The Inflation Reduction Act is a two-sided coin when it comes to government spending on drugs. On one hand, negotiations allow Medicare to pay a lower price for select branded medications. On the other hand, out-of-pocket caps for patients will require the state-run insurance to foot more of the bill.
But while some elements of the law are already in effect, the biggest cost savers across the board are still a few years away, according to the latest projections from the Centers for Medicare and Medicaid Services.
Seniors should see out-of-pocket costs dropping from 6.7% this year to 3.7% in 2025-2026 thanks to newly implemented caps, with higher Medicare spending to make up the difference. Even the drug price negotiations won’t immediately draw spending down — in fact, they’re set to increase in 2026, CMS economists found — but by 2027 through 2032, that spending growth will be “pushed lower.”
U.S. healthcare spending is estimated to have grown 7.5% in 2023, reaching $4.8 trillion, according to CMS’ study in Health Affairs. That’s higher than the national GDP’s annual growth rate of 6.1%, and well above the 4.1% growth rate in 2022. The increase also pushed healthcare spending to 17.6% of the nation’s economy, from 17.3% in 2022.
Still, the pharma industry is fighting tooth and nail against the drug spending provisions in the new law, battling what leaders have called a detriment to future innovation in the life sciences.
The IRA in action
The IRA’s most well-publicized provision among drugmakers is the government’s new ability to negotiate the prices of selected drugs under Medicare Part B and D. Beginning in 2026, the first wave of 10 drugs will be subject to the new pricing rules, and drugmakers are currently negotiating with the Biden administration to set the prices. Gracing the list in the first round are popular drugs like Eliquis, a blood thinner from Bristol Myers Squibb and Pfizer; Boehringer Ingelheim and Eli Lilly’s diabetic med Jardiance; and Bayer and Janssen’s Xarelto, another blood thinner.
The Congressional Budget Office previously estimated the negotiations would save Medicare $100 billion between 2026 and 2031. But the IRA spending cap could also cut away at those savings, the CMS found.
The out-of-pocket spending cap for selected Part D drugs is one of the IRA’s first provisions in effect. This year, Part D beneficiaries will pay between $3,000 and $3,800 toward the $8,000 true out-of-pocket costs, which is the threshold for the catastrophic phase of drug plan coverage. By 2025, that cap will drop to $2,000.
While these changes will decelerate out-of-pocket spending for patients, Medicare spending is expected to increase as coverage share shifts, with the government-run program expected to spend 5.7% more in 2025 and 8.6% more in 2026.
An embattled law
Big Pharma has been vocal about its opposition to the IRA, and several leaders have sounded off about the law’s negative implications on industry R&D. Some pharma companies have argued that a price cap on drugs paid by Medicare will reduce their incentives to develop new, innovative drugs. The average cost of developing a new drug can vary widely, but rose to $2.3 billion in 2022, according to a report from Deloitte.
The negotiation period for the first 10 drugs is scheduled to end Aug. 1, becoming public the following month. The new prices will go into effect the first day of 2025, but while Medicare is expected to eventually realize savings, it won’t happen right away.
The IRA also required drugmakers to pay CMS rebates if they increased drug prices faster than inflation rates. And the agency plans to start sending invoices to collect those payments “no later than fall 2025.” When negotiated rates come into play the following year, the CMS will no longer impose those inflation penalties on the selected drugs. Medicare beneficiaries will also see a lowered Part B coinsurance rate starting July 1 this year on 64 drugs “since each drug company raised prices faster than the rate of inflation,” the CMS said last month.
“Although 2026 marks the first year in which certain drugs have lower cost sharing because of their newly negotiated prices, Medicare spending growth is projected to accelerate, on net, mostly resulting from the expected reductions in rebates on drugs with negotiated prices,” the CMS report noted.
From 2027 to 2032, growth in out-of-pocket spending is expected to slow to 4.2% because of the projected drop in drug spending.
While the IRA provisions are already being implemented, pharma companies are trying their hands at stopping the price negotiations through the courts. Several cases brought by drugmakers are still ongoing and the CMS has opened up a comment period with entries due July 2.
