People are underestimating the significance of drug pricing provisions in Inflation Reduction Act

It would be a mistake to underestimate just how consequential the Inflation Reduction Act’s prescription drug pricing measures really are. The bill will do much more than drive down costs for seniors and people with disabilities on Medicare — although that alone would be a highly significant accomplishment. It will also reshape the overall drug pricing landscape, drive innovation and puncture the myths large drug companies have used to defend their out of control pricing. Ultimately every American who relies on prescription drugs will experience the benefits.  

The Inflation Reduction Act’s (IRA) prescription drug pricing measures are game changers for millions of Americans. It ends a nearly 20 year impasse that kept the government from negotiating lower prices with drug companies on behalf of all Americans. As anyone who relies on medication knows, drug companies charge excessively high prices and have raised them year after year, often forcing patients to make impossible choices between affording the drugs they need to survive or making ends meet. Seniors in particular are susceptible to these high costs, with nearly one in four reporting that they struggle to access the medications they need. 

Our analysis shows that, in the near-term, millions of seniors on Medicare will see savings amounting to thousands of dollars every year. Furthermore, the bill provides a powerful roadmap for states, businesses, and insurance companies to further extend savings to Americans of all ages who are insured through their employer or other sources.  

Let’s start with the savings. The IRA takes four important steps to rein in high costs: it gives Medicare the power to negotiate lower prices, it caps annual out-of-pocket drug costs at $2,000 for Medicare beneficiaries, it limits insulin co-pays to $35 per month for seniors, and it imposes a penalty on drug companies who raise Medicare drug prices faster than the rate of inflation. We examined drugs that are likely to be targeted for reforms under the IRA and estimated how much Medicare beneficiaries could save in the coming years, relying on our own analysis and work by others. 

Starting in 2023, the IRA will cap out-of-pocket insulin costs at $35 per month for 2.7 million Medicare beneficiaries. West Health estimates patients that use insulin will save an estimated $840 per year for a total of $2.3 billion in annual savings. The bill also eliminates cost sharing for adult vaccines covered under Medicare Part D beginning in 2023. This includes lifesaving vaccines for the flu, shingles, and hepatitis.  

The capping of out-of-pocket costs on drugs will also save patients billions of dollars. The Kaiser Family Foundation estimates that these savings will total $1.7 billion annually and help  approximately 1.3 million Medicare beneficiaries. As just one example of savings, for the 42,000 senior Medicare beneficiaries taking the cancer drug Revlimid to treat lymphoma and leukemia, the cap will save individual patients over $6,000 dollars in out-of-pocket spending every year, amounting to approximately $300 million in total savings in the first year alone for this one drug.  

According to the Kaiser Family Foundation, giving Medicare the power to negotiate lower prices for the top 10 spending drugs in Part D will save patients $876 million in just the first year. Ultimately HHS will negotiate lower prices for 80 drugs by 2030, and savings will continue year after year. 

Not only does the IRA save patients money in the short term, it also serves as a blueprint to follow for states, insurance companies, and large employers to drive down prescription drug prices for Americans of all ages and for people insured by their employers and other insurers. Savings from Medicare negotiation will likely result in downward pressure on commercial prices, especially where large employers can exert their leverage to demand prices reflecting Medicare’s negotiated rates. We are in conversations with governors and state legislators who are also thinking through legislation that would mimic the Medicare inflation cap and the insulin cap provisions of the IRA in other insurance markets subject to state laws and regulations.  

Finally, successful implementation of the IRA will demonstrate that industry claims that high prices and extraordinary price growth are necessary for innovation are nothing more than scare tactics. Common sense and years of analysis show that lower prices will increase the number of patients purchasing existing medication, which works to increase revenue for drug companies. Negotiations, when properly designed, will provide greater rewards for the development of drugs with proven benefit instead of minor tweaks to existing products, thereby improving the health of Americans and encouraging true innovation. In common sense and years of analysis show that lower prices will increase the number of patients who can afford to purchase existing medications, thereby increasing revenues for the makers of those drugs. 

Rena Conti is an Associate Professor of  Markets, Public Policy, and Law at Boston University. Leslie Dach is Chair of Protect Our Care, a health care advocacy organization. Richard Frank is a Senior Fellow in Economic Studies and Director of the USC-Brookings Schaeffer Initiative in Health Policy at the Brookings Institution.