President Joe Biden signed the Inflation Reduction Act (IRA) Tuesday, codifying into law some of Democrats’ most sought-after healthcare reforms since the passage of the Affordable Care Act under former President Barack Obama.
The healthcare provisions of the law — which also include significant changes to climate and tax policy — are aimed primarily at lowering prescription drug prices and expanding access to Obamacare. Democrats are touting the IRA as a major legislative achievement, but some experts are skeptical they’ll achieve its stated goals.
The headline policy within the IRA’s healthcare portfolio allows Medicare to negotiate drug prices. Beginning in 2026, the Secretary of Health and Human Services (HHS) will be able to select from a list of the 100 most expensive drugs for Medicare and negotiate prices directly with manufacturers.
Drug manufacturers will essentially face a government price-setting scheme or being taxed out of business. If they walk away from the negotiations, sales of that particular drug will be taxed at a rate of 65% of previous year’s sales. The rates will escalate by ten percent every quarter up to a maximum of 95%. They can either pay that tax, agree to the secretary’s negotiation or remove their drug from Medicare entirely.
Because the negotiated prices are negotiated as discounts to existing prices, the Congressional Budget Office projects that the provision may actually lead to higher drug prices, at least in the short term. Big Pharma can effectively circumvent the negotiated discounts by simply setting a higher launch price for a drug, meaning the eventual negotiated discount will take place from a higher baseline.
Manchin doubts CBO estimate that Inflation Reduction Act won’t have a real impact on inflation. “They haven’t always been always right…Everything we’re doing is reducing the costs individuals are burdened with & how they say that’s not going to help inflation, I have no idea.”
— Kaitlan Collins (@kaitlancollins) August 16, 2022
Companies will also be penalized for increasing drug prices at a rate faster than inflation. If they violate that rule, they will be penalized an amount to be paid back into Medicare. Refusal to pay the penalty will result in more fines.
Some experts worry that limiting the price controls in the IRA to Medicare will pass costs on to private insurers, as pharmaceutical companies seek to make up their lost profits elsewhere.
“Drug price fixing and billions more in health insurance subsidies will do nothing but incentivize insurers to continue raising rates,” Dean Clancy, senior health policy fellow at Americans for Prosperity, told the Daily Caller.
The law will also cap cost-sharing costs for Medicare patients at $2,000 per year beginning in 2025. Insulin costs specifically will be capped at $35 per month beginning in 2023, with no deductibles required.
As for non-Medicare-related benefits, the IRA will expand Obamacare subsidies set to expire later this year. Now, the 13 million Americans who buy their healthcare on Affordable Care Act exchanges will continue to receive benefits through 2025.
“By extending enhanced Obamacare subsidies, the IRA promotes wasteful health spending for the benefit of insurance companies and the wealthy, and will likely increase inflation,” Brian Blase, president of the Paragon Health Institute and former healthcare adviser to the Trump White House said. “The overall health care provisions in the Act will grow government’s already sizeable control over the health sector, worsen Americans’ health, and probably cost taxpayers more than what CBO estimates.”
Americans have long asked lawmakers to reform healthcare laws to lower costs for consumers. Nearly 80 million Americans struggle with high medical bills or debt, according to one analysis released earlier this year by the Commonwealth Fund. But there isn’t widespread agreement that the changes Biden signed into law Tuesday will produce the effects the American public wants to see.
For one, few of the provisions are directly geared toward Americans who aren’t on Medicare. Meanwhile, a proposal to extend the insulin price cap beyond Medicare users did not receive enough Republican votes to pass.
Even if Medicare patients end up spending less, an analysis by Tomas Philipson of the University of Chicago found that total healthcare spending will increase by $50 billion over the course of 20 years due to Democrats’ drug pricing policies.
“The Act will cut American lifespans. Over the next 17 years, the bill would reduce drug industry research and development by about $663 billion, resulting in 135 fewer new medicines,” Philipson told the Daily Caller. “This will amount to a loss of 330 million life-years, about 30 times the loss from COVID-19 so far.”
Generic drug manufacturers are concerned about the impact of the legislation as well. The industry heavily lobbied against the IRA, arguing that it would undermine the competition provided by generic drugs in the marketplace. The crux of their argument is that the government is setting up a de facto monopoly for any drugs it chooses to negotiate the price of via Medicare, and that the savings it will secure won’t be as much as those which could be achieved through competition with generics.
“The IRA has a number of deeply destabilizing health care provisions premised on Democrats’ faith in central planning,” former member of the Trump coronavirus response team and Office of Management and Budget healthcare official Joe Grogan said. “Their faith in HHS and its bureaucrats is apparently infinite.”
Still, some left-of-center advocacy groups are lauding the new law. Patients For Affordable Drugs Now said Biden had “made history” in a statement: “They have changed the trajectory of drug pricing in the United States. We are grateful for the President’s commitment to the issue and for delivering relief to millions of Americans.”
The clock is ticking on the Biden administration to take a chunk out of healthcare costs for Americans. Inflation has been at historically high levels, and there’s not much relief in sight on the healthcare front in particular. (RELATED: Here’s How The Biden Admin Is Quietly Expanding The Government’s Control Over Health Insurance)
Because Medicare, Medicaid and insurers typically negotiate prices months in advance, analyses have found that healthcare costs aren’t keeping up with other rates of inflation. That’s likely to change in the coming months, though, as those prices catch up. So, regardless of whether or not the IRA’s healthcare provisions do ultimately work, there’s likely to be additional short-term pain before any long-term gains.