How the Inflation Reduction Act Impacts Health Policy

Michelle Mello — a professor of heath policy and law — attended the Sept. 13 gathering at the White House to celebrate the passing of the Inflation Reduction Act 2022. She was invited for her contributions on Medicare price negotiation modeling for the landmark piece of legislation. In this Q&A, she discusses the bill's impact on health policy.
Biden celebration at White House for passage of Inflation Reduction Act 2022 Getty Images

The Inflation Reduction Act of 2022 (IRA) has gotten a lot of attention for its focus on domestic clean energy production incentives and carbon reduction. But the bill has also been praised as the most significant health care legislation since passage of the Affordable Care Act under President Obama. Here, Michelle Mello, a leading empirical health law scholar, discusses the new law and its impact on Americans’ healthcare—including historic caps on monthly prescription costs for retirees. 

Is the IRA Act a significant healthcare policy bill? If yes, why?

It's certainly the most significant legislation since the ACA’s passage in terms of improving access to health care. (Other legislation has cut in the opposite direction: in 2017, Congress gutted a key provision of the ACA, the tax penalty for individuals who failed to buy health insurance. The Congressional Budget Office estimated that three to six million Americans would go uninsured as a result of that legislation.)

The IRA has several important provisions that will improve the affordability of prescription drugs.  Addressing drug costs has for several years ranked among Americans’ top domestic priorities for the Congress.  It’s common for people to be underinsured against these costs, because most health plans involve substantial cost-sharing for patients and drug prices are often very high and have been rising steeply.

The bill contains a number of provisions that will cut Medicare drug costs by an estimated $287 billion over 10 years. Can you talk about that and how Americans will benefit? I understand that drug costs for retirees can go up significantly when they transition to Medicare off private insurance.

Right—Medicare prescription drug plans (called “Part D” plans) aren’t immune to this cost-sharing problem.  In fact, up until the IRA, these plans made patients bear part of the costs of their drugs in several different ways: seniors paid a monthly premium for their plan, then they paid a deductible, and then they paid a quarter of the sticker price of their prescriptions (even if the manufacturer offered their plan a discount off the sticker price!).  This resulted in thousands of dollars in out-of-pocket costs for many elderly Americans, and there has been no limit on what people might have to pay.

The IRA addresses drug affordability for Medicare beneficiaries in several ways. First, it reduces their out-of-pocket spending.  Part D plans will no longer be able to require patients to share the cost of their prescriptions once their drug costs hit a certain threshold. Even more important, nobody will have to pay more than $2,000 per year in out-of-pocket costs starting in 2025. 

This is a really historic fix to problems with the Part D benefit that health policy researchers and advocates have been working on for two decades! 

So, prescription out-of-pocket costs will be capped at $2,000 per year. That’s big news. What else?

Other provisions in the IRA cap the cost of insulin for Medicare beneficiaries at $35 per month, limit the amount that Part D plans can raise seniors’ premiums, and let beneficiaries pay big out-of-pocket drug costs over time instead of right when they start taking the drug.

The second big move in the IRA is to give the Centers for Medicare and Medicaid Services (or CMS, the federal agency that runs Medicare) the authority to negotiate a “fair” price for drugs that the Medicare program pays for.  The authority is limited to a modest number of high-cost drugs beginning in 2026, and the legislation defines what constitutes a maximum fair price.  Manufacturers who refuse to negotiate can be assessed a hefty penalty that is calibrated to their drugs’ sales volume and how long they’ve been out of compliance.  Experts and politicians on both sides of the aisle have long called for CMS to have this authority, but up until now the agency has been legally prohibited from trying to negotiate price.

Finally, the Act limits drug manufacturers’ ability to keep hiking their prices year after year. It provides that if they raise a drug’s price more than the rate of inflation, they must rebate back the excess amount to Medicare, beginning in 2023.  We already have something like this for the Medicaid program, which serves low-income Americans, and it’s a big cost saver.

Stanford's Michelle Mello at White House to celebrate passage of the Inflation Reduction Act

What are the chances that some of these benefits will be extended to all Americans? Do prescription costs hit middle income Americans particularly hard?

One of the disappointments for many people who worked on the bill was that in order to secure the votes to pass it, reformers had to drop a provision that required drug manufacturers to give the Medicare-negotiated price to commercial health plans too.  Because of another statute, the Medicaid program already gets the best price in the market, so it’s middle-income Americans—who get insurance from their employers or buy individual insurance plans—who are now left out of the savings.

States are keenly aware of this and thinking about how they can secure a piece of the action for their residents.  Although states have limited ability to regulate certain types of commercial health plans, there’s a lot they can do.  I’ve worked with the National Academy for State Health Policy to develop model legislation though which states can create a “drug affordability board” to adopt upper limits on what payers in the state will pay for drugs.  A few states have already implemented drug affordability boards.  We’ve also worked up a model act for states to impose limits on excessive price increases. 

It's certainly the most significant legislation since the ACA’s passage in terms of improving access to health care.
Michelle Mello
Professor of Health Policy, Law

The IRA took months and some contentious negotiating to pass. What are your thoughts on this legislative victory, given the political climate?

One of the reasons the IRA is such a huge victory is the perplexing politics of the prescription drug affordability issue.  Both parties campaigned hard on the issue in 2016, and President Trump advanced a quite thoughtful strategy for attacking the problem after he was elected, which included Medicare price negotiation.  But then things went off the rails, with the Trump Administration losing its nerve in the face of pushback from the powerful drug industry. 

Although supermajorities of Americans both Republican and Democrat felt it was important for Congress to pass the drug affordability provisions in the IRA, not a single Republican in Congress ultimately was willing to vote for the Act, and every Democrat vote in the Senate was needed to pass it.  It’s a sign of our polarized times that it came to that—and it’s a minor miracle this legislation got through.

Michelle Mello

Michelle Mello

Professor of Health Policy, Law
Examines issues at the intersection of law, ethics and health policy