In August, with great fanfare, the Centers for Medicare & Medicaid Services (CMS) unveiled lower prices for the blood thinner Eliquis, the diabetes drug Jardiance, and eight other medicines selected for price negotiations under the Inflation Reduction Act.
That means many Medicare beneficiaries taking these drugs are set to pay less out-of-pocket at the pharmacy counter.
However, an even higher number of Medicare enrollees could pay more out-of-pocket for their prescriptions because of price negotiations -- an unexpected outcome that runs counter to the IRA's intent. These higher costs are a result of how the lower prices that Medicare pays for the negotiated drugs (a good thing) unexpectedly interact with the law's $2,000 annual out-of-pocket spending cap for Medicare Part D enrollees (another good thing) that begins in 2025.
The $2,000 out-of-pocket cap is a much-needed reform. Prior to the IRA, there was no limit on seniors' out-of-pocket liabilities. Medicare beneficiaries who were diagnosed with certain cancers or rare diseases -- and who needed expensive treatments -- were sometimes forced to pay tens of thousands of dollars out of pocket.
High out-of-pocket costs have long dissuaded many patients from taking essential medicines, especially lower-income individuals and those with chronic conditions. Last year, three in ten Americans declined to fill a prescription, skipped doses, or rationed pills because of cost. Prescription non-adherence accounts for up to 125,000 deaths annually and costs the U.S. healthcare system $300 billion each year.
The Biden administration estimates that the Part D cap will reduce out-of-pocket spending for enrollees by over $7 billion annually -- more than triple the $1.5 billion in estimated out-of-pocket savings from price negotiations.
It's worth repeating here that much of the "savings" seniors will see as a result of the IRA aren't due to negotiations. Over one-third of beneficiaries will see direct out-of-pocket savings as a result of new benefit design changes, such as the $2,000 annual spending limit, the $35 monthly cost-sharing cap for insulin, and the elimination of vaccine cost-sharing.
While this is mostly good news, due to a peculiarity in the way Medicare calculates how enrollees reach the $2,000 annual limit, many patients could find it harder to afford the high-value care their doctors recommend starting in 2026.
Here's why.
Some Part D plans require beneficiaries to pay 25% of a drug's nominal "sticker" price out-of-pocket. But other plans -- often referred to as 'enhanced' plans -- don't conform to this standard. Instead, they require patients to pay a fixed amount, or copay, for each prescription -- which is often less than 25% of the drug's list price. Currently, around three-quarters of Part D beneficiaries are enrolled in such enhanced plans.
Importantly, beneficiaries in enhanced plans progress towards the cap as if they were paying 25% of a medicine's list price out-of-pocket, regardless of what they actually pay (another good thing).
But this beneficial loophole could create problems for those seniors taking drugs subject to price negotiations.
Suppose a senior fills a prescription with a monthly sticker price of $2,000 in 2025. Regardless of what that person actually pays out-of-pocket, Medicare automatically applies $500, or 25%, each month toward their annual spending limit. Therefore, under the new $2,000 annual cap, a Part D plan would stop collecting out-of-pocket payments from this person after four months.
If, however, a senior is enrolled in an enhanced plan that only requires a fixed $50 monthly copay for this $2,000 drug, under this calculation method, the beneficiary would still hit the out-of-pocket cap after four months even though the beneficiary paid only $200 in copays for that prescription over that four-month time period.
But here's the rub. Suppose the medication that originally cost $2,000 per month is subjected to price negotiation, and the list price is reduced to $1,000 per month in 2026. That means Medicare applies 25% of this lower price -- $250 per month instead of $500 -- towards the senior's annual spending cap. As a result, the patient would hit the $2,000 cap after eight months instead of four.
But suppose a senior on an enhanced plan is still paying a $50 monthly copay for that medicine. The lower negotiated price means the patient now has to fork over $400 each year (8 months of copays) for their prescription -- double the $200 paid (4 months of copays) prior to negotiated prices. A requirement of an additional $200 per year in out-of-pocket costs can have deleterious consequences, especially for vulnerable individuals on a fixed income.
Unfortunately, unexpected increases in out-of-pocket costs for seniors prescribed negotiated drugs will soon be common. According to a recent study from the actuarial firm Milliman, about 3.5 million Medicare beneficiaries could see their out-of-pocket spending rise in 2026 when negotiated prices are implemented. Meanwhile, an estimated 2.3 million beneficiaries will see no change to their out-of-pocket costs at all. This means that well over half of all beneficiaries taking selected drugs in enhanced Part D plans aren't likely to immediately benefit, with most of those patients seeing cost increases.
Milliman's analysis found that for Part D beneficiaries in enhanced plans who take price-negotiated drugs, out-of-pocket costs will rise by an average of 14%. The study also found that low-income beneficiaries, seniors in employer-sponsored retiree plans, and Medicare Advantage enrollees would be hit hardest. Such lower-income seniors are disproportionately nonwhite.
The IRA could also imperil seniors' access to essential drugs by incentivizing health plans to impose burdensome coverage restrictions. Some plans could refuse to cover certain drugs unless doctors first seek "prior authorization" or force patients to try certain alternative medicines before agreeing to cover the doctor-prescribed therapy (known as fail first or step edit). Others could simply exclude certain medications from their formularies, or lists of covered medicines, altogether.
Nearly 90% of plans report anticipating dropping more drugs from formularies, likely due to the IRA. Even CMS has acknowledged that Part D insurers may be incentivized to move drugs selected for negotiations into less favorable formulary tiers due to misaligned incentives, translating to worse access for patients.
One recent analysis from Avalere concluded that, accounting for all of these potential scenarios, at least four million Medicare beneficiaries within just one therapeutic area may face access restrictions or coverage changes due to the IRA.
Policies with laudable goals often have serious unintended consequences. An undesirable interaction between two well-intended IRA provisions may result in reduced access and/or higher out-of-pocket drug costs for many Medicare beneficiaries, particularly for those in underserved populations. Lawmakers must quickly implement a remedy to this problem such that the aim of the law -- lower drug prices for Medicare beneficiaries -- will be achieved. By doing so, they can bolster access to medications, enhance equity, and ensure better health outcomes for seniors.
A. Mark Fendrick, M.D., is director of the Center for Value-Based Insurance Design at the University of Michigan. He also is a professor in the departments of internal medicine and health management and policy.
