Selected Health Provisions of the Inflation Reduction Act

Selected Health Provisions of the Inflation Reduction Act

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September 1, 2022
Selected Health Provisions of the Inflation Reduction Act
Overview
During negotiations with manufacturers, the Secretary must
On August 16, 2022, President Biden signed into law P.L.
consider factors including the drug’s cost of production;
117-169, a budget reconciliation measure known as the
research and development expenditures, including federal
Inflation Reduction Act (the Act). The Act makes wide-
support; and alternative treatments. The Act imposes an
reaching changes to Medicare prescription drug coverage
MFP ceiling for a drug based on the lesser of (1) the price
and more targeted changes to Medicaid, the State
of the drug or biological paid under Part B or D or (2) a
Children’s Health Insurance Coverage Program (CHIP),
percentage of the nonfederal average manufacturer price,
and private health insurance.
which is used to help calculate a maximum price for drugs
bought by the “big four” federal purchasers: the Department
The Act requires the Secretary of Health and Human
of Veterans Affairs, the Department of Defense, the Public
Services (Secretary) to negotiate prices for certain drugs
Health Service, and the Coast Guard. The ceiling varies
covered under Medicare Part B (physician-administered
based on the type of drug or biological and the amount of
drugs) and Part D (retail prescription drugs), starting with
time the product has been marketed. There is a temporary
10 high-spending, single-source drugs for 2026 and
price floor for drugs of small biotechnology firms.
increasing to 20 by 2029. Effective in 2023, manufacturers
that sell drugs through Parts B and D must pay rebates to
A negotiated MFP would generally be in effect until the
Medicare if they increase drug prices faster than consumer
first year beginning at least nine months after the date the
inflation. Also in 2023, the Act eliminates enrollee cost
Secretary determines there is a marketed generic or
sharing for certain vaccines in Part D and sets a $35 cap on
biological substitute for a drug. The Secretary may delay
enrollee cost sharing for insulin in Parts D and B.
negotiating an MFP for certain biological products for up to
two years if a pending biosimilar that uses the biological as
Effective in 2025, the Part D benefit is reconfigured to
a reference product may come to market in that period.
include an annual $2,000 out-of-pocket (OOP) spending
cap, expanded subsidies for low-income enrollees, and
Drug manufacturers that do not comply with the Program
limits on annual premium increases, among other changes.
could be subject to a civil monetary penalty or an excise
The Act extends through 2025 more generous premium
tax. The excise tax amount on the sale of a selected drug
subsidies for health plans sold on exchanges, which were
would be set as a percentage of the sum of the drug’s sales
originally approved in the American Rescue Plan Act
price plus the excise tax imposed by the Act. This
(ARPA; P.L. 117-2). Following are the main provisions.
percentage could range from 65% to a maximum of 95%, if
a manufacturer were out of compliance more than 270 days.
Medicare Prescription Drug Price Negotiation
Medicare Parts B and D Drug Inflation Rebates
The Act establishes a Drug Price Negotiation Program (the
Program) for certain single-source chemical drugs and
The Act requires drug manufacturers to pay annual rebates
biological products covered under Medicare Part B and Part
to Medicare if they increase prices of certain Part D-
D. The Secretary is required to negotiate Maximum Fair
covered drugs above an allowable inflation rate from a
Prices (MFPs) with drug manufacturers for 10 qualifying
2021 base period (based on the Consumer Price Index, all
drugs for 2026, 15 drugs for each of 2027 and 2028, and 20
urban consumers [CPI-U]). The program applies in the12-
drugs for 2029 and each following year. (In 2026 and 2027,
month period starting on October 1, 2022, and each
the Program applies only to Part D.)
subsequent 12-month period. Likewise, beginning in 2023,
manufacturers pay a quarterly rebate to Medicare if the
The initial negotiations begin in 2023 when the Secretary
prices of most single-source Part B drugs and biological
publishes a list of selected drugs and culminate in 2026
products exceed a quarterly inflation-adjusted price, also
when the first round of MFPs takes effect. (Each following
based on CPI-U from a 2021 base.
year, the negotiation process begins about two years prior to
Medicare Part D Program Changes
the date new MFPs take effect.) Each year, the Secretary
selects drugs for negotiation from a list of 50 qualifying
Part D is a voluntary prescription drug benefit for Medicare
single-source drugs with the highest total spending in Part
beneficiaries, with plans offered by private insurers. Under
B and 50 such drugs from Part D, excluding already
the Part D “standard” benefit specified in current law (see
selected drugs. To be eligible for negotiation, a chemical
Figure 1), enrollees pay 100% of drug costs in the
drug must have been Food and Drug Administration
deductible, average 25% coinsurance from the deductible to
(FDA)-approved for at least 7 years and a biological
the catastrophic threshold, and a maximum 5% coinsurance
product must have been licensed for at least 11 years. To be
above the catastrophic threshold. Medicare covers a greater
eligible for negotiation, a qualifying drug cannot have a
share of costs for low-income enrollees through the Low
generic or biosimilar substitute. The Program focuses on
Income Subsidy (LIS), including capping OOP spending at
single-source drugs with limited market competition.
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Selected Health Provisions of the Inflation Reduction Act
