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Aug. 13, 2022, 10:50 a.m. EDT

Medicare is on track to negotiate drug prices, thanks to the Inflation Reduction Act — what it means for you

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By Jessica Hall

A game-changing new bill, dubbed the Inflation Reduction Act , could dramatically reduce how much seniors have to spend on medications. 

There are several proposed changes for Medicare and its beneficiaries under the Senate budget reconciliation bill from Senate Majority Leader Chuck Schumer, D-NY, and Sen. Joe Manchin, D-WV, which was approved over the weekend. The House is expected to pass the legislation this week, according to media reports.

Here’s a brief primer to help explain the basics.

The changes focus on cutting medication costs and reducing drug spending by the federal government. Medicare beneficiaries would be able to get the same medications, but it would cost them and Medicare less. The savings would not come through any cuts to the Medicare program, but instead come through price negotiations and other measures.

The government will be able to negotiate prices for some medications : The bill would allow the government to negotiate the prices for certain expensive medications purchased at the pharmacy (Medicare Part D) or administered by physicians (Medicare Part B).

Starting in 2026, the Department of Health and Human Services will choose 10 drugs eligible for negotiation. In 2027 and 2028, 15 drugs would be eligible and in 2029, 20 drugs would be chosen.  

The United States currently pays more than other countries for the same drugs. For example, U.S. prices for brand-name drugs were more than triple the brand-name drug prices in other countries belonging to the Organization for Economic Cooperation and Development (OECD), according to research from the Rand Corp.

According to the Congressional Budget Office, Medicare even pays higher net prices, on average, for brand-name drugs than the Veterans Health Administration, the Department of Defense, or Medicaid, all of which have the authority to negotiate prices or participate in the federal supply schedule for pharmaceuticals. 

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The Medicare Modernization Act of 2003, which established the Medicare Part D program, prohibited Medicare from negotiating drug prices. The new provision, if passed, would change that.

The pharmaceutical industry has argued that allowing Medicare to negotiate drug prices would harm innovation and lead to fewer drug breakthroughs. Yet, the Congressional Budget Office estimated that only 15 out of 1,300 drugs, or 1%, would fail to come to market over the next 30 years as a result of the new provisions. The move also only applies to medications and biologic that have been on the market for several years without competition from generics or biosimilar drugs.

The legislation, if enacted, would reduce the federal deficit by $288 billion over 10 years, according to the Congressional Budget Office.

The proposal also imposes rebates on drug manufacturers that increase prices faster than inflation.

Out-of-pocket drug costs for Medicare beneficiaries would be limited to $2,000 per year: For the first time, out-of-pocket prices for Part D prescription drugs would be capped. By 2025, beneficiaries would not have to pay more than $2,000 a year for their share of Part D drugs. Part D premiums would not be able to increase more than 6% a year through 2029.

The income threshold for beneficiaries to qualify for a subsidy to help pay for Part D out-of-pocket costs would increase from 135% of the federal poverty level ($18,347 for an individual in 2022) to 150% ($20,385 for an individual in 2022).

Starting Jan. 3, all vaccines will be free in Medicare.

There’s one broader health-related benefit the Democrats failed to get through this weekend. Republicans on Sunday blocked the $35 price cap on the cost of insulin for patients with private insurance coverage. Republicans, however, left the portion that applies to Medicare patients in place.

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