New Analysis: The IRA Could Lead to Higher Out-of-Pocket Costs for 3.5 Million Medicare Patients

IRA’s drug pricing provisions may undermine new out-of-pocket cap in Medicare Part D 

WASHINGTON, D.C. (June 25, 2024) – According to a new analysis from Milliman commissioned by PhRMA, the drug pricing provisions of the Inflation Reduction Act (IRA) could result in 3.5 million Medicare Part D beneficiaries facing higher out-of-pocket costs in 2026 — undermining the benefits of the new out-of-pocket limit for millions of seniors and people with disabilities.

The IRA gives the federal government unprecedented authority to determine the price of certain medicines in Medicare through the Medicare Drug Price Negotiation Program. For an initial group of 10 medicines selected by the government, prices will be limited to what the IRA calls a “maximum fair price” (MFP) beginning in 2026.

The IRA also includes important coverage improvements in Medicare Part D, including a new $2,000 limit on beneficiaries’ annual out-of-pocket costs. PhRMA has long supported adding a cap on out-of-pocket spending in Medicare Part D as an important step to improve patient access and affordability.

Unfortunately, according to the Milliman analysis, the IRA’s drug pricing provisions could undermine the benefits of the new out-of-pocket limit for millions of seniors and people with disabilities. The analysis shows that 3.5 million Part D patients taking medicines subject to the MFP could see higher out-of-pocket costs in 2026 as a direct result of the IRA’s drug pricing provisions. Specifically:

  • Seniors and people with disabilities who are enrolled in Medicare Part D and take a medicine subject to an MFP are likely to see an average increase of 12% in annual out-of-pocket costs.
  • Annual out-of-pocket costs are likely to increase by 27% for low-income beneficiaries and 11% for non-low-income beneficiaries using a medicine subject to an MFP.
  • Annual out-of-pocket costs are likely to increase by 29% for beneficiaries using a medicine subject to an MFP and enrolled in an employer group waiver plan (EGWP), which are plans offered by employers or unions to their retirees.
  • Black and Asian beneficiaries taking a medicine subject to an MFP are likely to have larger increases in annual out-of-pocket costs than people in other racial and ethnic groups — as much as 15% and 13%, respectively.

“This report is further evidence the IRA’s new drug pricing scheme will have significant unintended consequences for millions of Medicare Part D patients,” said PhRMA president and CEO Stephen J. Ubl. “Some people will be shocked when they see their out-of-pocket costs go up as a result of this law, which is the exact opposite of what many policymakers claimed would happen.”

The higher out-of-pocket costs are a result of the way the IRA’s drug pricing provisions interact with the new out-of-pocket cap in Medicare Part D. Here is how it works:

  • Most of the 10 medicines subject to an MFP in 2026 already have significant rebates and discounts due to competition in the marketplace. As a result, Part D plans often place these medicines on lower formulary tiers with fixed monthly copays.
  • The new annual out-of-pocket cap is not based on what Medicare beneficiaries in enhanced Part D plans actually pay out of pocket, but rather what they would pay if they were enrolled in a “standard” Medicare Part D plan, which assumes patients pay a 25% coinsurance based on the price of their medicine.
  • The IRA’s drug pricing provisions are designed to lower the price Medicare pays, not necessarily what the patient pays. If the government gets a lower price, a patient’s copay may stay the same, but the amount that counts toward their annual out-of-pocket cap may be reduced.
  • As a result, millions of Part D beneficiaries who currently pay a fixed monthly copay will not see any lower costs but will now have to wait longer before reaching the new out-of-pocket cap, thus increasing their total costs for the year.

This analysis specifically considers the impact of the drug pricing provisions on patient out-of-pocket costs. Given the actual MFPs for 2026 are still unknown at this time, the analysis assumes MFPs will equal estimated ceiling prices. This assumption is used for simplicity and is not intended to signal what actual prices may be.

Other changes made by the IRA may result in additional changes to seniors’ Part D coverage. In fact, in 2024 there is now the lowest number of standalone Part D plans available since the program’s inception and there are fewer low-income subsidy benchmark plans. Moreover, insurers have stated they expect to exclude more medicines from their Part D plans in the future because of the IRA, and there are few limits to plans’ ability to impose additional barriers, such as step therapy and prior authorization requirements. This will leave seniors and people with disabilities with fewer Part D plan options, fewer medicines covered by Part D and higher costs to access their medicines.

“Putting the government between patients and their medicines does nothing to fix what people hate about their health insurance,” Ubl added. “Policymakers should focus on fixing the flaws of the IRA and tackling the system-wide abuses by insurers and PBMs to ensure seniors and people with disabilities have consistent and affordable access to medicines.”

A summary of the analysis and the full analysis can be found here.  

About PhRMA

The Pharmaceutical Research and Manufacturers of America (PhRMA) represents the country’s leading innovative biopharmaceutical research companies, which are devoted to discovering and developing medicines that enable patients to live longer, healthier and more productive lives. Over the last decade, PhRMA member companies have more than doubled their annual investment in the search for new treatments and cures, including nearly $101 billion in 2022 alone. 

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