What Inflation Reduction Act does for drug prices, insurance subsidies

Zoë Petersen, Deseret News

While the Build Back Better bill is on life support, some of the pieces are getting new life in the recently announced Inflation Reduction Act of 2022 — including several health care provisions.

Senate Majority Leader Chuck Schumer, D-N.Y., and Democrat holdout Sen. Joe Manchin, D-W.Va., announced this week that they reached an agreement that if passed will let Medicare negotiate certain drug prices, cap out-of-pocket drug costs related to Medicare, extend the sunset date on COVID-19-relief-related subsidies for people who buy health insurance in the Affordable Care Act marketplace and tackle environmental justice concerns related to health.

Kristin Murphy, Deseret News

Schumer said the Senate will vote on the bill before the scheduled monthlong recess that begins Aug. 5. First though, the Senate parliamentarian has to agree taxing and spending are central enough for the bill to be voted on under budget reconciliation rules, which take 51 votes to pass, rather than the filibuster’s 60 votes.

President Joe Biden issued a statement Wednesday supporting the new proposal. “This is the action the American people have been waiting for. This addresses the problems of today — high health care costs and overall inflation — as well as investments in our energy security for the future,” he said.

The health care provisions allow Medicare to negotiate prescription drug prices, something the program is not now allowed to do. Should the bill pass, starting in 2026 Medicare can negotiate prices on 10 “high-spend” drugs prescribed to people on Medicare, the bulk of whom are older adults.

The inflation bill also caps out-of-pocket costs for the medicine they buy at the pharmacy at $2,000 for people in Medicare drug plans. Right now, those folks can pay thousands if they are prescribed expensive drugs, as the Deseret News recently reported.

“Senior citizens are among the heaviest consumers of prescription medicine. And Medicare occupies a strange place in the drug price landscape,” the article said. “For help with the cost of drugs administered outside of a facility, Medicare recipients need Part D Medicare or a Medicare Advantage Plan with drug coverage. Otherwise, they pay the cost themselves. If a drug is on Medicare’s formulary, patients typically pay up to 25% of the cost. But Medicare, unlike private insurance companies, doesn’t negotiate discounts with drug companies.”

The proposed inflation bill, if passed, would let Medicare negotiate discounts. Even more important to some consumers is that cap on out-of-pocket costs for prescription drugs.

For some people on Medicare, copayments and coinsurance for medication on the formulary can be hundreds — even thousands — of dollars.

Several Medicare beneficiaries in February told the Deseret News stories of the challenges they face affording drugs in the program. Moira “Meg” Jackson-Drage, 53, of Magna, Utah, described skipping or rationing medication prescribed for an autoimmune syndrome since she can’t always afford her copays.

David Mitchell, 71, of Bethesda, Maryland, said the out-of-pocket costs for just one of the medications he takes for multiple myeloma is $16,000 a year. He co-founded Patients for Affordable Drugs.

And another Medicare beneficiary, Therese Humphrey Ball of Ogden Dunes, Indiana, said this year that she’s struggled to afford her medication for multiple sclerosis.

“With this agreement, we have a chance to make prescription drugs cheaper by allowing Medicare to negotiate lower prices and we can lower health insurance costs for 13 million Americans, by an average of $800 a year for families covered under the Affordable Care Act,” Biden said in a written statement about the proposal.

Price control or negotiation?

Not everyone thinks that solution is sound.

Dr. Wayne Winegarden, a senior fellow in business and economics at the Pacific Research Institute, has been less than enthusiastic about the prospect of the Medicare program negotiating drug prices, at least as it was written in the Build Back Better Act.

In early July, before Manchin and Schumer negotiated the inflation bill, Winegarden told the Deseret News such a negotiation would amount to price control.

“They say Medicare negotiation, but it’s very much kind of the Godfather negotiating with you, giving you offers you can’t refuse,” said Winegarden, who also directs the institute’s Center for Medical Economics and Innovation.

As planned in Build Back Better, those who rejected the negotiated price would face a massive tax on their revenue, he said. “So that’s really not a negotiation, it’s price control. ... The key is we need to encourage innovation for the future and promote affordability in the present — and price controls don’t strike that balance.”

Others, like Dr. Kenneth E. Thorpe, a professor at Emory University who chairs the advisory board of the Partnership to Fight Infectious Disease, told the Deseret News the list price of medicine is not the problem with prescription affordability, which stretches well beyond Medicare.

“I think the overall focus on drug prices has been wrong,” Thorpe said recently. “That’s important for Medicare perhaps, but to me, the real focus should be on patients and what they pay out of pocket.”