the catastrophic threshold for LIS enrollees with the lowest
gradually for certain manufacturers that account for a small
income and assets.
share of Part D spending. The new manufacturer discount
does not count as enrollee OOP spending.
Figure 1. Current Medicare Part D Standard Benefit
Medicare Part D, Medicaid, and CHIP Vaccines
Medicare Part D generally covers commercially available
vaccines, except those covered under Part B. Currently, Part
D plans may impose cost sharing for vaccines. By
comparison, Part B beneficiaries have no cost sharing for
covered vaccines, except those used to treat an injury or
exposure to a disease. Under the Act, starting in January
2023, Part D plans may not apply a deductible, coinsurance,
or other enrollee cost-sharing requirement for Part D-
covered adult vaccines recommended by the Advisory
Committee on Immunization Practices (ACIP), such as the
Source: Based on Centers for Medicare & Medicaid Services data.
shingles (herpes zoster) vaccine.
Notes: Insurers submit annual bids to offer Part D plans, which contain their
projected cost for providing the standard benefit. Medicare provides subsidies
Beginning in October, 2023, the Act expands coverage of
to insurers equal to about 74.5% of the standard benefit cost, including a risk-
ACIP-recommended adult vaccines without enrollee cost
adjusted per enrol ee payment, LIS payments, and reinsurance for 80% of drug
sharing under Medicaid and CHIP by mandating such
spending above the catastrophic threshold. Insurers charge enrol ees monthly
coverage for (1) enrollees who receive coverage under
premiums, which are pegged to an annual base premium equal to 25.5% of the
traditional Medicaid; (2) all Medicaid Medically Needy
average of the insurers’ plan bids.
enrollees in specified states (i.e., states that offer services in
institutions for mental diseases or in an intermediate care
Manufacturers that sell brand-name and biologic drugs
facility for the mentally retarded [or both] to any Medically
through Part D must pay a 70% discount on sales in the
Needy subgroup in the state); and (3) CHIP enrollees 19
doughnut hole (the period in the standard benefit from the
years of age or older.
initial coverage limit to the catastrophic threshold). The
discount applies to non-LIS enrollees, who count the
Insulin Under Medicare Parts B and D
discount as OOP spending.
Starting January 2023, Medicare Part D enrollees no longer
have a deductible for insulin and have a $35 monthly co-
The Act restructures the Part D standard benefit by (1)
payment cap. Beginning in 2026, the cap could be less than
modifying enrollee cost sharing and the formula for setting
$35, if 25% of the Part D negotiated price or 25% of an
premiums; (2) reducing the Medicare reinsurance subsidy;
insulin’s MFP is lower than that amount. Starting July
and (3) establishing a new manufacturer discount program.
2023, the Part B deductible is waived for insulin furnished
For all enrollees, the Act caps Part D OOP spending at the
to a beneficiary via durable medical equipment. Beneficiary
catastrophic threshold, beginning in 2024, and reduces OOP
coinsurance for such insulin is not to exceed $35 a month.
spending required to reach the catastrophic threshold (set at
$7,050 in 2022) to $2,000 in 2025. (The threshold is
Premium Tax Credits
indexed to Part D drug inflation in following years).
Individuals (and families) who meet income eligibility
Starting in 2024, the Act enhances LIS subsidies for certain
criteria, are not eligible for subsidized health coverage (e.g.,
low-income enrollees and allows all enrollees to spread out
Medicaid), and meet other requirements may receive
cost sharing in capped, monthly amounts. Starting in 2025,
federal financial assistance in the form of a premium tax
enrollees may count certain third-party payments as their
credit (PTC), which reduces the cost of buying certain
own OOP spending, including reimbursement by health
health plans offered through exchanges (or marketplaces).
insurance, a group health plan, or other third party.
The Act extends the ARPA provision that expands
For insurers, the Act reduces the reinsurance subsidy from
eligibility for, and the amount of, the PTC for three years,
80% to 20% for brand-name biologic and biosimilar drugs
to sunset at the end of the tax year 2025 rather than 2023.
and to 40% for generic drugs, beginning in 2025. The Act
The Act (1) eliminates the eligibility phaseout for
sets a 6% cap on annual increases in the Part D base
households with annual incomes above 400% of the federal
premium from 2024 to 2029 and, in 2030, resets the base
poverty level (FPL) and (2) uses the ARPA percentages
premium formula, subject to a floor of 20% of plan bids.
(0.0% to 8.5% of annual household income) to calculate the
PTC amount. As under ARPA, the provision provides the
The current Part D manufacturer coverage gap discount
largest benefit to those with household incomes at or below
program ends in 2024 and is replaced with a new
150% of FPL; such individuals are to receive full subsidies
manufacturer discount program in 2025. Under the new
to cover benchmark plan premiums. Eligible households
program, manufacturers provide a 10% discount for brand-
with annual incomes at or above 400% of FPL must spend
name drugs, biologics, and biosimilars dispensed to any
up to 8.5% of their income (prorated monthly) before
enrollee who has exceeded the deductible but has not
receiving any credit. For some higher-income households,
reached the catastrophic threshold and a 20% discount on
this results in individuals receiving no credit despite being
such drugs dispensed to enrollees who reach the
eligible.
catastrophic threshold. The discount is to be phased in
https://crsreports.congress.gov

Selected Health Provisions of the Inflation Reduction Act

Suzanne M. Kirchhoff, Analyst in Health Care Financing
IF12203

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