap out-of-pocket expenses at $2,000 on Medicare Part D starting in 2025. There is a $35 maximum monthly out-of-pocket cost for insulin under Medicare Part D and Part B when administered through durable medical equipment as of the start of 2023.

Are You Required to Have Medicare Part D?

No, you are not required to have Medicare Part D. Medicare Part D is an optional plan that only covers prescription medication. Some medications may be covered under Medicare Part B, but they are typically drugs that would be administered via durable medical equipment such as a nebulizer or infusion pump. Most other medications fall under Medicare Part D.

When will prescription drug costs fall?

Some provisions in the Inflation Reduction Act (IRA) that lower the cost of prescription drug costs, such as a cap on insulin costs, take effect in 2023. Rebates for costs exceeding inflation began in 2023. Drug negotiations for certain high-cost drugs won’t take effect until 2026.

How will Medicare choose which drugs to negotiate?

There will be specific criteria for which drugs may be negotiated. They must have no generic form or biosimilar product and have been approved by the U.S. Food and Drug Administration (FDA) for at least nine and 13 years, respectively. The U.S. Secretary of Health and Human Services will choose from the 50 most expensive drugs that meet this criterion.

The Bottom Line

The Inflation Reduction Act (IRA) has the potential to significantly lower drug prices for those who need it most, but relief will not come immediately. Negotiation on prices won’t begin until 2026, and only the most expensive drugs with no generics or biosimilars will be considered. A cap on insulin started in 2023.

Article Sources

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The White House. “.”
U.S. Centers for Medicare and Medicaid Services. “.”
Kaiser Family Foundation. “”
Bass, Berry and Sims. “.”
Medicare.gov. “.”

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