Manchin had previously supported the cost-negotiation by Medicare provision in Build Back Better, so its inclusion in the inflation bill is not surprising. For drugs administered in doctors’ offices or purchased at the pharmacy, the Health and Human Services secretary would be able to negotiate some drug prices, starting with 10 often-prescribed, expensive drugs that heavily impact prescription expenditures, beginning in 2026. In subsequent years, the number that can be negotiated will grow.

The inflation bill would also require drug companies that raise their drug prices in Medicare at rates faster than inflation to rebate the excess amount.

“Altogether, the drug price provisions would reduce the deficit by $288 billion over a decade, according to the Congressional Budget Office,” CNN reported.

Other health provisions

The bill would extend Affordable Care Act subsidies for three more years. The subsidies were part of the American Rescue Plan package to provide financial relief during the pandemic, lowering insurance premiums for those who buy their insurance in the public marketplace under the Affordable Care Act. The subsidies were supposed to sunset at year’s end. Under this bill, they will go through 2025, at a cost of $64 billion.

The relief-effort subsidies capped insurance coverage at 8.5% of income; it had been close to 10% before the pandemic. For lower-income policyholders, the enhanced subsidies eliminated premiums. And for the first time, those earning above 400% of the poverty line became eligible for some help with the cost.

The bill would also cover vaccines for older adults. Some have had to pay for their vaccines themselves or skip them.

Finally, while the environmental justice provisions are listed under climate, they’re also viewed as good for public health, tackling some of the negative health impacts of public transportation and other projects on people in nearby communities.

Manchin in a written statement said the act “will address record inflation by paying down our national debt, lowering energy costs and lowering healthcare costs.”

Paying for it

Prior to this negotiation, Manchin had only agreed to a bill to lower prescription drug costs and extend the Affordable Care Act subsidies, according to Vox. “He’d argued that doing anything more would increase inflation and hurt the economy. Now, Manchin says, he has found a way to decrease inflation ... and advance Democrats’ legislative agenda.”

Capturing unpaid taxes is central to financing the measures. And the bill sets a hard 15% minimum tax rate for corporations earning $1 billion or more a year. The nominal tax rate is actually 21%, but many corporations find ways to skirt that and pay less.

The bill also goes after tax avoiders by investing money in tax enforcement.

A fact sheet on the Inflation Reduction Act says the bill will raise $739 billion, while investing $433 billion in programs, including $369 billion in “energy security and climate change” and $64 billion in the ACA subsidy extensions.

The fact sheet claims that “$300+ billion” deficit reduction will fight inflation.

And it says there are no new taxes on families making $400,000 or less and no new taxes on small businesses. Rather, tax loopholes are being closed and enforcement beefed up “to make the biggest corporations and ultra-wealthy pay their fair share.”

CNN reported that “Schumer and Manchin have been in revived talks since July 18 and locked down a deal Wednesday, according to a source familiar with the matter. Manchin had thrown cold water on doing tax and energy provisions as part of the deal, but ultimately agreed to it.”

Tough road ahead?

The Washington Post reported that to win Manchin’s support, “some Democratic senators in recent days also sought an intervention from Larry Summers, the former treasury secretary who has been sharply critical of Biden’s earlier stimulus law, according to two people familiar with the matter, who spoke on the condition of anonymity to describe private conversations. Summers was among the economists who first warned that inflation would rise.”

According to the article, “The two men spoke this week, and Manchin listened as Summers talked in detail about why Democrats’ proposed economic package — including its energy provisions — would not lead to higher prices, the people said. Manchin has on occasion consulted with Summers throughout the last year, and the senator’s allies have been adamant that his views have been consistent throughout the negotiations. A spokeswoman for Summers declined to comment.”

That it’s a framework with many details still to be resolved could delay or kill the agreement, as Howard Gleckman, senior fellow at the nonpartisan Tax Policy Center, told CNN.

Vox says it could still be tough going, as Sen. Kyrsten Sinema, D-Arizona, hasn’t said if she’ll support the bill. She has previously expressed distaste for corporate tax increases in the Build Back Better bill. “Similarly, it’s not clear what support in the House will look like, specifically from a contingent of moderate Democrats who had demanded the bill bring back the state and local tax deduction, also known as SALT,” Vox said.

CNN pointed out the bill has to make it past the parliamentarian and then both chambers of Congress, “where practically any Democrat could sideline or delay passage.”

Among reactions to the agreement on Twitter:

From former President Barack Obama:

Noah Rothman, author of “The Rise of the New Puritans”:

Ben Shapiro:

Benjy Sarlin, policy editor at NBC News: