Inflation Reduction Act Prescribes Fragmented Drug Pricing Reforms

For the American Benefits Council, Congress should have prescribed a far larger dose.

While provisions of the Inflation Reduction Act of 2022 will lower prescription drug costs for senior citizens who are Medicare beneficiaries, individuals with employer-sponsored health insurance are excluded, says Ilyse Schuman, senior vice president for health policy at the Washington, D.C.-based American Benefits Council.

“You’re squeezing the balloon—you’re shifting costs from one sector of the market to another,” she says.

Congress approved the bill earlier this month, and President Joe Biden has said he will sign it during the week of August 15.

Although the legislation may lower prices for seniors and for those with Medicare coverage, which is important, “it’s not a complete solution if it doesn’t also help and make prescription drugs more affordable for those with employer-sponsored coverage,” Schuman says.

“It didn’t include the kind of structural reforms that we had called for, as far as paying for value [and] greater transparency throughout the prescription drug supply chain … for [the] benefit of working families—employers and working families, not just seniors,” she says.

Health Care Effects

The American Benefits Council, a trade association that advocates nationally for employers, does support several of the bill’s efforts, such as its requirement that the Department of Health and Human Services negotiate maximum prices with manufacturers of certain prescription drugs that do not have generic competition.

Other reforms in the bill include: allowing Medicare, the U.S. government’s national health insurance program, to use its scale and pricing power to negotiate lower prices of prescription drugs for beneficiaries, beginning in 2026; providing for drug inflation rebates for brand-name drugs without generic equivalents under Medicare that cost $100 or more per year per individual, and for which prices increase faster than inflation; removing beneficiary cost-sharing above the annual out-of-pocket spending threshold under the Medicare prescription drug benefit, beginning in 2024; and establishing a program under which drug manufacturers provide discounts to beneficiaries who have incurred costs above the annual deductible, beginning in 2025.

The Centers for Medicare and Medicaid Services estimates total Medicare enrollment is 83 million overall, including 63.96 million individuals. Meanwhile, health care costs are increasing for both employers and workers.

One effect of that financial reality for plan sponsors is a mounting tension between rising health care costs and efforts to assist with employees’ financial wellness. Higher health care costs also affect the amount retirement plan participants can defer from their paycheck for retirement. In addition, health care costs in retirement are a top stressor; Fidelity estimates that a 65-year-old couple retiring this year can expect to spend an average of $315,000 on health care costs throughout retirement.

Cables to Capitol Hill

An earlier version of the Inflation Reduction Act did include prescription drug relief for individuals with health insurance from their employer, according to Schuman, but was removed from the final version.

“[In] earlier iterations of the legislation, efforts were made to try to include the commercial market in those provisions, but the Senate parliamentarian had ruled that the commercial market could not be included in the inflation drug rebate,” she says.

The bill was considered under Congress’ budget reconciliation process, the rules of which allow for expedited consideration of certain tax, spending and debt limit legislation, provided that the Senate parliamentarian rules that a provision measure is within scope. In the Senate, reconciliation bills aren’t subject to filibuster and the purview of amendments is limited, which means that a bill can pass the upper chamber with a simple majority and doesn’t have to meet the 60-vote threshold required to end a filibuster.

“The issue was there are requirements under the budget reconciliation process that precluded the inclusion of the commercial market in those reforms,” Schuman says. “The commercial market was removed from the price negotiation provision because that would not have passed muster under the budget reconciliation rules that basically require the provision to have an impact on government revenue, the budget, and not ancillary policy provisions.”

The American Benefits Council expressed several concerns about the bill’s consequences for employers and families in a letter sent to Democratic and Republican party leaders in Congress, earlier this month. The letter urges Congress to undertake comprehensive reforms, such as a system of value-based pricing that ensures drug prices reflect the benefits the drugs provide and do not impede meaningful innovation; a change in the incentives that lead to higher list prices; increased competition among all players in the pharmaceutical industry, not only manufacturers; and greater transparency in drug pricing.