Prescription drug costs are about to change – for the better. No matter your political leanings, you or someone in your family will likely benefit from the medical and drug provisions in the recently passed Inflation Reduction Act.

The drug pricing elements primarily benefit Medicare recipients, but the savings are expected to have a ripple effect throughout the prescription drug market.

The key element in this part of the massive bill gives Medicare officials the right and the power to negotiate drug prices for the first time. This will reduce the expenditures for many seniors.

In addition, the bill places a cap on a senior’s out-of-pocket costs for certain expensive drugs. It’s also expected to reduce federal spending.

These changes are significant, but they are limited and will phase in over the next several years.

Government Negotiated Prices on Prescription Drugs

Beginning in 2026, Medicare can negotiate prices with drug companies on a select number of medicines.

Why you ask, has the government not done this before? It seems like a no-brainer for the biggest buyer of a product to negotiate for a favorable price. Medicare Part D, which helps cover the cost of prescription drugs, was created in 2003 – 38 years after Medicare coverage of medical costs went online. In order to pass the bill to include drug coverage, a compromise explicitly forbids the government from negotiating prices.

Of course, private sector insurers do negotiate prices with pharmaceutical companies. Pharmacy Benefit Managers (PBMs) – the three largest are Caremark, Express Scripts, and OptumRx – fight hard to get the best prices they can.

Part D, by the way, is optional for the 63 million Medicare beneficiaries. You can choose a Part D plan and pay the premiums, co-pays, and deductibles to get price discounts on prescription drugs, or you can choose a Medicare Advantage Plan (sometimes known as Part C), getting benefits through a private sector health insurer. Many people opt for an Advantage plan because it’s usually cheaper at the outset. The disadvantages are that you will have a limited network of doctors to choose from, it may become more expensive if you’re sick, and you may face lifetime penalties if you switch back to Original Medicare.

Once Medicare starts negotiating prices, it will only be able to do so on a limited list of expensive medications that do not have generic alternatives. That first year, 2026, will include only ten drugs. The list will gradually increase to 20 drugs in 2029.

The savings will be substantial even with a limited list of covered drugs. Currently, the top 10 drugs eligible for price negotiation account for just 0.3% of all covered medications, but for 16% of spending in 2019, according to the Kaiser Family Foundation.

According to a Bank of America analysis, these four drugs could be among those eligible for price negotiation:

• Eliquis (made by Bristol-Myers) cost Medicare $9.9 billion in 2020. It’s an anticoagulant to prevent blood clotting and reduce stroke risk.
• Xarelto (Johnson & Johnson), $4.7 billion, is another blood thinner.
• Januvia (Merck), $3.8 billion, lowers blood sugar for people with type 2 diabetes.
• Imbruvica (Abbvie), $2.9 billion, is taken for different blood cancers.

The Bank of America report says prices on these and other medications subject to negotiation could cut costs by about 25%.

Penalties and Enforcement

The Department of Health and Human Services will be able to impose fines on pharma companies that do not adhere to negotiated prices or provide false information to negotiators.

Drug companies could also be penalized for raising prices faster than the inflation rate. That provision takes effect later this year. And if prices increase by more than the inflation rate, companies must pay the government a rebate. That’s not an idle threat, either. The Kaiser Family Foundation says prices rose faster than inflation on most drugs Medicare paid the most for in 2020.

Overall, prescription drug spending from 2014 to 2020 rose by 69%. That compares to an increase of 41% in other comparable countries.

Other Major Savings in the Inflation Reduction Act

Another major provision of the bill places a cap on out-of-pocket spending at $2,000 beginning in 2025 for seniors with Medicare Part D. There is no limit now. Kaiser reports that 1.5 million Medicare recipients paid more than $2,000 for their drugs in 2019.

The annual increase in premiums for Part D coverage will be capped at no more than 6% from 2024 through 2029. That means the long-term increase in Part D policy premiums should slow down.

The bill also removes the 5% cost-sharing obligation people currently pay after hitting their plan’s “catastrophic” threshold of $7,050. (The threshold rises to $7,400 next year.) That takes effect in 2024. Currently, there is no cap.

There’s also a huge benefit for the 3.3 million Medicare beneficiaries who need insulin: co-pays will be capped at $35 a month beginning next year.

In addition, all vaccines recommended by the federal Advisory Committee on Immunization Practices will be fully covered by Medicare, Medicaid, and the Children’s Health Insurance Program, known as CHIP.

Finally, the bill extends the subsidies to help pay premiums on Affordable Care Act policies through 2025. They had been set to expire at the end of this year. That will save about $700 a year for an estimated 10 million Americans.

AARP describes the bill as a “historic” victory for older Americans. While it does not include mandates for people covered by private health plans, consumer advocates believe it will have a trickle-down effect on controlling prices for everyone.

All-in-all, the provisions in the Inflation Reduction Act should drive down the immense cost of prescription drugs in America.