The Inflation Reduction Act: a cure or placebo for high drug prices?

Someone this week said of the congressionally enacted “Inflation Reduction Act” (IRA), “Well, it may not actually reduce inflation, but it will sure reduce Medicare prescription costs.” Will it actually do that?

I’ve been involved in health care financing policies for almost 40 years. I am diving into the claims that Medicare, and those it insures, will reap big savings. I conclude that these claims are much more talking points for an election year than financial reality, at least within the next few years.

The valid issue is that Medicare and Americans generally pay the highest prices worldwide for prescription drugs. In recent years, new blockbuster drugs have come out with mind-boggling prices. For example, Sovaldi, made by Gilead Sciences to treat or even cure hepatitis, was introduced at $84,000 for a twelve-week course of treatment.

As to Medicare specifically, when Congress enacted the Medicare Part D program in 2006, the concession required to overcome the powerful drug maker lobby was a prohibition on CMS negotiating prices with drug manufacturers. Instead, the drug program was to be run by private insurance plans which would negotiate prices and rebates in anything but a transparent manner to patients and the government.

There are some positive things in the new law on Medicare drugs.

The law caps out-of-pocket liability at $2,000 vs. the current $7,500 before catastrophic coverage kicks in. Keep in mind, however, that $2,000 per year is still a big bite when the average monthly Social Security benefit is $1,500 a month, likely a little less in Arkansas.

It caps the cost of insulin at $35 a month, but only for those on Medicare.

The law says that future prices of drugs, beginning in 2023, can’t exceed the rate of inflation. If that happens, the drug makers owe the difference back to the federal government as a rebate. However, the law will most likely use the health care inflation index, not the consumer price index. Patients could still see price hikes in the 10% range on top of what are already the world’s highest prices.

Let’s turn our attention to the IRA’s (terrible acronym) much-proclaimed ability to negotiate Medicare drug prices.

• Negotiations are not slated to begin until 2026, approximately halfway through the next President’s term with a new Congress. Why wait four years?
• Negotiations on drug prices will apply only to Medicare, nothing for privately insured or the uninsured.
• The pace at which negotiations begin in 2026 can only be described as glacial. In the first year, only ten drugs are subject to having the price negotiated, 15 additional drugs in 2027, and 15 more in 2028.
• Negotiation is actually prohibited for many years after a drug is on the market, some not for nine years, others not for 13 years. This long delay responds to the demand that drug companies have time to recoup their investments in bringing drugs to market.

There is a better model for negotiating drug prices. Medicaid leaders have been negotiating drug prices and rebates since 1990. I was the Arkansas Medicaid Director in 1990 when Sen. David Pryor led the legislation requiring drug manufacturers to give Medicaid the best price for the drugs it purchases. If drug makers charged Medicaid more than private customers, they were required to pay Medicaid a rebate to make up the difference.

Medicaid went on to develop Preferred Drug Lists, a list of often expensive drugs that didn’t require prior approval, provided the drug maker agreed to pay an added supplement rebate to the Medicaid program. In short, state Medicaid directors have three decades of experience managing drug costs, which seems to be ignored by Congress. This has been a tried-and-true system that has returned many millions of dollars to the Arkansas Medicaid program alone which were reinvested in the Medicaid budget.

Lastly, Congress passes the legislation, and federal agencies, HHS in this case, write the enabling regulations to implement the law. We will see more details as the regulations are written and released for comments.

We might learn, for instance, what happens when a drug maker declines to negotiate or if they reject the HHS offer on price. Will Medicare stop covering the drugs?

A lot remains to be seen as this inadequate legislation transforms into policy. At this point, the best we can say in a nation where Americans unfairly pay the world’s highest drug prices is, “well, it’s a start.”

Editor’s note: Ray Hanley, President and CEO of Arkansas Foundation for Medical Care, is the author of this commentary. The opinions expressed are those of the author.